The old adage "sell in May and go away" would have worked for many asset groups this year. In commodities, May marked the end of that rally that had commenced in 2010. The commodity sell off continues today with red numbers across the board. A unanimous bearish performance suggests some asset reallocation, and perhaps money flowing out of commodities. The end of a quarter is an ideal time to part with under performing trades. The last few days of September may be cruel to the commodity bulls, or it may present an opportunity for those with funds and a plan.
Had you sold equities and gone away, this too, would have worked albeit with a few week's of sellers remorse. The little rally in global equities this week seems to be predicated on a solution to the European debt problem. Betting on a decisive solution to the many issues confronting Europe by the current leadership group seems like a foolish bet. Bad news from the Bundestag tomorrow may set the stage for further selling as we approach the quarters end.
Should the collective leadership in the eurozone lull the markets with some soothing words, possibly some grandiose solutions, what then? Well let us not get too anxious because Friday October 7th we get the next non-farm payroll report. Remember it was the August report which showed zero jobs created that jolted the market. The early estimates are 56K jobs were created. While an improvement from last month, it is well short of the monthly need for 250K jobs. In equities, caution seems to be in order.
U.S. Treasuries have become a most favored asset class during the last quarter. The yields have come down and the value of existing paper has appreciated. Demand for Treasuries continues strong. This week the U.S. auction is going well. Yesterday they sold $35B at a low rate with the bid to call ratio 2.71 to 1. Today the Treasury sold $35B five year notes at 1.015% interest. The bid to call ratio was 3.04 to 1. The indirect bidder, often foreign central banks, took 45.9% of the total, compared to 40.9% in the last five year sale.
Compare this with today's German auction of €6B five year notes that failed to draw any investor bids. They received bids for only €5.1B, and those from banks obliged to make a market for the notes. When is the last time there was a bid to cover ratio of .85 to 1 at a U.S. auction? The developed world needs to borrow lots of money to pay for the current deficits and previous loans. It is a lot easier borrowing money in U.S. dollars than in euros.
August was a good month for the USD, compared with the euro and the pound. When the European markets recovered early this week, it was curious the currencies did not perform better. The COT report shows these currencies are loaded with speculator shorts. I thought there might be some profit taking, perhaps some liquidation on a small rally. Such was not the case as the futures open interest yesterday was up in the pound, 7.6K and up in the euro 4.1K. Should these two market fail to get good news tomorrow, the big short specs may want to lay on the market going into the week end.
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