Global Markets Quick View: Drivers of Risk Aversion Alive and Well

 |  Includes: FXY, IEF, SPY, UDN, UUP
by: Cliff Wachtel

Below is a quick one-stop-shop overview of what happened last week as well as key events and their possible ramification for the coming week in global stock, commodity, and forex markets.

Key Market Movers Last Week

Earnings, Manufacturing Data

Relatively strong corporate earnings, the solid ISM manufacturing data (the series grew at its fastest pace in January since August 2004) and the ninth consecutive improvement in the ADP employment data all drove moderate risk appetite through Wednesday. The ECB and BOE meetings were non-eventful.

EU Sovereign Debt Threat – This Was The Biggest Market Mover Of The Week

A fresh onset of European sovereign debt worry Thursday sent investors fleeing all risk assets for the perceived safety of US dollars and Treasury bonds. UK bonds also benefitted from the fear. Sources of the fear included a wave of false rumors about further debt trouble, an essentially failed Portuguese bond auction that augurs trouble for the other PIIGS block members, rising costs to insure these bonds against default (signaling higher borrowing costs coming) and growing signs of political opposition in these countries to taking the needed steps to solve their fiscal problems.

This set off a chain reaction of selling. As usual, this was most felt in equities, the broadest risk barometer. The S&P500 fell below key chart support at the 1100-1070 area.

The DJIA plunged nearly 300 points on Thursday, to close below 10,000 for the first time since November 4th, 2009, while the VIX volatility index spiked to highs above 28.

US Jobs Reports Disappoint, But Bargain Hunters Step In

Then on Friday came the week’s climactic US jobs reports. These initially confused markets as unexpectedly high jobs losses appeared to be partially offset by improved annualized unemployment figures. However that improvement turned out to be due to a mere change in calculation method, and the reported lower 9.7% rate would have in fact been at a new high of 10.6%. Along with downward revisions in unemployment for the past 12 months the overall affect was disappointing and drove markets down, but bargain hunters stepped in to give US stocks a surprising modest gain on the day. In particular:

  • Friday’s headline non-farm payroll data (-20K v 15Ke) missed expectations, although manufacturing payroll reading (+11K v -20Ke) crept into positive territory for its first positive reading since November 2007.
  • Meanwhile, the Labor Department nearly doubled the December non-farm losses by revising it to -150K, making the day an even bigger jobs loss downer.
  • Benchmark revisions for the 12 months ended March 2009 were also worse than preliminary estimates, showing 902K more jobs were shed during that one year period than originally reported.
  • The official January annualized unemployment rate dropped below the 10% level, although it’s worth noting that the Labor Department is using a new household survey in calculating the number; using the old payroll survey the annualized January unemployment rate would be 10.6%.


Given the rising fear, the effects on markets were what one would expect: risk assets down, safe-haven assets up.

US Stocks

The market again dropped nearly 2% on the jobs data, but bargain hunters stepped in to leave US stocks with a modest gain, perhaps hinting we’ve hit support barring further bad news. Equities had been undergoing an oversold bounce higher until Wednesday-Thursday. Thus by week’s end, the losses weren’t bad. DJIA lost 0.5%, the Nasdaq dropped 0.3% and the S&P 500 fell 0.7%.


The Reuters/ Jefferies, CRB Index lost -2.65% to 258.55.


WTI crude oil broke below 70 to 69.5, the lowest level since December 15, before closing at 71.19 Friday. The benchmark contract lost -2.7% on a single day and -1% over the week. Supplies remain high relative to demand, as shown by recent data this past week from the US Energy Dept. data on inventories (up) and refinery utilization (down). Many expect further weakness in oil prices and new lows in the months ahead.

Gas price rose Friday in the face of broad-based decline in the commodity sector. Settling at 5.515, the benchmark contract gained +7.5% last week, reversing part of the -12% loss made in the prior week, as unusually cold weather helped, but supplies remain very high relative to demand.

Precious Metals

Gold: The benchmark contract for gold slid -2.86% to 1052.8. Movement of gold has demonstrated high, but inverse, correlation with real interest rate. The pattern was particularly consistent in the second half of 2009. However, drastic change was seen in mid-January, when the euro dived against the dollar and Japanese yen because sovereign credit crisis in Greece escalated.

However, downside risk remains in the near-term as USD will likely strengthen further as long as worries about sovereign defaults in peripheral European nations persist. Although we do not see the USD as a safe asset as the US itself is facing huge budget deficits and recommend investors accumulate gold, it’s market sentiment, which views selling commodities and buying low/no-yield assets such as USD and JPY as safe strategy, that dominates. Therefore, it’s likely for gold to weaken further in the coming weeks, barring an EU inspired market crisis.

Silver: dived -8.4%, the worst performer of the week, to 14.83. Investors dumped silver amid concerns that slowdown in global economic recovery will cripple silver consumption. Capitals have seen flowing out of silver ETF since late 2009.

PGMs: are also highly exposed to industrial activities, price correction is contained by strong investment for the newly launched ETFs in NYSE. Moreover, the demand/supply outlook is better than for silver.


Strong Bias over the past week to safe haven currencies – the Japanese Yen, US Dollar, and Swiss Franc, vs. the risk currencies – The Australian, New Zealand, and Canadian Dollars, as well as the Euro and British Pound. In addition to market sentiment, the Aussie was hit by an unexpected pause in rate increases by the RBA, the Kiwi by bad jobs figures, and the Loonie by declining oil. The Euro dropped the most on uncertainty about the ongoing solvency of its weakest members and stability of the EU in general.

The dollar index surged for a 4th consecutive week, by +1.23%, to 80.44 last week. Against individual currencies, USD surged +2.31%, +1.93%, +1.94% and +1.44% against GBP, AUD. NZD and EUR, respectively.

Key Forces and Events to Watch For the Coming Week

News On The Dominant Fundamental Market Drivers

The key fundamental drivers of risk aversion that have been dominant over the past weeks are all still very much alive and well:

  • The EU sovereign credit crisis and lack of signs that anyone is seriously attempting to resolve it. The ECB essentially says “trust us, we’ll fix it.” Yet evidence of strong popular resistance in the PIIGS block to accept spending cuts that impinge on assorted “rights” appear to leave these governments powerless to help themselves. Some kind of bailout is likely, but ongoing uncertainty over how it will work and who ultimately will pay will continue to keep markets risk averse until this is resolved OR some other positive news of equal weight intervenes to reverse current risk averse trends. Rumors of a coming deal may have been a cause of the higher finish in US stock trading. This has been the key fundamental force since late November, when the Dubai World default threat awakened the international credit rating agencies.
  • Concerns that risk asset prices are too high vs. actual growth prospects.
  • Concerns about whether major currency blocks can really end their stimulus programs, which risks killing the nascent recovery, or will they continue, leading themselves down the same path of excessive deficits as the Southern EU members.

We expect the overall trend down in stocks, commodities, and risk currencies to continue – barring an announcement of a plan to calm markets about EU debt, be it a bailout or debt guarantee or whatever. If that happens, risk assets could well resume their short term oversold bounce they’ve been attempting ever since the S&P 500 began to pull up from its lower Bollinger Band (see Will S&P 500, Risk Assets Dance to the Tune of the Bollinger Band? and Stocks, Risk Assets Doing the Dead Cat Bounce – Don’t Buy Into It.

Yes, as noted in the above articles, in the short term risk assets may well be oversold, so a short term bounce is possibility. However risk assets had a long run since March 2009 on dubious justification. The counter trend could run just as long unless economies start to show more signs of self-sustaining recovery.

Note also that should the Yen and especially the Swiss Franc continue to climb and endanger export competitiveness, attempts by their central banks to pressure them are likely, especially for the Swiss as the EUR/CHF reaches the 1.4600, which was the last major SNB intervention point that has yet to be breached. The leading safe haven currency, the Japanese Yen, faces threat of a credit rating downgrade, but if risk aversion remains, that is no more likely to stem the Yen’s rise than the announced threat last week.

Other Key Events to Watch

Scheduled Major US, European Sovereign Bond Auctions

  • Monday: CHF- Retail Sales y/y
  • Wednesday: AUD- Home Loans m/m, CNY, Trade Balance, EUR French Ind. Production m/m, GBP Manufacturing Production m/m, BoE Gov King Speaks, Inflation Report, CAD Trade Balance, USD Trade Balance, Fed Chairman Bernanke Testifies
  • Thursday: AUD Employment Change, Rate, USD Core Retail, Retail Sales, Unemployment Claims, NZD Core Retail, Retail Sales
  • Friday: EUR German Preliminary GDP q/q, USD Prelim UoM Consumer Sentiment

Disclosure: No Positions