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Is the Risk Trade Back On?


Liquidity trends won't likely be a constraint on higher prices for a while.

This week's review comes to you in a shortened format as I'm about to leave Cape Town for a visit to the colder environs of Switzerland and Slovenia. Although reduced commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

The Federal Open Market Committee (FOMC) maintained its extraordinarily accommodative monetary policy following its meeting on Wednesday. The communiqué had no surprises and said that the committee expected to keep the fed funds rate target in the 0-.25% range "for an extended period." As expected, the European Central Bank (ECB) and the Bank of England (BoE) also kept interest rates unchanged at 1% and 0.5% respectively.

"A hesitant economic recovery, tame inflation and severe credit headwinds suggest that monetary policy will need to stay very easy for at least another year. Liquidity trends will not be a constraint on higher prices for risk assets for a while," said BCA Research.

The jump in the unemployment rate to a 26-year high of 10.2% in October -- an increase of 0.4 of a percentage point -- reminded pundits of the challenges in the labor market and broader economy. While investors' hopes of an economic recovery might have gotten ahead of reality, unemployment is still a worrisome issue.

The past week's performance of the major asset classes is summarized by the chart below. Gold bullion was the star of the week, especially subsequent to the purchase by India's central bank of 200 metric tons of gold from the International Monetary Fund. The price jumped by 4.7%, recording an all-time high of just over $1,100, with platinum (+1.7%) and silver (+6.6%) also handsomely higher. (See my recent post Gold Bullion Surging in All Currencies.)

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 (+2.4%) and the MSCI Emerging Markets Index (+2.4%) both made headway last week to take the year-to-date gains to 23.0% and an impressive 65.1% respectively. Interestingly, Chile is now only 3.9% down from its July 2007 high and could be one of the first markets to wipe out all the financial crisis/recession losses.

The US indices reversed a two-week down-patch and all the major indices and economic sectors closed higher for the week. The S&P 500 scored a full house of gains and the Dow Jones Industrial Index reclaimed the 10,000 level, putting these indices within 2.7% and 0.7% respectively of their 2009 highs.

The year-to-date gains in the US remain firmly in positive territory and are as follows: Dow Jones Industrial Index 14.2%, S&P 500 Index 18.4%, NASDAQ Composite Index 34.0%, and Russell 2000 Index 16.2%.

Top performers among stock markets this week were China (+5.6%), Argentina (+5.1%), Brazil (+4.7%), Ukraine (+4.7%), and Slovakia (+4.7%). At the bottom end of the performance rankings countries included Egypt ( 6.6%), Vietnam (-5.5%), Iceland (-4.2%), United Arab Emirates (-3.4%), and Serbia ( 3.3%).
No positions in stocks mentioned.
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