What The Stock Market Said -- Steve Plant
fxa.com
5:00 AM New York time. I’ve been in observation mode versus action mode this last week. There are several key price behavioral issues guiding my view, but they have yet become the dominant overall market view. First off… while I took off my short stock trade way too early, that trade is now playing, and will continue to play, a major role in corollary market action. The stock market is casting its vote on the future direction of the economy. And action in US stocks continues to send ripples through the world markets.
I said last week, I think weak stocks are currently a serious drag on gold. That remains in place. Yesterday gold was up $12 at one point, but closed up $3 and was down $2 in the post floor electronic session. That is not the kind of action I would want to see as an active and bullish participant… especially in light of what happened to the dollar. Hedge funds and other managed capital sources that have been very active buyers of gold remain under P&L pressure in other markets. Gold was one of their big trades for the year. Of late, my sense is they have been pulling back risk rather than committing new capital. And gold needs fresh capital to go higher. The problem with any pure speculative market like gold, which has neither regular market-moving news flow, nor a large professional base of active industry traders, is that it relies so much on momentum from outside sources, that once that momentum is broken, it takes a great deal of time and effort to create sufficient buzz to get it all started again. Unlike oil, where a large pool of active participants trade off weekly statistics on supply, demand and inventories, and can create directional impetus from inside the market, there is very little in the way of catalytic news in precious metals aside from the buzz that is constantly going around gold bug web sites. I remain with no position in gold.
Maybe the dollar doesn’t come out of this latest move with new lows, but yesterday shows that if your job requires you to be participating in the dollar on a macro basis, you must maintain a core short position of some kind. Nothing more needs to be said other than the obvious implications for the dollar from a weaker than expected US economy. There still appears to be plenty of selling power left in this market despite well advertised sharply skewed sentiment indicators from the futures market. That’s the problem with those futures market based sentiment indicators in a vast deep market like currencies, where most of the trading takes place over the counter. They can get pinned at what might be considered a historically high levels and then stay there for weeks, with the market continuing to trend.
The bond market remains caught between the mathematical realities of a flat yield curve with 5% funds, and the view that stocks are a proxy for the view that the economy will slow more sharply than consensus through the second half. It is my opinion that the yield curve realities (read future rate hikes by the Fed) will eventually wane in favor of the weak economy view that is currently in ascendance. There will also be the flight to quality kicker lying in the grass from major stock market weakness spreading to emerging markets. Stocks are telling us that the economy is going to slow much more sharply than the current majority view. I say again… you want a proxy for the housing market? Take a look at the homebuilders. While fuel costs, weaker home prices, and higher rates, will instigate the slowdown, it will be issues of credit that will take over and drive us to a sharper than current consensus view contraction. There are so many schlocky mortgage lenders out there, you can’t tell me that we’re not going to have a well-publicized problem at some point. Before all this is over, it will not surprise me to see such a problem force a tightening in lending standards, at exactly our most vulnerable time. That is why (from a macro fundamental view) I continue to be bullish bonds and think they could be the big trade for the second half of the year. As credit quality falls, demand for credit will drop along with it. Treasuries will benefit from a turn around in the rate environment AND a desire for higher quality instruments. The Fed will find itself in the difficult spot of having slightly above target inflation but with an economy that is softening quickly and in need of lower rates. Wall Street being unanimously bearish on bonds, just as we are witnessing the evolutionary process of storyline swinging from strength to weakness, provides yet another good example of one of those accident waiting to happen trades. By the way and for the record… Bill Gross changing his long-term outlook for long rates two weeks ago, will prove to be the bottom of the market. He's the Bond King.
Steve Plant
FXA |
