After weeks of positive sentiment across all equity markets, Friday saw a pullback. Let's be fair, you cannot be all running at the same time and see no pullback. But its interesting to see what the media and experts say were the reasons for the pullback.
a) China was making news all week, and on Friday the Shanghai Composite rattled world markets with a sudden 5% drop on inflation fears and the threat of tightening by the government. Is this a surprise? Of course not. What is more important is sentiment is still good and the pullback is just a breather. When you run for sometime, you have to pullback even if there were no bad news.
b) US municipal bonds took a huge hit and could be flashing danger signals for further problems to come. Muni prices have plunged as concerns about municipal debt and default continue to grow. So far this has been a back burner issue as everyone has assumed that the Federal government would bail out the states and municipalities, but with QE2 and a new House of Representatives in town, confidence in this outcome seems to be on the wane. So when did the rest of the markets really care about US housekeeping issues?
c) U.S. policy makers had a bad time at the G-20 meeting and while they were getting beaten up there for QE2 and devaluing the dollarIn Seoul, President Obama failed to get a much ballyhooed trade agreement with Korea, and the U.S. delegation took heat from countries like China, Brazil and Germany for devaluing the dollar at their expense. Later in the week, the Chinese again expressed their displeasure with current affairs as Commerce Minister Chen Deming said they didn’t support quantitative easing and espoused on the risks of growing more global bubbles. These are policy concerns, not liquidity driven issues.
d) While investor sentiment remains at extreme bullish levels. However in the U.S., insiders didn’t share the same optimism and set records for selling at a 12-1 ratio, perhaps sensing an interim stock market top. This is a concern.
e) In reality, US data has turned slightly more upbeat, reflected in higher US yields.
f) As the USD recovered, commodity markets have fallen back to earth with a thud, causing some to say the commodity bubble has burst, that's bull. A weaker USD caused a rally in commodity price, a slight rebound in USD would do the same in reverse, and since when we have a commodity bubble???
g) Debt worries are widespread in the Euro zone, the market is currently fixated on the Irish situation. Rumors are currently circulating that EU talks are underway that will lead to a financial rescue plan for Ireland as early as next week. Ireland’s Finance Ministry stated it had made no application for emergency funding from the EU and the European Commission said it has not received an aid request from Ireland. They are going through the motions. The Ireland issue is much smaller than the Greek's crisis, and the ECB have to do likewise and bail them, so what.
Being bombarded by various news and opinions can make one confused on market direction. Like I said before, all markets are running for quite some time, they have to pause even if there were no bad news. What's irksome is the business channels and media have to write "something" to explain the markets' pullback. As you can see, there are a plethora of reasons if you want a reason to sell.
I do not see any of the given reasons as anything new, we all know that. What is real is we are in for a low interest rate environment. The USD is moving down on QE2 and rebounding every now and then but the downtrend is there, which will move commodity prices higher and support US equity prices as well.
Elsewhere in emerging markets we are on a tear, or rather just starting. Its not a long drawn correction, its a blip. Thing should move up this week.
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