Global Markets in Review: Signs of Stability

“Words from the Wise” this week comes to you in a shortened format as “day-job” responsibilities precludes me from doing a comprehensive commentary. However, a full dose of excerpts from interesting news items and quotes from market commentators is provided.

Signs of stability characterized trading on financial markets during the past week. As investors placed their bets on a global economic recovery, equities, base metals and crude oil made further headway, with long-term government bond yields remaining at elevated levels, but declining somewhat after a successful U.S. 30-year bond auction and pro-U.S. Treasury comments from Japan’s minister of finance.

Notwithstanding buyers returning to U.S. long-term bonds, the greenback retreated on concerns of the huge issuance of government bonds, whereas commodity-linked and other high-yield currencies improved strongly.

Source: Jeff Stahler, June 9, 2009.

The British pound also advanced as the U.K.’s National Institute for Economics and Social Research said the recession had passed through its trough in March. Also, the Organization for Economic Co-operation and Development (OECD) reported on Monday (via the Financial Times) that most of the world’s big economies were close to emerging from recession and that data pointed to a possible recovery by the end of the year. “Twenty-two out of the 30 OECD countries saw a rise in forward-looking measures of activity,” said the report.

The week’s performance of the major asset classes is summarized by the chart below. Not shown, platinum (-2.1%) and silver (-2.9%) cooled off in tandem with gold bullion (-1.6%). As the precious metals consolidate, gold bull Richard Russell (Dow Theory Letters) said in frustration: “Gold, gold, you’re making me old.”

Source: StockCharts.com

The surge in oil prices to an eight-month high of more than $72 a barrel (in the case of West Texas Intermediate Crude), raised concerns as this is equivalent to a two-percentage-point drag on real GDP growth, according to David Rosenberg (Gluskin Sheff & Associates). In order to provide guidance on the direction of crude oil, Adam Hewison of INO.com has prepared another of his popular technical analyses, arguing that the long-term trend is bullish, but that a short-term pullback appears likely. Click here to access the short presentation.

The MSCI World Index (+1.2%) and the MSCI Emerging Markets Index (+0.4%) last week again added to the rally’s gains to take the year-to-date returns to +8.1% and a massive +39.4% respectively. Both these indices have only had one down-week since the advance commenced in early March.

Although trading was relatively flat, the major US indices (with the exception of the Russell 2000 Index) nevertheless gained for a fourth consecutive week - and for the twelfth week out of the past 14 - as seen from the movements of the indices: S&P 500 Index (+0.7%, YTD +4.8%), Dow Jones Industrial Index (+0.4%, YTD +0.3%), Nasdaq Composite Index (+0.5%, YTD +17.9%) and Russell 2000 Index (-0.7%, YTD +5.5%).

The Dow on Friday became the last of the major indices to break into positive territory for the year to date, albeit by a meager 0.3%.

Click here or on the table below for a larger image.

As far as non-US markets are concerned, returns ranged from top performers Namibia (+8.5%), Vietnam (+6.5%), Mauritius (+5.4%), Palestine (+4.5%) and Thailand (+4.0%), to Ghana (-8.7%), Serbia (-5.2%), Sudan (-4.8%), Taiwan (-4.4%) and Bahrain (-2.4%), which experienced headwinds.

Among the major markets, the Japanese Nikkei 225 Average jumped by 3.8% to breach the 10,000 level for the first time since October on the back of recent data releases, indicating that the pace of Japan’s recession was moderating. (Click here to access a complete list of global stock market movements, as supplied by Emerginvest.)

John Nyaradi (Wall Street Sector Selector) reports that as far as exchange-traded funds (ETFs) are concerned, the leaders for the week included MSCI Thailand (THD) (+6.2%), iShares MSCI Sweden (EWD) (+6.0%) and PowerShares DB Base Metal (DBB) (+5.6%), with notable laggards being Market Vectors Gold Miners (GDX) (-9.2%), iShares Silver Trust (SLV) (‑6.4%) and iShares Taiwan (EWT) (-5.8%).

Other news is that Chrysler completed its deal with Fiat, the US Treasury Department announced that ten banks would repay TARP funds, and the Obama administration is dropping its plan to cap salaries at firms receiving bailout funds and has backed away from a large-scale reduction in the number of agencies overseeing financial markets.

Next, a tag cloud of all the articles I read during the past week. This is a way of visualizing word frequencies at a glance. Key words such as “banks”, “markets” and “financial” featured prominently. “Bonds”, “yields” and “value” have soared in prominence as pundits debate whether government bonds and stock markets have seen secular turning points. “Recovery” also moved up the ranks as an increasing number of reports showed the global recession was abating.

Back to the stock markets: an analysis of the moving averages of the major US indices shows all the indices (with the exception of the Dow Jones Transport Index) above their 50- and 200-day moving averages and May 8 highs. The S&P 500, Nasdaq and Russell 2000 have also surpassed their early January peaks.

Click here or on the table below for a larger image.

According to Bloomberg, the S&P 500 Index has not posted a daily rise or fall of 1% or more since June 4, the longest stretch in 14 months. Since September 15, 2008, when Lehman Brothers filed the largest ever US bankruptcy, 131 out of the 188 trading days have had moves of 1% or more.

The S&P 500 seems to be mapping out a trading range between 925 and 950 as shown in the chart below. Time will tell the direction of the eventual break out of the trendless market, but stock markets would appear to be getting somewhat exhausted, as indicated in last Sunday’s “Words from the Wise“.

Source: StockCharts.com

The last words regarding stock markets go to David Fuller (Fullermoney) who said: “I am certainly not moving away from my view that this is a bull, since much of what we have seen since last October and everything since March has been consistent with a new bull market. However, extreme rallies to break the previous downtrends are often prone to lengthy pullbacks and ranging, because they discount improving or less bad news very quickly.

“Where the corrections occur, they are likely to be sharper in high-flying emerging markets but delay the next upward move on Wall Street for longer, because it is underperforming and is a much bigger market.”

For more discussion on the direction of stock markets, also see my recent posts “Video-o-rama: Risky assets - optimism waxing, pessimism waning“, “Faber: The frame of mind of American economic policymakers“, “Favorite theme: commodities“, “Donald Coxe: Investment recommendations (June 2009)“, “High-yield spreads heading south“, “Grantham on the markets“, “Technical talk: Sell the news” and “Interview with Yale’s David Swensen“. (Also, Donald Coxe’s weekly webcast makes for good listening and can be accessed from the sidebar of the Investment Postcards site.)

Economy
“Global business confidence in early June improved to its best reading since last October. Sentiment remains consistent with a global recession, but the recession is quickly moderating. Expectations regarding the outlook for year’s end are also much improved,” said the latest Survey of Business Confidence of the World conducted by Moody’s Economy.com. The Survey highlighted that US and Canadian confidence had notably improved in recent weeks, with businesses saying that sales conditions were stabilizing.

Source: Moody’s Economy.com

Nobel Prize-winning economist Paul Krugman commented that the US economy would probably emerge from the recession by September. “I would not be surprised if the official end of the US recession ends up being, in retrospect, dated sometime this summer. Things seem to be getting worse more slowly. There’s some reason to think that we’re stabilizing,” Krugman said at the London School of Economics (via Bloomberg).

According to Bloomberg, Richmond Fed Bank President Jeffrey Lacker said on Wednesday the Federal Reserve had to avoid the risks of “waiting too long or moving too slowly” to tighten monetary policy once an economic recovery begins. “The challenge for us on the Federal Open Market Committee will be to shrink our balance sheet and tighten policy soon enough when the recovery emerges to prevent rising inflation. The danger will be that we will not shrink our balance sheet enough when the recovery emerges.”

US interest rate futures rose to price in a tightening in the interest rate by the Federal Reserve by the end of this year. However, Andrew Balls, PIMCO’s managing director in London, believes this to be premature and wrote in a report (via Bloomberg) that signs of recovery in economies around the globe pointed to a slower pace of decline rather than recovery. “Rate hikes will be some time in coming.”

Week’s economic reports

Date	Time (ET)	Statistic	For	Actual	Briefing Forecast	Market Expects	Prior
Jun 9	10:00 AM	Wholesale Inventories	Apr	-1.4%	-1.0%	-1.2%	-1.8%
Jun 10	8:30 AM	Trade Balance	Apr	-$29.2B	-$29.5B	-$29.0B	-$28.5B
Jun 10	10:30 AM	Crude Inventories	06/05	-4.38M	NA	NA	+2.87M
Jun 10	2:00 PM	Treasury Budget	May	-$189.7B	NA	-$181.0B	-$165.9B
Jun 10	2:00 PM	Fed’s Beige Book	-	-	-	-	-
Jun 11	8:30 AM	Retail Sales	May	0.5%	0.3%	0.5%	-0.2%
Jun 11	8:30 AM	Retail Sales ex-auto	May	0.5%	0.0%	0.2%	-0.2%
Jun 11	8:30 AM	Initial Claims	06/06	601K	610K	615K	625K
Jun 11	10:00 AM	Business Inventories	Apr	-1.1%	-0.8%	-1.0%	-1.3%
Jun 12	8:30 AM	Export Prices ex-agriculture	May	0.3%	NA	NA	0.2%
Jun 12	8:30 AM	Import Prices ex-oil	May	0.2%	NA	NA	-0.2%
Jun 12	9:55 AM	Michigan Sentiment-preliminary	Jun	69.0	70.5	69.5	68.7

Source: Yahoo Finance, June 12, 2009.

In addition to an interest rate announcement by the Bank of Japan (Tuesday, June 6), the U.S. economic highlights for the week include the following:

Monday, June 15
NY Empire Manufacturing Index and Net Long-Term TIC Flows

Tuesday, June 16
Building Permits, Housing Starts, PPI, Capacity Utilization and Industrial Production

Wednesday, June 17
CPI

Thursday, June 18
Initial Jobless Claims, Leading Economic Indicators, and the Philadelphia Fed Survey

Click the links below for the following reports:

• Wachovia’s Weekly Economic & Financial Commentary (June 12, 2009)

• Wachovia’s Monthly Economic Outlook (May 2009)

• Wachovia’s Global Chartbook (May 2009)

Markets
The performance chart obtained from the Wall Street Journal Online shows how different global financial markets performed during the past week.

Source: Wall Street Journal Online, June 12, 2009.

Will Rogers offered the following advice: “Buy stocks that go up, and if they don’t go up, don’t buy them.” (Hat tip: Vitaliy Katsenelson.) It sounds simple enough! Let’s hope the news items and quotes from market commentators included in the “Words from the Wise” review will help Investment Postcards readers to have some advance warning of the most likely winners and losers.

(For short comments - maximum 140 characters - on topical economic and market issues, web links and graphs, you can also follow me on Twitter by clicking here.)

That’s the way it looks from a cold Cape Town.

Comments

[Jeff Nielson:]

Prieur, while there IS a "recovery" taking place, it is occurring in emerging markets, and the major commodity-producing nations.

For the U.S. and most of Europe, there are no signs of improvement. In the case of U.S. "statistics" putting aside blatant fabrications, the fact that the U.S. economy has gone from exponential decline to a steep, linear decline does not in any way suggest "recovery".

Plummeting downward at this speed is catastrophic, even if there is no further acceleration.

Fantasy-valuations in the equity markets of most industrialized economies - especially the U.S. - will correct with a vengeance sooner rather than later.

Jun 14 05:10 PM

[Plebian:]

Please stop believing in the 'stability' fairly tale. The world's fiat currency financial system could not be closer to the edge of the cliff. True, most people would rather see the present system endure, but change is inevitable.

Oil is going up, but that money is probably going into buying long-term US treasuries... Petro-dollars at work.

The other day it was reported that the Canadian Mint was audited and they found some physical gold and silver unaccounted for. That's more reason not to trust in 'paper' gold and silver. We all know that 'trust' is something to be earned, and after all that the govm'ts and big financial institutions have done lately throughout the world in the name of 'saving' the current world financial system, can we still put our trust in them?

Some commentators advised taking delivery of physical metals, because of the missing gold and silver story. This led to some media reporting on a possible 'run' on gold. But how can there be a 'run' on gold (or silver), unless the paper versions were not actually backed by real physical stuff?

What they fear most is a public run on banks (and people's loss in confidence in the system), because of the nature of the fractional banking system. Banks are allowed to lend out 10 times or more money than they have in deposits. Under any other circumstance, this would not be allowed (how can you lend out what does not exist?). But the system is rigged to allow banks to do it--everywhere in the world.

Again, how can there be a run on gold or silver unless the same principle as fractional reserve banking (of fiat currencies) was in effect for 'paper' gold and silver? A run on gold can only happen if all of the 'paper' promises for gold could not be redeemed for the real physical stuff. That is exactly what they fear.

In an honest system, people all over the world would have the freedom to put their trust in fiat money, gold, or silver. They could freely exchange one for another at any time, without any fear whatsoever of causing a 'RUN'...

Jun 14 05:38 PM

[Larry House:]

"Signs" mean be patient--not dive in. Since March the markets have caused many to see green, but that doesn't mean it can be sustained. I have long positions; I am not hiding in a cave in all cash, but I am not buying the market hook, line, and sinker. The world economy has come close to a total collapse. Perhaps (I hope) there are signs of stability, but that doesn't mean the patient is going to jump off the table and resume normal acitivies anytime soon.

Jun 14 07:16 PM

[chux08:]

"What they fear most is a public run on banks (and people's loss in confidence in the system)"

Well, you're half right. What, with all the electronic digits moving around at warp speed in cyberspace, you won't see any more old fashioned "runs on banks" with lines of people stretching around the block waiting to collect their money. (Though you may see bank holidays where they'll just close the doors....) Electronic banking with "helicopter Ben" at the controls with the great Messiah dropping the actual money and really, when they're all done....what's there to worry about??

Got gold??

Jun 15 12:09 AM

[David Bicch...:]

The data provided by yahoo finance are actually misleading because some have been revised downward. For example, Retail Sales Prior are not -0.2 but -0.4, which is 100% WORSE!
There is a nasty habit of issuing data more or less in line with market expectations and then revised it drastically.... it will keep the market buoyant for a while but not forever!

Jun 15 08:32 AM

[Mad Hedge F...:]

the calm before the storm. I heard a little tidbit yesterday that makes me feel like I just ate a bad fish taco. Frontline, the world’s largest tanker company, says that it has 100 million barrels in storage, the equivalent of five days of US consumption, the result of the spectacular contango situation that exists in the crude futures market. Traders have been buying front month crude, storing it, and reselling it one year out for non leveraged profits of up to 75%. With spot now at $72.12, and futures for December delivery selling at $75.56, that spread has narrowed to an annualized 9.53%. The last crude top was made by the filling of the Strategic Petroleum Reserve. Could this intermediate top be put in by the filling of the world’s excess tanker fleet? This makes me worried not just about crude, but all of my longs in commodities and their producing stocks, the S&P 500, the BRICK’s, and everything else that has enjoyed a torrid doubling since the beginning of the year. Could gold’s poor performance this week, which dropped from $990 to $935, be the canary in the coal mine? And by extension, is it time to take profits on my short Treasury positions by selling the TBT, which has also doubled? There are just too many charts hanging around their 200 day moving averages to dismiss this lightly. I hate to sound redundant, but selling in May is looking more clever by the minute. Cash is King.

Jun 15 10:56 AM