Thursday, June 08, 2006

 

Market Turmoil On Rate Uncertainty

Markets are shook up all over the globe. "The European Central Bank raised its key interest rate by a quarter percentage point to 2.75% Thursday in a move aimed at keeping inflation at bay. Most European stock markets were sharply lower, responding to Wall Street's extended slump and the ECB."

"Japan's benchmark stock index plunged more than 3 percent Thursday, falling to its lowest in six months amid anxiety that possible U.S. interest rates hikes will slow U.S. and perhaps global growth. The Nikkei 225 index dropped 462.98 points, or 3.07 percent, to finish at 14,633.03 points on the Tokyo Stock Exchange, the index's lowest close since Nov. 18. The market has fallen 7.3 percent this week."

"Investors were jittery about the third straight decline overnight on Wall Street and prospects for higher U.S. rates, which could slow economic growth and demand for Japanese exports. 'Continued selling is based on worries among investors that the Fed may raise U.S. interest rates further to rein in inflationary pressures, even if allowing for an economic slowdown,' said Takashi Ushio, a strategist at Marusan Securities Co.'

"The sell-off was aggravated by heavy training ahead of Friday's settlement of June futures contract, said Akio Yoshino, market economist at Societe Generale Asset Management. 'Until global interest rates movements become clearer we'll see a move out of equities,' Yoshino said."

"Canada's dollar fell for a fourth day as commodities including crude oil, gold and copper declined. The Canadian dollar has weakened since reaching a 28-year high last week as commodities extended losses, reducing demand for the currency. The Canadian dollar declined as much as 0.8 percent to 89.15 U.S. cents before rallying to 89.45 U.S. cents at 9:03 a.m. in Toronto. It closed at 89.86 U.S. cents yesterday. One U.S. dollar buys C$1.1179.'

"The currency reached 91.44 U.S. cents on May 31, the highest since 91.47 U.S. cents on Jan. 4, 1978."

"The currency extended its loss as Canadian new-home construction declined in May as builders curtailed apartment and condominium projects."

"Gold futures tumbled $10 an ounce early Thursday as the dollar rallied on continued rate hike expectations and news of the death of Abu Musab al-Zarqawi, the leader of al-Qaida in Iraq, in a Baghdad air strike. The announcement by Iraqi Prime Minister Nouri al-Maliki sent oil futures below $70 a barrel and sent the dollar higher. But the greenback really took off following less hawkish than expected comments from European Central Bank President Jean-Claude Trichet."

"Other metals fell sharply too. Silver was down 36 cents at $11.53 an ounce, platinum fell $15.50 to $1,216 an ounce, palladium fell $9.85 to $328.90 an ounce."

"Editor Kevin Kerr said the market's initial reaction to the Zarqawi news may be short-lived. The news 'seems to have sent a message that oil production in Iraq may increase and that the death also somehow is good for the dollar,' he said. 'As we have seen in the past though, if anything the killing may lead to more attacks and even worse violence, having exactly the opposite effect.'"

"Gold has fallen for the past three sessions since Federal Reserve Chairman Ben Bernanke's comments on inflation at a bank conference Monday revived fears in the market of further interest rate hikes."

Comments:
Ben,I have reading your housing blog for about a year,all of you have beenright,I live in Evans ga,columbia county,growing like crazy alot of half backs as they say,with all I have been reading it looks like the dollar is toast with norway,iran,vens, russia leaving the dollar,the whole works is collasping. any thoughts?
 
Stocks down, dollar up, PMs down...

It's fascinating that so many intelligent people are displaying such "cognitive dissonance". A weaker economy ultimately means a weaker dollar, not a stronger one. Once they snap out of it, PMs will skyrocket.

In the meantime, the Fed's just providing more opportunities to accumulate PMs on the cheap!

p.s.: Oh, and since I'd like to buy a nice home without mortgaging my life away, BB may be helping by accelerating the housing bust.
 
I am 50 years old, been retired 4years just paid off all debt, just don't know what to do about all the money I have invested in my adviser, american express some in cd's most in other mutual funds I have been buying silver since first of year,what to do about the rest of my money before I loseIt.
 
blogger.com is a shitbox Ben. Have you thought about moving it to the server that HB is on?
 
TJ, you are right about cognitive dissonance. Other countries raise rates and the dollar rises? Why? The competition for investment is growing stronger as foreign countries raise rates.

Zarqawi is killed, and I am supposed to believe this will increase oil production? Absurd! People are betting on their fantasies. The snapback rally in metals, and the plunge in the dollar, is only building up pressure. Reality will be a cold slap in the face.
 
It's fascinating that so many intelligent people are displaying such "cognitive dissonance".

But tj, let me play devil's advocate: who is suffering from cognitive dissonance -- the rest of the market or people who are bullish on gold after a remarkable speculative runup and in the midst of an aggressive Fed inflation fight?

The gold bull arguments are puzzling to me. When the Fed has a loose monetary policy, it's a great time to buy gold because the fed is causing inflation. When the fed is tightening, it's a great time to buy because they're eventually going to have to reverse course and cause inflation. The first part of that, i get -- the fed's injecting liquidity, so buy hard assets. However, I also believe in the corollary -- fed's tightening, so get out of hard assets. That's exactly what's going on in the market. Yet gold bulls seem to want to have it both ways.
 
Gold continues to get hammered on the Hong Kong market. I can't recall a positive day there for at least a week. In fact the Asians appear to be bearish on EVERYTHING. The Hang Sen and the Nikkei have been getting crushed. I had a big position in the Japan ETF EWJ that I sold in March. Thank God. Now may be a good time to stock up again..Note to self: must be patient
 
John,
Why did they hid M3 data? Too expensive??? When they are printing billions a week? How can you say you're fighting inflation and printing billions every week? The CPI is a joke as well as the Core. I find it amusing that now the rent equivalent is going up now that housing market is falling off a cliff. Maybe they'll just adjust it back to get the numbers they want. They'll keep spinning plates in the air until one too many and the dollar crashes. One country will spark off the sell off and the others join in so they are not left holding the bag.
 
The CPI is a joke as well as the Core.

I've made this assertion myself, on the housing blog.

However, there's no question that the Fed is on a tightening campaign, and I think everyone was surprised to learn that Bernanke is more hawkish than we had all assumed. Moreover, he doesn't appear to be very concerned with what the markets think. Note that while markets are tanking, the Fed is still throwing fuel on the fire with hawkish statements. Under AG, there would have been some reassuring signals coming from the Fed to make Wall St. feel OK. Bernanke apparently doesn't share this obsession. He's made it clear that he's going to fight inflation no matter what, and he came right out and said that commodity prices are driving inflation. That means he's targeting the commodities bubble. I think that it's a mistake to make investing decisions based on a presumption that BB doesn't mean what he says. Don't fight the Fed.
 
I'm not fighting the Fed...they keep printing money. This "inflation" is a symptom, not the cause.
 
"That means he's targeting the commodities bubble"

We haven't yet seen a big correction in crude oil, the biggest inflation driver of them all. Could it be that the Fed's deliberately trying to cool overall US consumption to affect a decline? This could take months. If true I'd say that that's entirely too much power to be entrusted in so few hands.
 
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