Prior Two Weeks Dec. 12-24
Stocks, commodities, and risk currencies have continued rising to two year highs, despite a list of deteriorating fundamentals that includes:
· EU Sovereign Debt/Banking Troubles
o Rising PIIGS bond rates
o A steady stream of credit downgrade warnings for Portugal and Spain
o Downgrades for Greece, Ireland, and Hungary
o Talk of additional Irish bank bailout disbursements to Allied-Irish Bank
· Further Tightening Measures In China To Reduce Inflation and Growth
o Rising Bank Reserve Requirements
o The second short term rate hike since October
· Overall Data From The US, UK, and Japan
· Ongoing Threats Of War From N. Korea
Why? The buying isn’t coming from retail buyers or insiders, both of whom have been selling for months.
Rather it appears that cash continues to come into the markets from assorted US and EU stimulus measures, as central banks buy government bonds from major banks, which in turn put the cash into equities.
Looking Ahead: Brief Thoughts On What’s To Come
Here’s a brief summary of how the bullish and bearish forces stack up in the coming weeks.
Bearish
- Risk assets at multi-year highs, tepid growth prospects could provide a pretext for year-end profit taking.
- Looking beyond next week, we suspect the weight of bearish forces detailed below put the odds in favor of a pullback in risk assets.
- Low liquidity magnifying any big surprise negative events that cause mass selling of risk assets with few buyers, and buying of safe-haven assets with few sellers. The result – wild price spikes.
- Continued China tightening threatens to slow growth in China, and thus Australia, Canada, and other markets tightly tied to China
Bullish
- Low liquidity magnifying continued stimulus actions in the US
- Possible Santa Claus Rally Continues
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