Apologies for the tacky reference to the 1980’s movie ‘Top Gun’. I could not help it especially after the President of the World Bank Group (Robert B Zoellick) in his press conference at the World Bank and International Monetary Fund (IMF) annual meetings said the ‘world was in a danger zone’.
His message to the leaders of developed countries was simple - “dangerous times call for courageous people”. Furthermore, Zoellick stated that “Europe, Japan, and the United States must act to address their big economic problems before they become bigger problems for the rest of the world. Not to do so is irresponsible”. When pressed on whether he felt the world was heading for a double dip recession, Zoellick did not think so although he hastened to add that his confidence was eroding daily with the constant drip of bad economic news.
Talking of bad news, this morning we saw the Dow Jones Industrial Index (Dow Jones) down well over 500 points at its peak. The Dow Jones index did recover somewhat to close down 391 points. This sell-off was a continuation of the carnage seen yesterday following the announcement of Operation Twist and a rebalancing of large institutional investment portfolios. The language coming out of the Fed was overtly negative and this has not gone unnoticed.
One of the things that has gone relatively unnoticed is that the previous negative correlation between gold and equities is slowly unravelling. Gold has up until very recently, been seen as a safe harbour for investors. There is speculation that some of the major corporates and banks in Europe who had been stock piling gold were now selling the precious metal to shore up their balance sheets.
Another metal that has been sold off today was copper. On CNBC.com this morning they highlight that the fall in the copper price is possibly an indicator that more stock losses could be ahead. Copper has traditionally been seen as a predictor for the global economy. Jeff Hirsh who runs the Stock Traders’s Almanac is quoted as saying that “every bull market has a copper top”. He also notes the top of a stock bull market has previously co-incided with the top in the price of copper. Hirsch also notes that it could be time to start buying equities as markets have historically bottomed after this type of sell-off.
The NZ/US dollar cross rate is now below 80 cents (traded down to 78 cents today) which is a six month low. What we are seeing is a stronger US dollar as investors are bailing out of what are perceived to be more risky currencies (e.g Euro, NZ$, AUS$ etc) and investing it into US cash, treasuries and some equities.
Tomorrow’s trading in the US should be an interesting affair.
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