In a sudden switch, roles the European and U.S economies have switched their roles in determining stock market action. Last month it was worries coming from Europe which were dragging the market down. Each news item, telling of sovereign debt problems and unhelpful news items being produced by the nations leaders, each lead to market downturns. While the U.S economy was seen as a source of strength. No one was saying the U.S economy was strong, but it looked like it was on an upward trajectory and self sustaining. So it acted as a counter balance to European troubles. China meanwhile payed the role of wild-card. It sometimes gave good news and sometimes presented new worries about its own economic growth maintaining its high level.
Since the European worries were very dominate, the markets fell for the entire month. The suddenly following the G-20 meeting, role switched. The economic news from Europe is the most stable it has been in weeks. The politicians there have taken what positive actions they need, and now have other things to do than to upset the markets. So the euro has stabilized and rebounded back to the $1.25 level. Since the declines in the euro were in perfect accord with declines in the stock market, its increase would have been expected to mean a upswing in the market. But it did not happen that way.
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Instead, the confidence in the U.S economy has been shaken but the failure of the U.S job market to make anything resembling an improvement. And since everyone remembers the economic predictions made in the beginning of the year, which said that by June there would visible improvement in the unemployment rate, and foreign problems no longer can be blame, the market is coming to the conclusion that the recovery is not going well, and forecast earnings for the second half of the year and not going to happen as expected.
So now the market is falling because of the failure of the U.S recovery. The relationship to the euro is no more. Instead of the U.S providing a base of support for the world markets, it is now the major downward factor. Gold on the other hand, which rose rapidly, with increased demand derived from the European and euro worries, now is dropping because they are seen as stabilized.
One thing to look at as a leading indicator for the market recovery is the the yield on Treasuries. Ten year yields are under 3%. Which is amazingly low, and represents a huge flight to safety. Since this flight is no longer from the troubles in Europe, a turn around in these yields could be the first indication that the market has bottomed. Until then the worries in the U.S will continue to push the markets downward and yields will remain low.
Of course this role reversal could end at a drop of a news item, if some worry returns to Europe. But until then it looks like we are on our own.
Disclosure: No positions