There seemed to be a general reflation type of trade back in play yesterday although it was mixed in the sense that the bonds were a bit higher which generally does not jive with the return of risk trade and Copper was lower which sends a mixed signal.
The grains however were very strong with beans and corn leading the way. Crude moved higher on news of a drop off in oil moving through the Trans Alaska Pipeline due to a leak.
The Dollar was slightly lower and equities were a tad lower leading to some conflicting short term signals for traders to sort through.
US Dollar is continuing to exert pressure on the overall level of commodity prices, I am not so sure that we are going to see a direct link reassert itself to the degree where we have nearly every tick higher in the Dollar followed by a tick lower in commodities. There are certain commodity markets which have a set of fundamentals that are strongly bullish (Precious metals, grains, beans, rice). While those markets are indeed influenced by inflows of hot money flows (mostly tied to industrial and manufacturing) and would tend to move lower while the Dollar moves higher, where the fundamentals are very strong (see previous posts) fundamentals are so strong that downdrafts are going to be bought, regardless of what the dollar does.
Recent economic data has given proponents of an improving economy some reason to support the view of the so-called “economic recovery” in the US, but the fact is that job creation is practically non-existent. Even those jobs which are being created are not sufficient to keep up with just the increase in the numbers of job those still looking for work.
I believe the market is looking past the various data releases and more focused on the fact that this critical aspect of any true recovery, jobs etc, remain weak and will remain sluggish for the foreseeable future. Fed Chairman Bernanke as much as said the same in his comments last week.
The stock market and the bond market is telling you that it expects the QE policy is not going to go away and is convinced that inflation is in its future. That means the bullish trend in commodities as a whole will continue until or unless there is a CLEAR SIGNAL that the number of jobs being created is of sufficient size that QE will no longer be necessary.
The price action of the overall sector as indicated by the CCI is reflecting this view as it is more suggestive of a lull in buying rather than the beginning of a sustained downtrend. I think we are seeing this reflected in the gold market which while it cannot yet manage to climb back above $1400 and reassert another leg in its long term uptrend, does not appear to want to break sharply lower either.
We will know whether this is indeed the case if the Dollar manages to punch through the 82 level on the $DXY and closes there on a weekly basis. We will have to stay tuned and watch developments in real time to see where we head next.
But when looking at the dollar strength we must not forget that its not the improving fundamentals in the US but worsening in Europe. As long as Euro based problems are lingering the dollar will remain relatively strong and there are those out there floating the idea that QE will end sooner than most expect.
Short term the markets are giving off mixed signals which is indicative of uncertainty on the part of traders. Some are moving to the sidelines or lightening up a bit as they wait to gauge future direction. In addition, we are still going to be dealing with index fund rebalancing which further clouds the analysis. In the long term , the damage associated with a $14 Trillion national debt is not going to go away, nor are the effects of QE is doing in terms of inflation creation.
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