Tuesday, December 02, 2008

Market Signals

The USD Index which measures the performance of USD against a basket of currencies has shown a visible negative correlation to equity markets and metals markets. The strengthening USD has been a direct consequence of flight to safety to the US treasury. The money market has improved as lending in overseas markets have again started though the rates are still on the higher end as compared to the benchmark US and Euro Area rates. The TED spread is now hovering around 2.18 percent.

Intermarket analysis shows that a strengthening USD is bullish for US equities. The other leading factors being rising bond prices and a crash in commodity markets. In the current scenario we have three set of factors which are inline with the historical activity.

The US 30 year bonds have rallied strongly showing that US will maintain 1% or below interest rates for next few quarters. The USD has entered a strong upmove, which can last quite a while, though long term bearishness is still in force. Commodity markets have topped out with the exception of gold and crude oil. It is highly likely that we may have already seen the top for most of agricultural commodities for the next one decade.

All this points out to a few important factors. Low inflation, cheap credit. However an important issue for commodity driven emerging markets is the strong USD. Most of the commodity driven EMs like Brazil would not do great in a rising USD scenario. The best of the lot from emerging markets is India.

I think the equity markets may give a strong rebound in the short term can can spend a lot of time in the counter trend rally of the present bear market. The bear market has not given a convincing sign of a final bottom. However, I feel the negative correlation of rising USD and falling equity markets might break in few weeks as risk aversion takes a back seat. We may have formed a low for this month today, only time will tell. DJIA looks set to give a strong relief rally if prices hold 7950 on closing this week.

Gold now looks an appealing sell on a rally to $790-$810.

Zinc may form a reversal pattern in few days, watch it carefully.

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