Risk Fatigue Grips Financial Markets
And the US dollar -- the catalyst of many recent moves -- stabiilizes.
Stock markets succumbed to a bout of profit-taking last week, sparked by concerns that the rally has overshot the pace of economic recovery. Riskier assets were showing signs of fatigue as the US dollar -- the catalyst of many recent moves -- stabilized and was perceived to be near its trough (if only short-term in the books of ardent dollar bears).
The greenback, usually the remit of the US Treasury, received support from Fed Chairman Ben Bernanke in a speech. He noted:
[The Fed was] attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the US economy, will help ensure that the dollar is strong and a source of global financial stability.
These comments spurred some buying interest.
Bill King (The King Report) summarized the situation as follows: "For the past few months, bad economic news was perceived to be good news for stocks on the rationale that it ensured more juice. Dollar down, stocks and gold up has been the routine. Are we at an inflection point, where bad economic news is becoming bad news for stocks?"
The past week's performance of the major asset classes is summarized by the chart below. With the exception of equities and investment-grade corporate bonds, most asset classes closed higher on the week despite nervousness creeping in before the weekend. Gold bullion touched a record high of $1,152.74 on Thursday and helped platinum, silver, palladium, and copper reach fresh peaks for the year.
A summary of the movements of major global stock markets for the past week and various other measurement periods is given in the table below.
The MSCI World Index (-1.1%) and the MSCI Emerging Markets Index (+0.3%) followed different paths last week, resulting in year-to-date gains of 24.5% and an impressive 70.2% respectively. Notwithstanding solid gains since the March lows, no major index has yet been able to reclaim the 2007 pre-crisis peaks.
As far as the US indices are concerned, the Dow Jones Industrial Index eked out a small gain for the week as investors emphasized high quality, but the other major indices all reversed a two-week up-patch. Six of the 10 economic sectors closed lower for the week, with Technology (-1.4%) and Consumer Discretionary (-1.1%) underperforming.
The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 17.6%, S&P 500 Index 20.8%, NASDAQ Composite Index 36.1% and Russell 2000 Index 17.1%.
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