Revolution in Egypt and poor US data herald a Black Monday for stocksPosted on 29 January 2011 with 7 comments from readers
The eruption of widespread protests to overthrow the regime in Egypt and several weaker than expected US economic numbers brought stock markets down the most since November yesterday with emerging markets falling furthest. Gold, silver, bonds and the dollar strengthened in a flight to safety by investors.
Stock markets were already looking vulnerable to a correction after a long rally from the lows of March 2009. But the revolution in Egypt was completely unexpected this week, and grew from small protests to an attempted revolution within days.
Uncertainty in anarchy
What comes next is hard to predict, not least because all Internet and mobile communications have been shut down. But with key buildings in Cairo on fire last night the chances of the old regime surviving look slim, and the shape that any alternative government might take is completely unknown, if indeed there is one.
Meanwhile, the more humdrum issue of US economic data contained a string of disappointing figures last week that pointed to the weakness of the economic recovery. The durable goods order number was particularly bad, so too house price data showing a continued fall, and GDP data below expectations.
The spin doctors of Wall Street and the US financial media struggled to find positive trends within these data sets, and looked increasingly about as credible as spokesmen for the Egyptian government arguing that everything was fine.
However, in order to stay bullish in this market you need to have a solid argument for going long on stocks right now. What is it? Are you so sure that the money supplied by the Fed to the banks to prop up the stock market will be enough to manipulate the market still higher against this flock of black swans?
Is it not more likely that a big downturn in stocks will follow as that artificial prop breaks? For the stock market is currently set up to anticipate rising profits in a full-on recovery. Not only does the actual US economic data quite clearly show this is not happening but the global situation is worsening by the day.
Revolution in Egypt is one thing. What about hyper inflation and a property bust in China? What about the downgrading of debt in Japan? That means the country with the world’s largest overseas assets will have to liquidate holdings as yields rise on its bonds – that’s terribly bad news.
And what about Ireland, Spain, Portugal and Greece and the euro zone debt crisis? Or the UK with its falling GDP? Really for stock markets to be doing anything other than tanking in this economic environment is absurd.
Gold and silver are the winners, and in the short term the US dollar, oil and bonds. Short stocks. Unless peace breaks out in Egypt over the weekend this is the new momentum trend.