The markets appear to be “stabilizing” for the time being after yesterday’s massive sell-off, the 6th largest down move for stocks in the history of the markets. Oil has pulled back as well, though gold is sky-rocketing to new daily highs, reaching just under $1780.
There is obvious fear in the marketplace, and what started out as debt concerns both here in the US has become global economic growth concerns. So right now, the market is unsure who poses the bigger the risk, the US or the Euro zone. This is reflected in the currency values, as EUR/USD has been trading a range with no clear direction.
This is in stark contrast to the commodity currencies, which have sold-off greatly lead by the Aussie which is down close to 10% for the week! On the flip side, the safe havens have received these money flows, with the Swiss franc making new all-time highs vs. Euro and USD. The Japanese yen is also strengthening despite the attempt to weaken the currency through intervention last week.
The British pound is also trading a range as their economic data weakens and also dealing with the “protests” taking place in London right now. I’m not sure that the media is giving this the proper attention it deserves, but looting and rioting are taking place as a single incident has ignited the anger over austerity measures.
One of the last bastions of growth in the global economy has been China, and overnight their CPI data came in higher than expected showing inflation of 6.5% which means that they may make further efforts to slow down their economy. Talk of the global “double-dip” is starting to heat up, as it appears that the soft patch we were dismissing the data as may become a harsh reality.
So it’s the Fed or nothing today, as all eyes are on the FOMC meeting taking place today. What, if anything, can the Fed do at this point? Bernanke will clearly attempt to calm fears in the market but at this point it may be difficult to provide the magic pill that everyone so desires. Instead, the medicine we may be forced to take is a much tougher pill to swallow.
The global banking system while not in great shape is clearly better than in 2008, though European bank exposure to sovereign debt and US bank exposure to a still-declining housing market may make it difficult to bring confidence back. Money pours into US Treasuries, as it is not certain where to go.
So how do we get out of this mess? It all comes back to economic growth. Without it we are doomed and those who think the government can pick up the slack are delusional. Without job creation form private business, demand will continue to weaken.
So while stocks may be higher to start the morning, do not be fooled into believing a bottom is in. This saga is far from over, and thankfully politicians are on vacation for the rest of the month so I don’t have to listen to the blame game take place.
Be cautious and judicious in your trading and use strict risk management principles. Volatility can be your friend, though it can also be your greatest enemy!
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