Aug 10
17
US Stocks crash on double-dip recession fears
The US markets tumbled last week, led by the Nasdaq, which dropped 5% to the 2173.48 level. The Dow fell 4 days out of 5, and finally set foot over a support level of 10,300, closing the week at 10,303.15, a 3.3% drop. This should have been considered a normal correction after 5 weeks during which the Dow jumped a whopping 10%, from 9,686.48 to 10,653.56, but frightened investors are talking about a double-dip recession all over again. Just as the indices returned to the pivot point where they gave a positive return this year, then came the FOMC statement on Tuesday that kept the Federal Funds rate unchanged, signaling concerns about the economic recovery. On Wednesday came a disappointing Trade Balance number for June, -$49.9B, 20% more than analysts expected. The US debt is at its historic record, and after holding back for much of 2010, (by US standards that means only $20-30 billion) it is now rising faster than ever! This was enough to end the optimistic momentum created by the earnings season, and to start the new trend – the bear trend. Investors fear that the Fed is just kicking the can down the road – creating more debt to settle today’s problem, whilst creating even bigger problems for the future.
Europe is following its currency – Down!
Europe went the same way as the rest of the markets last week – down. The FTSE lost 1.07% and closed at 5275.44, but the rest of the indices didn’t fare that well! The German DAX fell 2.38% to 6110.41, and the French CAC dropped 2.83% to 3610.91. The big news in Europe last week came from Germany when it published its second quarter growth – a 2.2% growth from the first quarter. It’s the fastest pace since the country’s reunification in 1991, as the global recovery boosted exports and companies stepped up investment. The rise benefited from global demand, as well as the euro’s 10% decline, which made Germany’s exports more competitive and exceeded economists’ predictions. While other economies in the euro region are fighting sovereign deficits and cutting expenditures, Germany’s growth is even more noticeable. The only problem for Germany is – it’s still a part of the euro.
The euro takes a beating
After climbing almost continuously from early June, when the EUR/USD pair traded at the lows of $1.19, then up till $1.33, a climb of almost 11%, the euro had one of its worst weeks this year, as it fell by 2.86% back to 1.2753, well below the $1.30 technical support level, which it couldn’t maintain. The fall is related to investors fleeing to cash, and buying US treasury bonds, a known phenomenon in turbulent times. But these days, it looks like many leading economies are putting themselves in a risky situation by buying more and more US debt to feel safe, while the US is mounting its debt at record levels and no country has the courage to ask if the move is indeed safe? Even the Japanese Yen, which also suffers from the flights to safety, had a calm week as it dropped 1% to 86.28 JPY vs. the USD. The Japanese economy is export oriented and the strengthening of the Yen is a major problem. Honda’s CFO was quoted recently as saying that a rate of 85 JPY to the USD, a rate at which the Yen was trading at in early August, makes car manufacturing in Japan “not economically feasible”. The Yen is still trading at these record low levels. Therefore, as long as other central banks will keep their rates low, there is no reason for a change in this situation.
Crude Oil falls as US equities slide
Crude oil prices fell almost 7%, from $80.86 a barrel down to $75.41 – falling 4 days straight from Tuesday to Friday, just like the Dow. Oil has been trading in the range of $70-$85 since October 2009, and just like the Dow, it now seems like it will continue its sideways trend, at least until macro conditions will decide where they’re headed. Copper also suffered from investors’ fears. Being correlated with industrial production, the price of copper is a good indicator of economic sentiment. The negative sentiment last week caused the price of copper to drop 2.7% to $3.25 a pound. From the 3 metals offered at anyoption™, Gold, Silver and Copper, Copper is still 2010’s worst performer, and if this year’s trends continue, Copper will remain that way. When the markets stumble and investors fear a recession, Gold is likely to reap the benefits. After a second consecutive positive week, it is now back to $1,200+ levels, trading at $1216.6 an ounce. Therefore, if equities continue to dive, then the double-dip theory is likely to kick in. Gold is now up 10.9% this year, leaving the performance of virtually all leading indices’ way behind. Will Gold break new records before the summer is over? With the current fear in the markets – it is very likely.
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