Correlated risk is off

Stock markets around the world are either in full flight correction (Australia) beginning, or wobbling along. Yesterday we had the Asian stock markets, with the ASX200 down 1.88%, Japan (Nikkei 225) down 1.52%, Hong Kong (Hang Seng) over 2.11% and Singapore 1.83%.

This action was continued through to Europe, with the German DAX down 2%, UK FTSE 1.9%, French CAC40 2.1% and Italian MIB over 3.3%.

Lastly in the US falls were not on the same magnitude, with the DOW down just over 1%, the broader S&P500 1.2% and tech stock NASDAQ down 1.5%

What does all this mean? It is quite normal for markets to correct – they can’t go up 1% a day forever and need to reverse some of these gains before turning into a bubble.

What has been different in overnight markets is the nature of this sell off. Risk markets are normally highly correlated, which continues into currencies and bonds, and whenever risk is “on“, stocks and non-USD currencies and gold rise, almost in lock-step.

When risk is “off“, there is a flight of safety back to the USD and US Treasuries. Remember markets must equalise – there is no such thing as more buyers or sellers – they must mathematically be the same for anything to be traded. The influx of new money (via QE) subverts this equation, as does increased leverage through meta-money.

I’ve compiled some charts below that show where risk markets are at the moment, including commodities, currencies and stocks. These are daily/weekly charts that provide a technical look at trends complementing the fundamental macroeconomic view.

What’s interesting to me, particularly for Australian investors, is that gold (and silver) have been resilient to this broad selloff, and have not fallen with their other risk “comrades”, stabilising in value against the rising USD. Gold sold in AUD is rising in this case – $33 an ounce in the last 24 hours (I’ve used the Gold ETF traded on the ASX in the final chart below).

This sell off has all the hallmarks of an orderly correction – but it could turn into something much more. All markets – developed and emerging – are not experiencing benign bullish conditions, but are in a multitude of confusing sideways patterns. These are not investor’s markets.

Equity Markets

SP500 is in downtrend channel with short target at 1300 points


NASDAQ is following SP500, but with more volatility - could overshoot to 2600 points


The Dow is also in correction phase with short term target at 12200


FTSE has broken support at 5850 pts with a short term target of 5600


DAX has also broken support with 7000 points the next target


The Nikkei was in a weak upward trend channel, but this has broken.


The volatile Hang Seng is in a sideways channel with support at 22200 pts

Currencies

The Aussie has broken short term support and is heading for parity again


The Euro has completed a Head and Shoulder pattern with target at 1.30 if the neckline breaks below 1.40


King Dollar is back - strong reversal underway

Bonds

10 yr Treasury notes haven't changed - no bidders at end of QE2?

Commodities

Has Silver found a bottom at $35 an ounce?


Gold in USD is not only resilient, but bullish

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Disclosure: The article is not to be taken as investment advice and the views expressed are opinions only. Readers should seek advice from someone who claims to be qualified before considering allocating capital in any investment.

Comments

  1. Top work Prince.

    I 100% agree with your conclusion:

    >This sell off has all the hallmarks of an orderly correction – but it could turn into something much more.

  2. Thanks Avid – space doesn’t allow me to show the real correlation with November 2008 markets.

    The lack of downside on Gold (USD) has me very interested, as does no upside in Treasuries.

    As DFM said in the King Dollar comments, “The USD might surprise everyone and rally because other nations or groups are in a worse spot. ”

    I would not be surprised at two rallies (or sideways) during a subsequent equity market correction: USD going up and gold staying stable or slightly rising (particularly against GBP and EUR – Adam Carr is right there – inflation is debasing their currencies more so than the USD QE debasement)

    • Drederick Tatum

      M2 shows why. In the USA it is rising at “normal” rates — i.e. at the same rate as we’ve seen for over a decade. M2 rising at similar rates in other regions. QE2 is an asset swap and not effecting M2.

      http://www.wolframalpha.com/input/?i=US+money+aggregate

      In other words the “debasement” is no different to what is occurring in other denominations.

    • I agree with DFM’s point about the USD.

      I’d add that when the equity markets get shaky, everyone wants cash on their books, and cash still means USD. USDs are required to settle the majority of debts, in global terms. Those two factors are what lead to the flight to safety.

      So there’s plenty of wind at the back of a USD rally in coming weeks.

  3. “These are not investor’s markets.”

    Never a truer word spoken. Nice work with the post and charts.

    Will be interesting to see how Gold/Silver hold up over the next several months if the general markets continue to correct (as I expect they will). News just out that Moody’s is reviewing UK banks with speculation they will be downgraded, could be the catalyst to send the FTSE to test that target you suggested.

    Seems to be quite a few catalysts lined up that could send the world into another price destruction tailspin.

    Time to be looking at ways to protect ones wealth IMHO.

    • Thanks BB – there are a few bargains out there for medium term investors, but not much at all for the long term/buy and hold.

      Frustratingly for value investors, the focus may need to change to dividends only as the upside potential for listed shares is extremely low/nonexistent.

      I’m watching gold closely – it has rebuffed the return to the USD – look at its twin AUD which briefly flirted with 1.04 today – this is a change…

      Catalysts are the right word for sure.

      • Yeah, i have noticed the recent gold trends, too…interesting sideways movements, given the context (incl likely – and, as you show – actual movement cak to the USD).

        I wouldn’t expect an uptick though (??) – more “price resilience” (aka sideways bullish?) than ouright appreciation vs USD at the moment?

        Thoughts?

        Even sideways for metals is a great result…

        Interestingly, too, platinum didn’t fair as well as gold (slight correction) – symptom of weakening, or perceived future weakening, of industrial demand??