Friday, December 11, 2009

Shifting Intermarket Relationships?

The weak euro (above)/strong U.S. dollar has been associated with stock market selloffs for much of the bull market run. Lately, however, we've seen stock prices hold relatively firm in the face of dollar strength. Given some positive economic news this morning, I continue to keep on the radar the possibility of shifting intermarket themes, where economic strength could benefit both dollar and stocks and support higher Treasury yields at the long end. (Note that the 10-year rates have moved nicely higher this morning to 3.58%).


OKL said...

I completely agree with you Doc, this is one trend i've been noticing for the past 2wks or so that's been growing prevalent.

Specifically, I'm referring to the Treasuries (price)-Commodities relationship, which is traditionally inverse.

Particularly peculiar this week has been the shift from inverse to direct; both are getting clobbered this week, especially oil & gold... but not copper.

Maybe the Fed's reverse repo, Bernanke's re-election, worry about the unwinding of certain programs next year is playing into traders' / investors' minds?

What about the corporate bond market? Its getting strange too; since March, LQD HYG has been moving pretty much in tandem and it makes sense since then to assume that both are giving support to equities.

However recently, I'm spotting some notable divergences between the two; specifically, LQD is having trouble moving higher while HYG is continuing to do so.

While "King Dollar" certainly has its own part to play in this whole affair, there is some strong resistance to recent USD movement from equities.

The Yen is also going a little nuts- hovering around the 08 highs, which by itself suggests a high amount of risk aversion... on the other hand, it may have simply been replaced by the USD carry.

As for equities, maybe this is why prices are stuck in a range, even with the recent weakness in TF XLE... I reckon that it will remain so until the inter-market situation gets sorted out; the economy/market might be going through a transitional phase.

The next sizable break from this range could be significant in a sense that, it could be the beginning of a battle between institutions w/regards to the next "market theme".

Or maybe everyone's just waiting for Santa Claus to solve these problems that the market is thinking about:

- Unemployment

- If the US is supposedly recovering, in view of Europe's yet-to-unwind-crap, do we buy or sell the dollar? What about treasuries?

- So... at least a 4% GDP growth next year for equities... really?

- Toxic Assets not so toxic because of "mark to model" & FASB accounting changes, but still toxic

- US, Japan, UK, Spain, Italy, Ireland super deficit AND upcoming liabilities... how to keep it funded?

- Dubai & Greece; who's next? Solution? More bailouts?

- Impact of Consumer deleveraging

- EU's rotten banks

- Energy problems

- Iran/Iraq/Afghanistan/North Korea

- What governments might/can do to keep Gold prices down, other than selling it in the open market, which is pointless cos some other central bank is going to buy it these days

- Where are we going with the current policies?

There's alot more... I guess the market is really thinking, while waiting for Santa.

Gotta love it when Volcker said that the banks' best contribution to society is the ATM and everything else is crap.

Oh I can't wait for Xmas... "Let it snow... let it snow... let it snow..."

sandp emini said...

I thought things are so easy a caveman should be able to make money sleeping - buy equity or euro and sell dollar. Why make things complicated ? LOL

Anyway, as always thank you for the heads-up.