Seeking Short-Term Safety
The prospect of further disruptions to life or even
additional terrorists attacks have the trade pondering the case for likely
additional slowing in the US economy. The disruption to people’s lives across
the the country is a factor whose economic costs have not been adequately
estimated and whose human toll is incalculable. Corporate profitability and
thereby, any rebound in US stocks, will surely be effected. Barring more
reassuring signs of the situation stabilizing, traders appear eager to flee the
uncertainty of the US economic scene by purchasing short-term government debt
and other "safe haven" assets.
Retail sales inched up .3% in August, making their biggest gain in four
months. Of course the data was collected prior to the unprecedented devastation
at the World Trade Center, Pentagon, and in Pennsylvania. With recent data
showing a manufacturing recession and the gross domestic product (GDP)
figures showing a near-recession, the economy had already been struggling to
recover from its biggest slowdown in over eight years.
The recent tragedy will likely dampen consumer sentiment –and their
willingness to spend — in the short-run. Consumer confidence is a key
leading indicator of consumer spending (and retail sales), spending that
accounts for two-thirds of economic activity.
The short end of the yield curve is up sharply, demonstrating the market
believes the disruption will be a short-term dislocation. September Treasury
bills
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December five year notes
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From the Momentum-5
List, 10-year notes
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up 14/32. But T-bonds
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as well, are up a more subdued 5/32 at 105 29/32.
Although the Japan’s public debt is estimated will reach 130% of GDP and government
data continues to show signs its economy is deteriorating, the
Japanese yen
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strongest things a market can do is continue to rally in the face of
negative news. The yen has rallied throughout the late summer as Japanese
corporations repatriate funds (selling dollars and buying yen) to meet new
requirements to "mark to market" or realize losses on failed
domestic investments.
Another element of the yen’s rally is the flight out of US assets in the
wake of Tuesday’s murderous tragedy. At some point the tremendous run-up in
the yen will stabilize. For instance, we are beginning to see the yen pulls
back from the May 31 high (in action similar to a Turtle Soup Plus One Sell
pattern, but on a weekly scale).
Grains are also trading at the Chicago Board of Trade (CBOT) along with
selected contracts at the Chicago Mercantile Exchange. Soybean meal
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is remaining resilient in the bean complex. Fresh outbreaks of hoof and
mouth disease last week in the United Kingdom and the first confirmed case
of mad cow disease in Japan could increase the demand for the protein
available in soybean meal as feed. Bean meal has held above the 159.20 pivot
and the gap left on June 29, an encouraging sign for the bulls.