Stimulus Stimulus

Looks like market optimism is not jet ready to vane. On the back of falling dollar the gold reached new highs, and equity followed. It looks that the speculation on extension of some stimulus measures played most important part in this mini rally. Looks like dollar, gold, crude oil and equity correlation have become a part of computer algorithms and almost perfect inverse relationship  will continue. Not indefinitely, I’m sure. It looks artificial.

Chart 1. Gold Futures

$GOLD 07102009

At the moment I don’t believe that the inflation is  bound to accelerate, at least till the end of the 2010. The spare production capacity of around 35% in the US, declining credit leading to subdued consumer and investment demand  cannot spark price growth needed to accelerate inflation. The wage growth is integral ingredient of inflation. It lookse that the weakness in the labor market excludes every proposition of wage growth.   In terms of FED balance sheet expansion, it’s enormous, but if we look at BOJ balance sheet during the Japan’s lost decade we will see that in terms of the balance sheet compared to GDP the FED could double or even triple the balance sheet without sparking inflation. The dollar weakness is another story. I do not believe that the macro situation in the major currencies countries is better than in the US, the crisis is global. The dollar is bound even, lower judging by the sentiment, but I wouldn’t be surprised if we see a reversal of the trend in dollar soon.

Chart 2. S&P 500

$SPX 07102009

I was looking to re initiate my SPY put option position, but it never felt right, so I decided to wait a little bit. We have no market moving economic data this week.

Asian markets ended higher on the back of US market performance, no major news. Europe is trading marginally higher.

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This entry was posted on Wednesday, October 7th, 2009 at 3:21 am and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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