An unnatural state of calm in markets as jobs data disappointsPosted on 08 January 2011 with 8 comments from readers
Stock markets fell and futures indicate a further fall on Monday morning but the general reaction to the latest below expectations jobs data was pretty calm. Too calm really, and perhaps the calm before another storm in financial markets.
Certainly something is brewing here. The long rally since March 2009 has its rationale in a recovery that just is not happening. US home building is running at an annualized 500,000 units compared with 2.2 million pre-crisis, and auto sales are still down 25 per cent.
When you consider that housing and autos are the largest items of consumer expenditure that comprises 70 per cent of US GDP, and that these sectors are still mired deep in depression, is it any wonder that unemployment is 9.4 per cent?
That marked a fall in the unemployment rate but is largely a statistical quirk as many folk just gave up looking for a job and so came off the official list. Down-in-the-street nothing much changed.
The Baltic Dry Index of global trade has fallen back to levels last seen in May 2009, and the falling Chinese stock market also points to a renewed squeeze. Is this the delayed start of the long-awaited global double-dip?
Federal Reserve chairman Ben Bernanke sees a bleak future for job growth and the Fed is not slackening its $600 billion QE2 money printing, a stimulus designed to keep the tiny flame of recovery alive.
But in reality the US economy appears stuck in the same deep hole it fell into in the financial crisis. House price date still looks abysmal, so no sign of a recovery there (click here) and auto sales are still very low (click here).
Bond market tremors
In the meantime, the new threat comes from rising interest rates and a weakening bond market. Indeed, since QE2 started interest rates have been moving up, the reverse of the intended effect (click here), so QE2 is not working. Portuguese bond yields topped the danger level of seven per cent last week.
This leaves financial markets in an unnatural state of calm. There must be huge manipulation in progress to prevent a more violent market reaction. We know that the Fed’s cheap money is being used to prop up the market because there are few other buyers.
What happens when artificial supports are removed from any market or suddenly overwhelmed? That is something any investor ought to reflect upon and take appropriate action while there is still time. Normally around about this phase in the cycle some bad news that comes completely unexpectedly would trigger a big sell-off.
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