The main story in the financial world is still about the indiscretions of Dominique Strauss-Kahn. Many are making a great deal out of the fact that a major player in the European debt scene is now missing from the table. Yes, because of French domestic political considerations DSK has thrown himself into the Greece et. al. debt resolution scheme of which he is deemed a significant actor. Though, it’s highly doubtful that he is the only person with enough clout to bring the financial weight of the IMF to bear. Europe’s leaders will not allow this situation to further deteriorate because of one person being removed from negotiations for there is far too much at risk.
Much more important will be the impact of Kahn’s fall from grace, although France may actually elevate him and turn him into to a national hero. The French seem to relish their leaders being symbols of virility and look past the indiscretions of its leaders–probably just another way to cast aside the prudent natures of the Anglo-American model. The markets need to get beyond this and let the U.S. judicial system do its work.
The U.S. data that was released yesterday was very weak as CAPACITY UTILIZATION, INDUSTRIAL PRODUCTION, HOUSING STARTS AND PERMITS were much lower than forecast. The NOTES and BONDS both rallied to new highs as EQUITIES and METALS were sold off in the fear that the U.S. economy is softening. The anticipated end of QE2 with a lackluster economy is causing investors to head to safety and remove some of the risk that was necessitated by the BERNANKE PLAN to enhance the wealth effect through the “PORTFOLIO BALANCE CHANNEL.” While I certainly agree that the U.S. and GLOBAL economies are slowing, today’s data should be analyzed with caution.
It seems that a large part of the slowing in the CAPACITY and INDUSTRIAL numbers was a result of the Japanese earthquake and its impact on the global supply chain. We will need to see a few more months of data to be assured of the beginnings of a renewed downturn in the economy.
By the close of the markets, the S&Ps were unchanged and a higher close on the NASDAQ 100. The GOLD closed somewhat weak but it did rally $13 off its lows. Gold is beginning to struggle as there is a sense that any global slowdown will result in some very long-term profitable trades being unwound. There is a risk off scenario developing with the high correlation of DOLLAR STRENGTH, EQUITY WEAKNESS and the GOLD being vulnerable to profit taking.
This dynamic has provided a BID to the NOTES and BONDS as there is an immediate demand for safety. The problems in Europe on center stage also bring a DOLLAR BID putting more pressure on the dynamic of the risk off scenario. This confluence of events is powerful and I can’t wait for it to breakdown for that will be important to resume a return to what I believe are the major fundamentals.
Interestingly, it seems that the GRAINS are the first asset to breakaway from the RISK-OFF paradigm and will trade according to its underlying knowledge of demand/supply regardless of momentary bouts of systemic profit taking. It seems that the next key will be a DOLLAR RALLY with a simultaneous U.S. EQUITY RALLY for that would throw the risk-off algorithms into a state of confusion and release other classes form the BONDAGE of liquidation models.
As always, there is the need to remind all traders that the markets are DYNAMIC and all relationships are ever-changing. It is just a matter of HOW LONG and at WHAT PRICE, which is why you must prepare your technicals and charts to be prepared for a change in sentiment. Even though it is a mind-boggling global quilt, it seems we will always have Paris.
Tags: Bernanke, bonds, Capacity Utilization, dollar strength, Dominique Strauss-Kahn, Equities, France, Gold, housing starts and permits, IMF, industrial production, metals, notes, portfolio balance channel, risk-off, SPS
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