Global markets have rallied for two weeks, which has investor hopes high that the rally marks the end of the market correction that began in March.
But the rally has run into serious problems in the news, as well as technical resistance on the charts that make the thought of the correction already being over questionable to say the least.
First it was that Spain receiving a $125 billion loan for its banks two weeks ago did not result in the expected big relief rally in euro bond markets. Instead, markets realised that Spain’s government debt crisis was an even more serious problem than its banking crisis. The yield on Spain’s 10-year bonds then surged up to 7%, which is considered the danger zone for government borrowing costs that may require a bailout for Spain, since that was the level that required the bailouts of Greece and Portugal.
Then the election in Greece was supposed to create a big relief rally if the conservative pro-euro, pro-austerity New Democracy party won the election. The pro-euro party did win. But instead of rallying, markets sold off on the news, as if they had already factored in the favourable result in their two-week rally.
Then the G-20 meeting in Mexico was supposed to produce a major coordinated economic stimulus effort. Instead it resulted in yet another bland statement that the 20 major nations recognise the problem, but are not yet willing to come up with a plan of action.
Then there was the Fed’s FOMC meeting, for which there was also high hope of a major stimulus announcement, some form of QE3 to rescue the rapidly worsening U.S. economy. Instead it produced a disappointing decision to merely maintain the status quo. That is, ‘Operation Twist’, which is clearly not working to halt the worsening slowdown, and was due to end this month, will be extended to the end of the year.
Meanwhile, in the background there were more disappointing economic reports this week of the type that already had markets expecting the major rescue efforts that did not materialise.
They included reports that new housing starts, and existing home sales both fell again, and the Philly Fed’s Business Index plunged to a negative 16.6 in June from an already negative 5.8 in May. Global reports were equally disappointing. China’s PMI Index fell again in June, to a seven month low of 48.1, remaining below 50, indicating a contracting economy. The euro-zone’s PMI Index was reported at 46 in June, a 35-month low.
And rare for a Wall Street firm, the head of Goldman Sachs Macro Equity Team sent an e-mail to clients recommending they sell the S&P 500 short on expectation of the market’s correction resuming.
Moody’s added to the negatives by following through on their warnings in February to do so if conditions didn’t improve, downgrading the credit ratings of more than a dozen major global banks on Thursday, including five of the six largest banks in the U.S.
And last but not least, the plunge in commodity prices that I warned of in my column several weeks ago accelerated.
The price of oil dropped beneath $80 a barrel this week, and is down 29% since its peak at $110 a barrel in February. And the CRB Index of Commodity Prices plunged further and is now down 18% from its level in March. The ominous implication of that is that the CRB plunged 57% in the financial crisis of 2008 to its low in March, 2009, and the S&P 500 plunged 57% in the 2008-2009 bear market. The CRB then fell 15% in the summer of 2010, and the S&P 500 fell 15% in its summer correction in 2010. The CRB fell 19.5% last summer, and the S&P 500 fell 21% in last summer’s correction. And here we are this year with the CRB Index down 18% since its March peak, and still falling.
Meanwhile, on the charts, the two-week rally carried the major indexes up exactly to the potential short-term resistance at their key 50-day moving averages on Wednesday, not just the U.S. market, but most global markets as well. And sure enough, global markets plunged Thursday from that potential overhead resistance, the Dow closing down 250 points.
The major Asian and European markets closed down again in their last session of the week. However, as this being written mid-afternoon on Friday, the U.S. market is rallying back some from its big loss on Thursday.
I have to wonder where the hope is coming from now if this week’s understandable high-hope events fizzled so badly.