Home > Uncategorized > 2012/03/09: Curiouser & Curiouser as Other Asset Classes Not Reflecting Equities Strength

2012/03/09: Curiouser & Curiouser as Other Asset Classes Not Reflecting Equities Strength

© 2012 ROHR International, Inc. All International rights reserved.

There have been combined recent constructive influences from the Greek Debt Deal PSI negotiation ending up with a high level of participation (even if the Greek government Collective Action Clauses needed to be triggered) and another round of upbeat US Employment numbers into today. Even allowing that the international economic data is not quite as upbeat as the US right now, it is reasonable that the March S&P 500 future should escape key resistance at 1,367-69. The only dilemma with all that is why the other asset classes are not performing in their classical manner? And some are even throwing off signals that would seem to run counter to the idea further extensive US economic strength will be forthcoming.

We are of course referring to the degree to which the primary government bond markets have taken the further extension of the equities rally from Tuesday’s low by not selling off much and all (and the German Bund future is actually higher.) Similarly in foreign exchange, the US Dollar Index is strengthening nicely back above its .7950-25 previously violated support. And along with Australian dollar and Japanese yen weakness against the greenback, that is substantially based on the (heavily weighted) euro sliding even further from key resistances at EUR/USD 1.3460-1.3500 (from last week) and the 1.3360 area. Next support there might be is nearby as the 1.3050 area, but the overall trend momentum feels pretty negative.

So, what’s up with all that?

There are several possible explanations for this, each of which may be partially the case at present. In the first instance, maybe there is more than enough sheer liquidity out there on the back of all of the central bank stealth QE (quantitative easing) that we have noted previous. Under that logic even though there are some folks who are skeptical of buying equities at current levels, they are willing to take a chance on the specious idea that primary government bond markets are a good store of value even if yielding less than 2.0%. Fair enough, as the alternative would be to leave the money yielding zero in money market funds, or parking with the ECB at a 0.25% yield.

On the other hand, the strength of the US dollar could be because the Asian and general emerging markets economies are beginning to really weaken. That flies in the face of all the logic surrounding the lower-than-expected Chinese Consumer Price Index data encouraging its central bank to begin stimulating the economy once again. However, that weakness in the Australian dollar is on the back of what was nothing less than a really downbeat week in Australian economic data. And for all the Japanese Ministry of Finance and Bank of Japan would have us believe they’re on the verge of renewed growth, which doesn’t seem to really hold water either.

And if there is going to be such sustainable global growth based upon the US economy leading the way up, why isn’t the euro acting better after the ostensible success of heading off any Greek default on its major €14.4 billion government refunding on March 20th (even if a technical default will be declared based upon the exercise of those Collective Action Clauses)?

Classically the improvement in overall economic growth should be a very good thing for all those indebted countries that need a good bit of it to work their way out of their Brobdingnagian burdens. Not that Italy or Spain are in anywhere near as bad a shape as Greece, but the weak economy there is beginning to raise questions about various fiscal calculations; especially for Spain, and possibly Portugal. As such, the equities rally should be improving their prospects… and that of the euro. It is interesting that there is no such market response right now.

The other factor that raises some questions over the sustainability of the equities rally in spite of the sense that the US markets are underpriced relative to earnings at current levels is the continued strength of especially energy markets, with a further influence on the inflationary drags from other key commodities. The latter include everything from Copper right through to the Grains.

OR, maybe there is a much simpler, albeit technical, answer to why the other asset classes are not reacting in a classical manner to the March S&P 500 future escape back above 1,367-69.

General Market Observations & Anticipation for Next Week

With the quarterly S&P 500 futures expiration rollover as nearby as next Thursday’s Close, possibly the other asset classes want to see whether the June S&P 500 future can sustain activity above that key resistance prior to reacting in a more classical fashion; which is to say pressure on the primary government bond markets and the US dollar.

That would seem to fit in fairly well with the DJIA also failing to get back above the 13,000 level after trading as high as 13,056 last week. It had been the case previous that both the NASDAQ 100 future (still the strong sister) and the DJIA had outpaced the S&P 500 future by a fair margin in overrunning last summer’s trading highs. While the NASDAQ 100 is already well above that level, the DJIA is still churning not all that far above 12,876 from last May.

As such, based both upon the less than consistent activity in other asset classes and the degree to which the equities act like they will need just a bit more technical confirmation before a swing up to the 1,400 area in the lead contract S&P 500 future is clearly indicated, unless there is a further sharp upward spurt into the Close today, it looks like another weekend when the real decision will wait until next week.

And we shouldn’t have to wait too long for that to be very interesting. While it is not often an immediate trend influence, the divergence between different countries in last month’s OECD (Organization for Economic Cooperation and Development) Composite Leading Indicators means that Monday morning’s next release is going to be more interesting than most. And beyond that a lot of the balance of the critical influences next week hit on Tuesday (as opposed to critical mid-to-late week horizons over the past couple of weeks.)

Those include everything from the next Bank of Japan interest rate (non-)decision meeting and statement in the morning into German and EU ZEW Surveys, the Bundesbank Annual Report and press conference, US Retail Sales, and all wrapping up with the FOMC interest rate (non-)decision meeting and statement (even if that is a one-day meeting with no press conference this month.) So the only reasonable view into this weekend would seem to be to maintain current trend views in each of the asset classes even if the intermarket influences did not seem to be operating in a normal manner, and be ready to be very nimble into early next week.

The balance of our trend views remain much the same as yesterday’s post.

Thanks for your interest.

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