Key News
* Norway Set to Be First European Country to Raise Rates Tomorrow (Bloomberg)
* ECB reveals first fall in household loans (Bloomberg)
* Consumer Confidence in U.S. Unexpectedly Decreases (Bloomberg)
* South Korean Economy Expands (WSJ)
The Event Agenda
Afternoon Run-Down
The broader stock market is continuing the weakness from last Friday and that’s carrying over to other asset classes, global stocks and emerging market currencies. The disconnect between the rise in asset prices and economic fundamentals become a focus when stocks point south. The weak consumer confidence and disappointing Richmond Fed data this morning were more fuel for an already shaky risk environment. The descending trendline in the S&P 500 that describes the entire decline from the October 2007 highs has so far contained an exhaustive (and exhausting) 8-month rally in risk assets (see the chart below).
After a few days of uncharacteristic downdrafts in stocks a couple of conveniently timed bearish pieces made the rounds this morning. Bill Gross of Pimco is calling a top in the risk trade in his monthly letter. Gross points out the obvious circular feeding frenzy of the past eight months that has driven asset prices: Hope and optimism have fed into higher stock prices … higher stock prices have fed into more hope and optimism … which has, in turn, fed even higher prices.
Here are a couple of interesting excerpts…
He says… “Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don’t go up – economies don’t do well, and when they go down, the economy can be horrid.”
The Fed is trying to …“keep the capitalistic patient alive through asset price support”
And for those that have been on the risky asset joy- ride…“ the risks outweigh the rewards at this point.”
The Reserve Bank of New Zealand meets tomorrow to set rates. They are expected to keep rates at 2.5%. Because Australia made a first post-crisis rate hike last month, speculation has been stirring around New Zealand’s rate prospects. But a closer examination of the RNBZ’s statement last month sheds a fairly clear light on the central banks cautious position.
“the Bank took a number of steps to
enhance its liquidity facilities to improve credit flows, and
most recently, communicated its expectation that the
OCR will be kept at or below the current level through
until the latter part of 2010. These two measures are
aimed at helping the transmission of the lower OCR to
the interest rates faced by households and businesses”
With yesterday’s move higher in the dollar, lower in stocks, lower in crude oil, the contra-risk trade day finally got market participants concerned about complacency. Implied volatilities (a good measure of market uncertainty) started rising in stocks and currencies.
Here’s a look at some interesting charts…
Key Charts
The dollar index breached an eight month descending trend line today…
I showed this chart of the euro on Friday and pointed to the significance of the $1.50 level. The first attempts at $1.50 starting back in 2007 failed three times until finally charging through in early 2008 to ultimately reach $1.60. And now, $1.50 has proven again a difficult objective. The euro posted a bearish daily reversal signal yesterday.
The S&P 500 has run into big trendline resistance of the entire move down from the 2007 highs. Now, trendline support of the 65% move off of the March lows is testing. A break here and a sharp slide would be a quick sentiment deflator … i.e. risk aversion round 2.
If the S&P breaks down expect the Canadian dollar to take a equally if not more aggressive hit…
Could these charts spell the next phase of a broader-longer term global instability/risk aversion theme?
Related posts:
- Friday Recap … October 23, 2009 Key News * U.K. Economy Shrinks (WSJ) * September...
- Friday Recap … October 30, 2009 Key News * U.S. Economy: Consumer Spending, Confidence Fall...
- April 28th, Morning Run Key News *Home Prices in 20 U.S. Cities Declined...
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