Will We See a Short-Term Top?
Most stocks are in uptrends, but line could turn down from the high level.
After hitting its best levels of the year on Wednesday ahead of the Federal Open Market Committee's (FOMC) communiqué, the S&P 500 Index ran into heavy weather on the realization that the Fed could start scaling back on emergency support of the economy. US equities dropped further later in the week on renewed concerns about the state of the troubled housing market and weaker-than-expected durable goods orders.
In addition to global stock markets declining, risky assets such as commodities, oil, gold, and other precious metals all sold off as pundits worried about the winding down of quantitative easing puncturing the "liquidity rally." Government and corporate bonds, as well as the Japanese yen, emerged as winners.
The FOMC maintained its loose monetary policy following its meeting on Wednesday. The statement said the committee expected to keep the Fed funds rate target in the 0% to 0.25% range "for an extended period."
Moody's Economy.com said:
"The committee extended the time period over which it plans to purchase Fannie Mae (FNM) and Freddie Mac (FRE) debt and mortgage-backed securities. The remarks on current economic conditions were more optimistic than in August, and the FOMC now believes the recession is over. The Fed will keep monetary policy loose in the near term to support the recovery but is laying the groundwork for an eventual tightening."
Although the US Dollar Index (+0.4%) closed a little higher on the week, the greenback hit a one-year low against the euro on Wednesday, with the Fed's indication of keeping US interest rates at current levels for a while longer underscoring the dollar's status as a carry-trade funding currency. (Click here for a short technical analysis of the outlook for the dollar by INO.com's Adam Hewison.)
The past week's performance of the major asset classes is summarized by the chart below – a set of numbers that shows risk aversion creeping back into financial markets.
A summary of the movements of major global stock markets for the past week, as well as various other measurement periods, is given in the table below.
The MSCI World Index (-1.4%) and MSCI Emerging Markets Index (-1.2%) both closed the week in the red, with the Shanghai Composite Index (-4.2%) one of the biggest losers among the major stock markets. After bucking the global weakness that prevailed during the week, Chile is now only 5.1% down from its July 2007 highs and could be one of the first markets to wipe out all the financial crisis losses.
The major US indices declined for three consecutive days (from Wednesday to Friday) and registered their first weekly drop since the last week of August. The year-to-date gains remain in positive territory and are as follows: Dow Jones Industrial Index +10.1%, S&P 500 Index +15.6%, NASDAQ Composite Index +32.6%, and Russell 2000 Index +19.9%.
Top performers in the stock markets this week were Latvia (+8.0%), Cyprus (+6.8%), Israel (+5.0%), Ukraine (+4.9%), and Saudi Arabia (+4.1%). At the bottom end of the performance rankings, countries included Luxembourg ( 8.7%), Ireland (-4.2%), China (-4.2%), Mexico (-4.0%), and South Africa ( 3.3%).
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