The long and winding road toward a global recovery continues to encounter tight hairpin curves and an occasional roadblock. Last week, just when it seemed like most markets were poised to fully embrace a return to double-dip recession conditions, sentiment pivoted and improved significantly. Apparently the mere hope of accommodation from the BOE and the US fed provided the impetus for the recovery in attitudes, but it is also possible that a flurry of mostly supportive US corporate earnings and a further downshift in Euro zone debt fears also contributed to the revival. One might also suggest that a final end to the push for financial reform removed a layer of anxiety that had been hanging over the market for most of the last 6 months. However, until the flow of US scheduled data shows some improvement again, we would label the gains in stocks and certain physical commodity markets as rather suspect. With the renewed concern toward the US recovery and the most recent “quietly orchestrated” push for another extension of US unemployment benefits, it is possible that US financial instruments might be viewed with some suspicion by foreign investors.
With the US Dollar seeing a two-month slide and US Treasuries only able to manage a two month consolidation below contract highs, it would also appear that some flight to quality interests are already pulling away from the US Dollar and US Treasuries. While we don’t see the US credit rating called into question anytime soon, in the event that the numbers remain soft and the next non farm payroll report shows another big loss, the onus could be on Washington to do something other than extend unemployment benefits. While Harvard and other politically correct institutions of higher learning might be able to produce studies that ferret out some abstract stimulus effect from extending payments to the unemployed, to get “self perpetuating” growth might require some tried and true classic stimulus efforts.
While China and other important world entities have signaled their ongoing interest in US Treasuries, it is not a given that another round of deficit spending from the US will go off uncontested. Therefore, we see the potential for even more slowing ahead and a major political/economic decision might have to be made by Congress and the President in the coming month. While physical commodities like oil and metals are sure to be dramatically impacted by the recovery/no recovery situation, we think the tell-tale markets will be the US Dollar and perhaps the US Treasuries.
