A Bounce That Might Not Last

As you might expect from a market that was hit pretty hard the session prior, equity markets are seeing a bit of a bounce this morning.  Earnings reports from the likes of Wells Fargo and Morgan Stanley provided a somewhat mixed picture for the financial sector, which will likely keep some pressure on the sector throughout the session.  Outside of the financials, United Technology and Boeing both provided positive commentary on the outlook for their respective businesses, especially in markets outside of the United States.  So all in all, equity markets are poised for a quiet consolidation day.  The one wild card, of course, will be the release of the Federal Reserve’s Beige Book this afternoon.  While it’s unlikely that this release will contain any insight that the market does not already possess, commentary of any sort has been a market moving event of late and, therefore, worth keeping an eye on.

After ripping to the upside yesterday, the U.S. Dollar Index is following equity’s lead and is consolidating a bit today, though still solidly above trend line support.  Interestingly, though, gold prices have moved very little (up $2.10/troy oz. as of 9:10 CDT) in the face of this slight pullback in the Dollar.  In weeks prior, any sort of weakness in the greenback prompted another round of frenzied buying.  So far it appears that this tendency may be fading away.  That said, bearish gold investors like myself are looking for confirmation of yesterday’s drop in prices in today’s price action.  If gold is unable to recoup a sizable portion of yesterday’s gains, this will be a definite sign that the bullish fervor has lifted for the time being, thereby opening the door to a continued move down to the first support level around $1,250.  The gold market is notorious for dramatic moves lower, so I wouldn’t be surprised to see this level materialize within a week’s time if confirmation materializes today.

Looking more broadly across the spectrum of markets, the general sense I get is one of caution and little conviction.  To an extent, this is symptomatic of a consolidation day, but it’s interesting to see both equity and commodity markets are not showing any more resiliency given their recent runs.  This is yet another sign, in my opinion, that we have probably reached a corrective phase in risk-based asset classes.  Treasury yields are confirming this sentiment shift with their relative lack of volatility so far today.  Simply put, investors seem to be continuing their love affair with U.S. Treasury debt (In part due to larger concerns elsewhere), despite the numerous assertions that the market has reached bubble status.  Until this fear subsides, equity and commodity markets will find it quite difficult to initiate and sustain a sizable rally.  Logical or not, this will be the reality that we all must operate within.

For the rest of the day, gold and the U.S. Dollar will once again be the focus of my attention.  With both markets moving significantly yesterday, the sustainability of these moves is the critical question that we now face.  And as I’ve been saying for a while now, the direction of these market, particularly that of the greenback, will tell us the direction that equity and commodity are likely to move.  The Beige Book release will be worth reviewing, but odds are that little price action will result from it since the Fed has been out front signaling their upcoming moves.  After the chaos of yesterday’s session, a quieter day should be a welcome respite for most investors.  My view, for now, is that this break in volatility will prove to be a temporary phenomenon.  With corporate earnings, Federal Reserve intervention, and federal elections all swirling around, I find it hard to believe that the markets will take solace from all these unknowns.

Until later….