Economic Review

2/16/2010

Will there be a break in the recently correlated moves in financial markets?

It’s been difficult to diversify exposure to market sectors given the “follow the leader” moves that have been transpiring over the past couple of weeks. The leader of the pack has been the US$ which has managed to post a noteworthy rally via the once unstoppable EURO. Unfortunately, this US$ rally has helped bring about the hefty correction in the major US Equity Indexes and has also managed to knock some short term steam out of the shinny gold market. Finally, US treasuries that appeared to be mounting a Yield surge early in the year, have experienced price rallies that have sent Yields lower.

For the short term much of this makes sense, as a rising US$ makes US goods more expensive on an export basis and profits for multinationals get squeezed, and of course, the carry trade becomes a bit less comfortable for speculators. The higher buck also naturally puts pressure on Gold, and the culmination of potential reduced earnings for multinationals and reduced exports may send longer term rates lower. But should these relationships continue over the long term…probably not.

The US$ is experiencing a pop via the EURO because of problems in the EURO Zone rather than enhanced fundamentals for the US. With the US$ not fundamentally a bullish sector, nor the EURO Zone, where do global investors turn for real value…Stocks? Bonds? There’s still a lot of air in these. Perhaps a shinny, glistening, yellowish asset class that the media seems to love to hate.

Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR

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