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"Slowing activity that is not accompanied by easing inflation raises the prospect that Chinese monetary policy will continue to tighten, exacerbating the activity slowdown and thus weakening demand for Australian commodities," TD Securities FX and rates strategist Roland Randall noted.
Last Friday, the government reported a much better than expected job report. The major stock indexes soared higher after the announcement. However, once the U.S. Dollar Index traded higher that rally faded throughout the day and the major stock indexes barely closed higher on the day. The Wall Street computer algorithms are programed to trade inverse to the U.S. Dollar Index. Often the major stock indexes will trade inverse to the U.S. Dollar Index tick for tick. The same type of action can be seen this morning and it is not yet 10:00 am EST right now.
Everything inflates higher when the U.S. Dollar Index trades lower. The entire stock market rally from March 2009 has been on a weaker U.S. Dollar Index. In fact, the only corrections that the stock market has seen have been when the U.S. Dollar Index rallied higher. Oil, gold, silver, copper, coffee, cotton, gasoline, and almost every commodity except natural gas have benefited from a weaker U.S. Dollar Index.
The problems in Europe do not seem to be going away anytime soon. Greece is looking to possibly leave the European Union if they do not get more favorable borrowing terms. The problem is that if Greece does get new borrowing terms countries such as Ireland, and Portugal will also look to get more favorable lending terms. This is just another domino effect that will take place in the European Union. Should all of this transpire in Europe over the next few months then the U.S. Dollar Index could actually trade higher. Hence, when the dollar is higher the inflation rally over.
It will be very interesting to see how the central banks are going to handle this situation. Obviously, they will need to keep the U.S. Dollar Index down at all costs in order to keep asset prices inflating higher. Right now the CME continues to increase margin rates on many of the leading commodities in order to keep these prices from climbing. We shall see how they try and accomplish this task in the coming months.
While the financial stocks are seeing a rare move higher, it is likely they will see more downside in the near term. None of these stocks mentioned above have solid support. Goldman Sachs has major support at $143.00, JPMorgan at $43.00 then $42.00, Bank of America at $11.50 and Wells Fargo at $26.50. If you want expert trades on these stocks, take the one week free trial of the Research Center.
These levels are key supports and should they hit, then these stocks will have a reward to risk that is worthy of a long. Until then, today appears to be a minor dead cat bounce in an otherwise ugly sector.
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
WTI oil surged higher by $5.37 to $102.55 a barrel. That is a rally of more than 5.00 percent on the session. The United States Oil Fund(NYSE:USO) is trading higher $1.73 to $40.60 a share. The iPath Dow Jones UBS Copper Total Return(NYSE:JJC ) also benefited from the U.S. Dollar Index pullback. The JJC rallied higher $1.03 or $53.30 a share. Gold and silver also surged higher this afternoon. Silver was the big winner rebounding over 6.5 percent to $36.78 a share.
The Federal Reserve seems to be stuck between a rock and a hard place now that the market leading commodities are trading inverse to the U.S. Dollar Index. If the U.S. Dollar Index was to decline or pullback further the commodity complex looks as if it would go wild to the upside once again. High oil, gasoline, and other commodity increases will eventually have a negative effect on the inflation rally by the central banks.
If you look at a chart of the Dow Jones Industrial Average over the past two and a half years you will notice that there have been less than a dozen Friday's where the market has declined by more than 100.0 points. This is because the powers that be need the U.S. consumer to spend money. All of this weak dollar stuff that the Federal Reserve and other central banks have done, such as the zero percent Fed funds rate since December 2008, $1 trillion QE-1, and the current $600 billion QE-2 , will only work if the U.S. consumer spends money. Please remember that consumer spending accounts for roughly 70.0 percent of the gross domestic product (GDP) in the United States.
The Federal Reserve boss, Ben Bernanke, wrote exactly about this many years ago. Basically, he said if the stock markets are higher than the public will feel better. He is actually correct if you look at the Friday effect. The central bank controls the stock and commodities markets by the amount of cash reserves they create. The only negative for the Bernanke theory is that by creating cash he also creates inflation. When goods become too expensive due to inflation the economy will ultimately suffer. Just look at the price of gasoline, food, and most other commodities recently. However, the party for the stock market will usually last until that final point of inflation becomes too much pain for consumers. Since March 6, 2009, the inflation party has been in full force. Yesterday, the U.S. Dollar finally surged higher and look how quickly that inflation party came to an end. Today, the U.S. Dollar is trading flat and the party is back on. Today is also a Friday, the volume is extremely light, and the government job report was much better than expected.
Since the tech wreck, and the dot com bubble burst, in the year 2000, the solution for the stock markets by the central bankers has been to weaken the U.S. Dollar. That was tried by the former Federal Reserve boss, Alan Greenspan, in 2002 which lead to the greatest stock decline since the Great Depression in 2008. This time around the current Federal Reserve boss, Ben Bernanke, has done much more stimulus and money creation than Alan Greenspan ever did. This method that the central bank uses is really just playing yo-yo with the U.S. Dollar. Last year, the U.S. Dollar Index surged higher from November 2009 until June 2010 and that surge in the dollar caused the stock market to stage its first 17.0 percent correction since the inflation rally began in March 2009. This is a direct correlation to the U.S. Dollar Index and that is still all that really matters. At this point in time the stock market cannot stand on its own two feet with a falling U.S. Dollar. This is unlike the 1990's when the stock market and the dollar rallied higher together. When the dollar and the markets can trade higher together that is real wealth. Right now, when the dollar trades lower and the stock market trades higher that is just a trade off. Wealth is not created when that happens, and hopefully the equity you have has increased more than the dollar has declined. There is really nothing gained here.
Oh well, let us enjoy the Friday rally and remember to spend some money this weekend. Please keep an eye on the U.S. Dollar, if that green piece of paper catches a bid, today's rally may not last very long.
88 to 88.50 levels holds yet again. Bearish outside bar on the weekly. Price on the weekly can't close and hold above 88, and most times when we've seen a bearish outside bar it's followed by a good few weeks of trading lower. Waiting for a short setup here.
