Supposedly you’re not supposed to read much into a few days worth of action, but whatever, let’s do it anyway, because big changes in the market have to start at some point, and it’s possible that that point was this week.
Also, let’s define “week” liberally, so that it started last Thursday at 8:15 AM, when Ben Bernanke spoke to the Boston Fed.There was a ton of hype going into this speech, and talk that perhaps Bernanke’s old “helicopter” self would make a new appearance. The dollar had been getting crushed, and everything else was surging.
The moment the speech hit the wires, markets did their standard Bernanke shuffle. The dollar dove against the yen, and gold surged.
But that reversed itself in like, two seconds, perhaps when investors realised that Ben Bernanke didn’t exactly open up the cash faucet. Or maybe it was just the fact that the trade had become stale and cliched by that point, and that even if mega-QE is still coming, it’s been known for weeks, and there was nothing new.
That peak has now proven to be the peak for gold at least for the moment.
At the moment gold is trading around 1320, so it’s off a bit less than 5% since then. That’s not a mega move, and gold bulls are still sitting very pretty.
But there’s more to the story than that.
Treasuries are also starting to lose their bid.
The yield on the 30-year looks set to slice back above 4.00%, and it’s been ages since the 10-year made a new low. The yield hasn’t jumped much, but the sideways action definitely marks a break from the ongoing decline that we’d seen leading up to this.
Meanwhile, through it all, stocks have managed to rally despite some notable headwinds. Apple tried to tank the market by reporting weak iPad sales (well, weaker than the googly-eyed estimates of greedy investors). And the rumblings of what could be a new financial crisis — foreclosure-gate, mortgage putbacks — has done real damage to investors in the big banks.
And yet, here we are, approaching new highs in stocks. Going into the weekend, the NASDAQ is still off about 40 points.
One reason: the economic data is actually improving.
This chart from Deutsche Bank, which plots stocks against the firm’s surprise index is compelling — when the macro numbers beat expectations, stocks go up. Forget QE.
Now let’s go back a bit and reverse-engineer the market based on what we’ve seen: prior to the recent bond weakness, there was a ton of talk about the apparent disagreement between bonds and equities. The stock market seemed to be saying that things were OK/decent while the bond market seemed to be predicting decades of Japanese-style stagnation?
Which was right? Well, there’s a cliche (probably unfounded) that the bond market is smarter, so it must be right.
But maybe it wasn’t in this case. Look, QE works by buying bonds, not stocks, and the transmission mechanism of QE to the stock market is tenuous. If you had to pick one market that was probably being distorted — bonds or stocks — then you’d have to pick the bond market., because you KNOW the Fed is in there keeping the bid up.
Thus it’s possible that this week represents a real game-changing break, where the stock market has established itself as the market that’s right about the economy — with equities showing the ability to rally for reasons other than cheap money.
This weekend the story is all about the G20 meeting, and whether or not some kind of currency deal can be reached. It’s unlikely that Tim Geithner — who on Friday unveiled a proposal for current account surplus caps — can get exactly what he wants. But if he makes some leeway on weakening the yuan, that will add to the momentum.