- The small candlesticks in the green shaded areas with black arrows on the main chart highlight the indecision in the market as the S&P moves into new high territory. When candlesticks are that small with "tails" on the candlesticks it delineates ambivalence and uncertainty among participants regarding future market direction. Contrast this price action with the larger candlesticks in the earlier advance from the October lows (blue arrows) where the tall candlesticks spoke to conviction in the advance higher.
- Also notice momentum indicators are waning with a divergence in the upper panel (black arrow)
The German manufacturing giant has also fallen into contraction:
The other "straw" investors and traders seem to be hanging on is the supposed inevitability that the ECB (European Central Bank) is inevitably going to break down and buy European sovereign debt, much the way our Federal reserve brought Treasuries over the past five years.
The weakness in stocks we had during the first hours of trading on Thursday were the result of Mario Draghi, the President of the ECB, comments during his press conference after the ECB governing counsel met. It was clearly apparent and he even stated that there was significant division among the members of the governing counsel on implementing any other measures that might mitigate the ongoing deflationary pressures building in the Euro zone. The press conference was decidedly down beat with the further comment that the ECB would monitor the progress of the other stimulus measures already implemented and reassess the situation "next year" and that did not meaning January either.
I've got news for everybody. The ECB will NEVER buy sovereign debt for the reasons that the Germans, who are the deep pockets in Europe, will never agree to finance their poorer and sometimes profligate southern neighbors. And if I'm right about this, and I have hardly ever felt so sure of something as this, then Europe is going to have to "pull a rabbit out of a hat" to get their borderline recessionary economy going.
Can they do it? Anything is possible in the realm of economics and the financial markets but it clearly is not probable. If US consumption could make the kind of gains that spur emerging market and Chinese economies then our economic steam engine could keep chugging but I cannot say I have a lot of confidence that we could carry the global economy alone.
In the meantime, the Fed seems to be on track to start raising short term rates sometime in the second quarter of 2015 (most think in June). What would be the implications if they raised rates in an environment where the Eurozone was barely growing? Well, we're seeing it now as the market is currently pricing in the first raising of short term rates but I suspect that the long end of the yield curve (10 and 30 yr. yields) would also finally jump. Such a move in the Treasury market would cause the US Dollar rally to continue with the following results:
- Deflationary pressures would mount due to the continue strengthening of the Dollar.
- Money would continue to be sucked out of emerging market economies but at a quickened pace. You'll almost be able to hear the sucking sound ...
- The strengthening Dollar would negatively impact earnings of US companies doing business overseas by making their goods more expensive in foreign currencies.
So, maybe the Fed will keep ZIRP? I agree with Jeff Gundlach of DoubleLine that the Fed really has no choice but to start the process. Jeff even stated that they'll probably do it just to see what happens.
The principle behind raising rates is that the economy is strengthening, allowing creditors to charge more money to lend it. But we live in a global economy and what we, the Germans, the Chinese and the dozens of emerging market countries do, effects all of us together. We're no longer silo'd in our own economies. There are "knock on" effects when the largest and most powerful central bank on the planet decides to raise interest rates. In our present economic environment, even more so ...
So, the markets in 2015 will be largely and substantively held captive to the economic progress or lack there of in Europe.
This is my last commentary for 2014. Have a Merry Christmas and a great holiday season!
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