Prieur Perspective: Wall Street Reverses Course
Rescue plans redirect the market.
Global stock markets shrugged off dire news on the US employment front, arguing that the gloomy data would hasten US lawmakers' passage of a stimulus package. After falling for 4 straight weeks and recording the worst performance of the major US indices for January on record, Wall Street reversed course on the back of a stimulus-induced rally.
The US government seems on-track to announce 2 new recovery plans next week. Firstly, Senate Democrats reached an agreement with Republican moderates on Friday regarding a fiscal stimulus package. The deal, in essence, entails about $110 billion in cuts to the roughly $900 billion legislation, according to the New York Times. Secondly, a rescue plan to inject billions of dollars into banks and entice investors to purchase toxic assets will be outlined on Monday by Treasury Secretary Timothy Geithner.
As investors' risk appetite returned, the MSCI World Index and the MSCI Emerging Markets Index chalked up decent gains of 3.8% (YTD -5.4%) and 5.3% (YTD -1.7%) respectively. Among exchange-traded funds (ETFs), sector leaders were China (see additional comments below), Brazil and South Korea - all recording double-digit gains, according to John Nyaradi (Wall Street Sector Selector).
All the major US indices revved higher, as seen from the week's movements: Dow Jones Industrial Index + 3.5% (YTD -5.6%), S&P 500 Index + 5.2% (YTD -3.8%), Nasdaq Composite Index +7.8% (YTD +0.9%) and Russell 2000 Index +6.1% (YTD -5.8%). Interestingly, the Nasdaq has been outperforming the Dow and S&P 500 since the beginning of December 2008. Leadership by the technology sector is often good for the market as a whole.
Recent safe-haven trades such as US Treasuries (-0.7% in the case of 30-year bonds), the US dollar (-0.6%) and gold (-1.5%) took a back seat, as investors favored equities and commodities such as copper (+4.9%) and aluminum (+7.7%).
While pundits were speculating about when the Federal Reserve would enter the market as a buyer of US government bonds, Treasuries sold off as a large issuance of sovereign debt looms. However, German bonds gained handsomely on the perception that the European Central Bank was behind the curve with interest rate cuts against the backdrop of poor economic data.
The performance of the major asset classes is summarized by the chart below, courtesy of StockCharts.com.
Click to enlarge
Giving a glimmer of hope, the Baltic Dry Index (BDI) -- measuring freight rates for iron ore and other bulk goods -- jumped by 40% last week due to increased Chinese demand for iron ore. The Index has gained 125% over the past 2 months after plunging by 94% since its May high. The chart below illustrates the close relationship between the BDI (red line) and Reuters/Jeffries CRB Index (green line). (Not shown, the trends of the BDI and US Treasury yields also follow more or less the same path.)
Click to enlarge
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