STOCKS:
The European debt contagion has been “kicked down the road” as Spanish and Italian short-and-long term bond yields have moderated recently given the ECB “plan” to buy bonds of up to 3-years in maturity...but only if asked; and only if conditionality is imposed upon those asking. The Fed has also changed its game from “inflation-fighting” to “unemployment fighting” with the new move to QE-4; and with any war — they will go further and farther than anyone believes in printing money to achieve their ends...regardless of their balance sheet concerns.
STRATEGY: The S&P 500 remains above the 160-wma long-term support level at 1261. The much followed 200-dma support level stands at 1391, and was regained in weekly key bullish reversal fashion. Collectively, this stands bullish for a test and likely breakout above the recent September highs at 1475. We are long of gold and transports at this juncture; but need to consider pullbacks for a potential rally extension.
WORLD MARKETS ARE MIXED COMING INTO FRIDAY with China showing the worst declines of any of the major bourses we follow…down -1.8%. This was due in large part of a “spike” in food inflation to a 7-month high; rising +2.5% year/year. The Chinese always and everywhere fear food inflation because the population tends to stir and demand political change – change the authorities do not believe in. Too, the Chinese are on the verge of easing monetary policy once again; but doing so within the context of rising food prices gives Chinese authorities room for pause. The Chinese stock market didn’t like it; but it hasn’t translated into other bourses as much as it has bled into the commodity markets.
That said, gold prices are lower, although far off their overnight night lows; crude oil is lower, but again it’s off its worst levels – and this within the context of a sharply falling US dollar against the euro. We have shown recently that the US dollar is likely to falter rather badly in the months ahead if the “head and shoulders” top comes to fruition; and we are still pondering the impact upon Europe of just such a sharp move higher in her currency.
It's been saved, and perhaps it drives sharply higher cutting her competitiveness even further and plunging Spain and Italy further into economic decline. Certainly their bond markets aren’t reflecting this as of yet as both country’s 10-yr note yields are below 5.0%; and while this is relative stressed, it is far below the highs seen above 7.0% just last July.
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