The fear of
Since 1950, there were only six-times when January got it wrong in a big way, giving it an accuracy rate of 90-percent. However, in 2009, the January Barometer went terribly awry, and its reputation was badly tarnished. Although the S&P-500 suffered an -8.5% loss in January 2009, portending another year of negative returns, quite the opposite occurred. The S&P-500 index finished the year with a 23.5% gain, following a spectacular 65% rebound from its bear market bottom.
The Nasdaq ended up 44%, and the Shanghai Composite Index rallied 80% for the year. The Euro- Stoxx 600 Index gained 28%, its biggest annual increase in a decade. Dollar inflows to
Unprecedented intervention by the Group-of-20 central banks and governments, including $13-trillion in bank guarantees, monetization of government debt, bailouts, and the alteration of FASB #157 in the
However, January 2010 got off to a rocky start, with commodity and stock markets tumbling worldwide, on signals that the politicians pulling the strings in the world’s two fastest growing economies -
The Reuters-Jefferies CRB Index, a basket of 19-exchange traded commodities, suffered a loss of 6% in January, led by the copper market - rudely interrupted with a sharp 9% decline, and crude oil fell 8%, all tracking losses on the
Selling pressure in commodities in January was extenuated by a stronger US-dollar - which knocked its top rival, the Euro, below $1.400 for the first time in more than six-months. Big speculators began to unwind the massive US-dollar carry trade that was utilized for risky bets in global stock markets. In a virtuous cycle, a stronger US-dollar makes commodities more costly for users of other monies, and helps to contain inflation. Ironically, it wasn’t the Federal Reserve that ignited the unwinding of US-dollar carry trades, but rather the central banks of
Chinese and Indian policymakers became alarmed by the sharp rebound in industrial commodities, particularly crude oil, which must be imported in large quantities, in order to fuel their manufacturing based economies. Higher food and energy costs feed heavily into the consumer price indexes of the emerging Asian giants, and adjustments of interest rates and other monetary tools are often utilized by their central banks to contain inflationary pressures.
Global demand for crude oil has been buoyed by a powerful rebound in global factory activity, led by the
Over the past four-months,
On Jan 12th, the PBoC shocked the global markets, with its first meaningful move to tighten liquidity in eighteen months. Armed with knowledge that China’s economy was growing at a 10.7% annualized rate in the fourth quarter and with its import bill in December soaring to an all-time high of $112-billion, the PBoC began draining liquidity, and clamped down on bank loans. Consequently, $12 /barrel of speculative fluff was wiped-off the crude oil market over the next two-weeks.
The Bank of India (RBI) followed suit on Jan 29th, surprising commodity traders, by lifting cash reserve requirements for banks by more than expected 75-basis points to 5.75%, and warned of mounting inflation, suggesting its next move may be an interest rate hike.
On Feb 1st,
“China might increase interest rates once consumer inflation exceeds the one-year benchmark deposit rate of 2.25%,” warned Ba Shusong, a prominent government adviser on Feb 1st. Consumer prices rose +1.9% in the year to December, but inflation could accelerate at a 6% clip, without further tightening measures. Thus, the
However, in reaction to Chinese and Indian central bank tightening, combined with the Euro’s descent below $1.400 due to
In the first round of iron ore pricing negotiations between Rio Tinto is asking Japanese and Korean steel mills for a 40% price increase. However, since
Gold weighed down by weaker Euro
In sharp contrast to the sound finances of
Over the course of the past two-months, the interest rate that
On Jan 29th, Greek Prime Minister George Papandreou complained that his country was being targeted as a weak link, by speculators with ulterior motives, and seeking to profit handsomely from the possible break-up of the single European currency. Already, amid the capital flight from Greek bonds, there’s been a simultaneous exodus fleeing the Euro currency, knocking it below the psychological $1.400 area, from around $1.500 just two months ago.
In an ironic twist, the “flight for safety” from the Greek bond market, isn’t finding a “safe haven” in the gold market. Instead, the yellow metal is enduring selling pressure, undermined by the weakening Euro. The US-dollar is getting stronger by default, largely due to the unwinding of “carry trades” in global stock markets. Furthermore, spike rallies in the gold market could meet resistance, as it becomes increasingly apparent, that
In the event that
Already, contagion sales from the troubled Greek bond market are starting to seep into the Spanish bond market. The credit default swap rate to insure 10-million euros of Spanish bonds has nearly doubled to 148,000-euros, and yields have climbed 40-basis points higher to 4.15% over the past two months.
Still, capital flight from the weakest links in the Euro-zone bond markets is triggering the unwinding of US$ and Japanese yen carry trades, which in turn, is rattling global commodity and stock markets, and precious metals. While it’s true that the January Barometer was far off the mark in 2009, one also should remember that it’s been accurate for 90% of the time over the past 60-years. Much will depend on the degree to which the G-20 central banks drain the global liquidity swamp, which led that the emergence of asset bubbles in 2009.
(from goldseek.com, February 4, 2010)