Markets Sending Conflicting Signals

Since Fed Chairman Bernanke's press conference back in mid June, markets have been erratic. Interest rates have soared along with oil, while equity markets swooned and have stormed back, and gold has attempted to halt its decline as well as other commodities. With markets hanging on every word from the Fed Chairman, volatility has come back to the markets. After the market close July 10, the Fed Chairman spoke in an attempt to clarify the Feds position on easing and markets responded positively the following day. Most markets rallied as a result. Economic data has been light this week, the first week of earnings, so there were not a lot of other data points to justify the markets positive bias. The treasury market rallied sending its yield down 11 basis points, while the Dow, S&P 500, Nasdaq, and Russell 2000 all closed with gains of at least 1.10%, with the stand out Russell 2000 logging its 5th straight record close.

What Gives With The Market Moves?

The current explanation for the equity markets resurgence is a widely held belief that the markets overreacted to the Fed Chairmans comments to the media after the June meeting. The the Chairmans soothing words on July 11th, markets have recorded record gains, eliminating Junes swoon. Although rates continue at elevated levels relative to May, treasuries have staged a mini comeback sending yields well below the highs. This is little reassurance for prospective borrowers who are still staring at higher interest rates for home loans and other purchases. The question is why are equities and fixed income rallying together? Typically these two markets are associated with being negatively correlated, when one rises the other falls. The surmised "Great Rotation" was based on this understanding. As money would flow out of fixed income assets and in to equities, rates would rise as equities benefited with higher prices. However, it seems what is taking place is a combined reaction by both markets to the overreaction to the Feds June meeting and a "short" covering by investors in  both markets. An indication that this may indeed be the case would be both markets behavior early next week. By then shorts have probably covered and the markets should see some consolidation until either earnings act as a catalyst or some other market moving event takes place.

Oil Is Up Over $100 a Barrel But Gasoline Prices At the Pump Hold Firm. Huh?

There has been much made of the rise in the price of oil and lack of corresponding move in the amount consumers are charged at the pump, particularly during the traditionally high driving season. Articles are starting to hint that higher gas prices are coming as a result of the rise in oil, but why hasn't it happened yet? Typically when oil rises gas prices at the pump react spontaneously, and when oil falls gas prices at the pump "fall like a feather". This time around there is almost a stubborn resistance of gas prices to follow oil higher. Most analysts point to falling American demand at the pump to explain this phenomenon. However, as the traditional summer driving season heats up and American families hit the road, gas prices have not only held steady but seemed to have bucked the trend and in some cases declined as summer has rolled on. As the economy continues to improve and demand continues to grow it is likely prices will ultimately give in and start to rise creating a headwind for consumers. Until that happens, happy driving!

The Dollar is Being Blamed For the Rise In Commodities

One thing that most analysts agree on is that the U.S. dollars decline has led to the rise in commodities like the metals and oil. Gold has found support and has currently stopped declining while copper and other metals associated with a growing economy have firmed. What is not so easy to explain is how these commodities will perform going forward with expected economic weakness out of China and other "BRIC" economies that were supposed to lead the global growth story. After witnessing the dollars strength against other currencies, particularly the Japanese yen, the dollar has declined recently, most likely the result of relaxed anxieties by the market of further rate rises in U.S. treasuries. Typically, a currency's strength is a function of that currency's interest rate structure. A strong currency is associated with higher interest rates as it attracts investors which drive up the exchange rate against other currencies.