Commentary & Analysis
Yesterday was a day that sent up warning flags. Sure, we’ve been talking to this idea for some time, indeed in these pages over the last couple of months. Jack has provided the roadmap here through his macroeconomic analysis showing the key linkages in the global economy and how it’s leading us down the path of an accelerated deleveraging and deflationary environment. He shared a snapshot of the view in this Currency Currents back on June 20th. He will share more in his webinar on China next Tuesday, as China is a key player in the global linkage chain.
Was yesterday just another deeper version of the “on again, off again” risk aversion we have been seeing, or the beginning of something more?
To date, we have seen nothing persistent on the risk aversion front, despite the ugly global macroeconomic outlook we believe is growing darker by the day. Even when it looked like risk assets were losing appeal, it tended not to be an across-the-board move, e.g. risk currencies were falling but commodities were not ... or some commodities were falling while other commodities were not.
Yesterday pretty much every major gauge of risk appetite took a hit – even silver and gold.
By now you’ve heard that US stock indices have finished lower for 9 straight sessions ... and that the record losing streak is 14. The fall has been substantial, but has not been perfectly correlated with the price action in other markets. At the beginning of this losing streak (sparked by US default speculation), money seemed to be flowing into commodities in search of stability (i.e. get out of US stocks and dollars.) But that has changed for the time being ...
Copper is down big this week; crude oil is down big this week; the Australian dollar is down big this week; the Canadian dollar is down big this week; and if it weren’t for one day of news-driven demand, grains would probably also be down big this week.
Despite a big hit to silver yesterday, gold and silver are both holding current levels ... each playing a safe-haven role for the better part of the week. Silver remains more volatile than gold; gold remains the better safe-haven play.
The obvious take away from the week’s price action: investors are finally showing their concern for a global economy facing many headwinds.
this morning we get the July US Nonfarm Payrolls report. The expectations are set at an addition of 85,000 jobs. A number in-line with or better-than-expected likely only buys time before further data disappointment down the road; but a number worse-than-expected likely means a whole lot ...
Considering all the negative data points we’ve received in the last week, a jobs disappointment today likely means growing expectations, if not a growing likelihood of QE3. It sounds perverse, but bad news today on jobs could mean good news for investors. The slide in risk assets over the last two weeks is offering up some attractive buying opportunities, should the consensus agree that the Federal Reserve will step in again.
I don’t have to show you again what prior QE installments have done for the markets. We shared that chart on Wednesday. I just need to let you know that the next FOMC meeting will be conclude six days from now.
Is it time to front-run Mr. Bernanke and buy back risky assets? Or is Mr. Bernanke out of ammo and market players set up to be let down? I can tell you the talkers are “betting” on more QE. Based on the latest Fed comments suggesting more QE when (not if) necessary, I’m not sure how Mr. Bernanke could avoid decisive action if today’s jobs disappoint.
Be careful out there. Have a nice weekend.