Intraday Market Thoughts

Bank Rumours, Philly Fed Batter Market

by Adam Button
Aug 18, 2011 23:57

After five days of relative calm, wicked volatility returned on Thursday as stocks tumbled, gold hit a record and bonds rallied to the highest in 50 years. The commodity currencies were the worst performers while JPY outperformed. Japans all-industry activity index will be released in the upcoming session. Ashraf's Intermarket Insights has 9 new trades, 8 of which are already executed & in progress.

Thursdays turmoil was initially sparked by talk of huge losses in European banks. A rumour circulated about a bank needed an emergency $500 million loan this week. The US session added concrete negative news as the Philly Fed plunged to -30.7. The 33-point drop was the largest ever one-month decline in the index and the details of the report were equally troubling with new orders and employment tumbling.

Other economic data showed:

- Existing home sales falling 3.5% compared to the 3.5% rise expected.

- US initial jobless claims rising to 408K versus the 403K expected

- Leading indicators climbing 0.5% compared to +0.2% expected.

The S&P 500 fell 4.5% to 1141 and oil fell $5 to $82.

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Stocks are not even reflecting the full angst in markets. Bonds are pointing to something like a depression. Just hours after US CPI jumped 0.5% in July, the yield on the 10-year note fell below 2.00% for the first time since 1954. At that rate, almost a quarter of the yield is wiped out in a month.

Looking at the longer term, the CPI ran at 3.6% y/y. In the past year, US 10-year yields have only traded above 3.6% for two weeks (in Feb), so almost every single person who bought or held T-notes over the past year had a negative real return, oftentimes by more than 100 basis points.

Yet even at these levels, and with the US downgrade, no one appears to be selling bonds -- people would rather lose money than take any risk. Given this, its easy to see why so many investors are piling into gold, which gained $28 to settle at a record $1822.

Asia-Pacific Preview

The yen narrowly outperformed USD on Thursday but the gains would likely have been larger if Noda didnt caution that Japan may intervene again. The lone economic data point of interest is the June Japanese all-industry activity index. Expectations are for a 2.2% rise after a 2.0% increase in May but with all the turmoil in markets, its extremely unlikely this data point will have an immediate impact.


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