Asia, Europe, U.S. Dollar, and QE-2 Make The World Go Around
Where do we begin when trying to talk about this global soap opera? Lets start in Europe. Ireland is now on the official bailout list with Portugal, Spain, Italy, and Belgium being adding to the list of the next countries to need a bailout. Gold has surged to a new high versus the Euro currency. In other words panic is starting to set in and this problem is starting to hit the fan. The big question that everyone is asking is, will there be enough money available to bail out these countries? Perhaps the Federal Reserve can bail them out if they have not already. Today the Currencyshares Euro Trust(NYSE:FXE) is trading lower by $1.32 to $129.41. On November 4th, 2010 the popular FXE was trading at $142.28. When the Euro declines it means that the U.S. Dollar climbs and this is what deflates the global markets.
Yesterday the Chinese central bank (People's Bank of China) said that loose monetary policy must change. This means interest rates will go higher and easy credit will not be as readily available. This could certainly hurt the industrial commodity stocks. Leading stocks such as U.S. Steel Corp.(NYSE:X), and Cliffs Natural Resources Inc.(NYSE:CLF) could be negatively effected. However, it is still the movement in the U.S. Dollar Index that will likely drive the commodity stocks higher or lower.
North Korea and South Korea tensions seem to be increasing. China says that they want peace and will mediate the talks between the two countries. However, many experts believe that China supports the North Korean actions while the United States obviously supports the South Koreans. This story is far from over and will probably continue to unfold over the next few months.
Now on to the U.S. Dollar Index. When the U.S. Dollar Index declines the stock markets will rally and inflate higher. Even this morning as the U.S. Dollar Index pulls back intra-day the major stock market indexes bounce off the morning lows. The opposite occurs when the U.S. Dollar Index rallies or trades higher the major stock indexes simply deflate and trade lower. The U.S. Dollar Index holds all the cards to whether this stock market trades higher or lower. In my opinion all the rest of the news is minuscule when compared to the action in the U.S. Dollar Index. Just remember the stock market trades inverse to the U.S. Dollar.
Let us not forget the Federal Reserve Bank's quantitative easing operation. This is where the central bank will buy $600 billion in U.S. Treasuries in order to stimulate the economy. This is really just more support for the large major banks. These institutions that sell the U.S. Treasuries to the Federal Reserve Bank are expected to buy stocks and inflate the stock market back up. Just look at how the NASDAQ 100 stocks surge higher after a POMO operation.
Well, this is what makes the financial world go around at this time. While Asia, Europe, and QE-2 are all important it is the U.S. Dollar Index that is the most dominant market mover at this time. When the U.S. Dollar Index falls the major stock market indexes inflate and trade higher. The opposite is true when the U.S. Dollar Index rallies, the major stock market indexes will deflate and decline. Therefore, this environment remains a traders market.
I'm not a big proponent of any single form of technical analysis but what your chart does show very well is the clear trend downwards for the time being - moves lower are sharp and persistent, moves up choppy and half hearted. Stay onside with the market by selling into any rallies until the market tells you otherwise. Keep well.
Too right, I thought a positive Michigan would take it higher along with Dow, but looks like dead cat bounce so far.
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