Global growth scares are really spooking the markets. Kazakhstan, central Asia’s biggest crude exporter, devalued. Bloomberg reports according to the futures markets, the odds of a Saudi devaluation are now the highest since March 2003. [Note: Most Middle Eastern currencies are pegged to the dollar].
As noted yesterday, the pain in increasing exponentially for the oil/commodity producing socialist countries. Many have not remotely considered that these economies are also subject to the rule of economics. The self-induced plunge in oil is causing a shortage in revenues thus suggesting entitlement spending cannot remain at current levels without abandoning existing policies or philosophies.
It is widely accepted economic pressures causes social unrest. Will Saudi Arabia devalue; a move that I think will be met with ferocious political resistance, to ensure its ability to placate its restless and largely unemployed youth via entitlement spending? If we use the futures markets as a proxy, the odds are the highest since 2003.
Were these global growth fears increased by dovish FOMC Minutes which can be interpreted that an interest rate hike in September is now questionable given the global macro-economic conditions, specifically the intense volatility in oil and the currency markets? Many, including me, viewed a change in monetary policy as a sign of strength.
Speaking of signs of strength, existing home sales rose to the highest level since February 2007. Moreover the supply of available home for sale is now at a decade low. This could suggest several things. First, sales will not be as robust in coming months given the dearth of supply. Second, greater pricing pressure.
All must remember that OER and rental expenses are the greatest contributor to inflation indices. July’s CPI data indicated shelter prices were up 3.1%, the greatest annual increase since early 2008.
And then there are weekly jobless claims. Even though claims were nominally higher than expected, Americans filing for unemployment benefits remained around their lowest level in several decades.
These signs of strength are in direct contradiction to the complete implosion of commodity prices. In my view, unlike 2008-09, commodity prices are not collapsing because of economic weakness but rather from massive over supply. Moreover like everything else, commodities have become subject to financialisationdefined as prices are driven by the ebb and flow of investor sentiment rather than “real” demand.
Sentiment can change quickly especially if an unexpected event occurs. Speaking of a change in sentiment, gold and gold mining shares surged yesterday. Gold is now up over 7% from its 5 year low in July. The metal climbed 70% from December 2008 to June 2011. Additionally the dollar fell, falling to the lowest level this month.
Speaking of a change in sentiment, even though the S & P 500 remains in the tightest range since 1927 according to Bloomberg, the benchmark has now fallen through its average price for the past 200 days for the fourth time this month. Yesterday was the first time it did not rally back over this pivotal moving average line since July 9.
Does this suggest more selling is at hand?
The momentum issues bore the brunt of yesterday’s 358 point 2% drubbing. Are these issues just playing catch up with the rest of the market as the typical stock has all but been abandoned for the handful of the momentum names?
I can make an argument that this can be indeed the case.
What will happen today?
Last night the foreign markets were down. London was down 1.18%, Paris down 1.26% and Frankfurt down 1.43%. Japan was down 2.98% and Hang Sang down 1.53%.
The Dow should open nominally lower. China reported the weakest manufacturing data since the global financial crisis. Oil has declined for eight consecutive weeks, the longest stretch of declines in almost three decades. The 10-year is off 2/32 to yield 2.08%.