October 4, 2010
After a record month in September and a strong opening in October, equities across the board on an international scale are finally responding to poor European data. This could mark the beginning of a consolidation period as well as investors get out of their long positions on based on expectations for low earnings reports for the third quarter and flat to slightly worse off economic data. Key reports to look for in the US this week include Non Farming Payroll with a street consensus of literally zero change and perhaps at best +5000 and a September unemployment rate increase to 9.7% up from 9.6% in August.
This morning forex markets opened relatively quietly with the yen a bit weaker and the euro as well The lack of activity comes ahead of an important IMF meeting later this week during which Brazilian Finance Minister Guido Mantega’s remarks that the world is entering a global “currency war” will most certainly be addressed. However, the climate quickly changed to more exciting terms as the dollar rose countering the European weakness discussed earlier last week. It is interesting to point out how individual events affect the euro as well taking note of the fact that it is a continental currency being pulled by a multitude of macroeconomic events. Today it fell to the blows dealt by the Irish central bank’s statement today that Ireland’s economy would crawl to a virtual halt this year after it had imposed progressive monetary easing policies earlier this summer. Fears that Ireland might follow in Greece’s footsteps towards increasingly high interest rates and therefore a spiral towards sovereign default have come to center stage. From a technical standpoint, this retracement was to be expected as the euro topped out last December at 1.5150 and fell to a low of 1.1900 earlier this year. Since then it has been on a steady incline reaching new highs Friday and entering the 50-62% retracement area (see Fibonacci retracement for more details) of 1.3550 to 1.3950. However a move toward 1.3600 would mean for a definite reversal in the trend.
On the Asian frontier, the yen has eased due to an unexpectedly aggressive announcement of monetary easing policies made by its central bank, the BoJ. Although central banks usually tend to take action in a manner avoiding direct submission to their respective governments in order to maintain the borderline of separation between the two, the BoJ seems to have been pressed into a corner. As a result, ten-year Japanese government bonds reached a seven year high of 143.59. Moreover the Nikkei has an astounding 1.5% on hopes that the currency’s trend maintains its direction. Returning to the subject of the IMF meeting, it will be noted that Chinese Premier Wen Jiabao has openly and with great fervor expressed that the surging economies of Asia should be granted more power in the traditionally Western-dominated global financial institutions and that Asian leaders expect Europe to relinquish some seats at the IMF. First off that's just a badass statement. Secondly, it's most certainly the truth given the stark difference between China, India, Japan, et al and say for instance the PIIGS...
Moving towards commodities, gold fell as the dollar rose and as stated last Wednesday this movement was to be expected. However, this can’t be seen as a reversal but merely a consolidation as gold has been too strong for too long. I would highly recommend being standoffish in gold as the longer and stronger and overvalued commodity is, the harder the comedown will be. Corn on the other hand was expected to fall today due to a surprise discovery of 300 million bushels of corn by the USDA... What a surprise! This news would be seemingly bearish but corn also has a less than 30 days of harvest left when usually at around this time of the year it would have something more in the mid 30’s. This is most certainly bullish news. These reports along with the strengthening of the dollar have led to a nearly flat day for corn. Of course wheat and soybeans have fallen in step. Crude oil seems to be bidding for storage still but not nearly as aggressively as it has been which can be reflected in the Nov ‘10/Nov ’11 contango decreasing from $5.00 to $4.76 earlier this morning. It is important to note that this figure was $5.40 a week ago.
Democrats will eat this up… So for all you leftists, here’s some food for thought:
“The Top 1% of Americans… or more precisely the top 1% of American households… own or hold 34.6% of all the privately held wealth in the US. The next 19%... comprised mainly of “managers,” professionals and small business owners… hold 50.5%. The remaining 80% of households control the remaining 14.9% of private wealth in the country. On the other hand, the bottom 90% of households have 73.4% of the total outstanding consumer debt, while the upper 10% have only 26.6% of that debt” – Dennis Gartman “The Gartman Letter”
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