November 05, 2010

Market Wrap: for the week ending 5-Nov-2010

Weekly Snapshot 
• US nonfarm payroll employment increased by 151,000 in October (BLS)
• US unemployment rate was unchanged at 9.6% in October (BLS)
• Spot Gold rose to a new all-time high of $1397.80 just shy of $1,400 on Friday (Reuters)
• Spot Silver reached a new 30-year high of $26.89 on Friday (Reuters)
• US stock markets rose to a two-year high after Fed announcement of QE2 (NY Times)
• France's BNP Paribas is the world's No. 1 bank, with assets of $3.2 trillion (Bloomberg)
• The price of sugar hit a 30-year high amid forecasts of a sharply reduced harvest (Economist)
• Bank of England left rates unchanged and refrained from adding to asset purchases (Bloomberg)
• European Central Bank kept its benchmark interest rate unchanged at a record low (Reuters)
• Fed announced plans to buy $600 billion in long-term Treasury bonds by the of Q2 2011 (WSJ)
• India has hiked interest rates for the sixth time this year, in a bid to tackle high inflation (AP)
• Australia raised its benchmark interest rate by a quarter percentage point to 4.75% (Bloomberg)

Weekly Market Barometers    
st-2010-1105   fx-2010-1105

Chart Of The Week
Friday’s employment report was somewhat encouraging showing better than expected jobs numbers. However, the unemployment rate remained at 9.6% and there is a long way ahead to get back to a more robust labor market.  See the chart of the week to find out how far the US labor market has come since 2007.  


QE2 Recap 
The much anticipated FOMC statement this week confirmed what many market observers had anticipated: More quantitative easing.  From the FOMC statement released on November 3rd, 2010:

The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.

There you have it then.  Another $600 billion down the hole or will QE2 have some positive consequences?  The market analysts have been pondering this question for quite some time examining the various scenarios.  In our view, the more likely scenarios have already been priced in.  This week’s market reaction has confirmed the overall theme of a loss of purchasing power in US Dollar terms.  See the following charts to get a sense of what may be next. 

US stocks at 2-year highs    
INDU   spx
Bond bubble resuming its course    
10-year   5-year
Commodities gaining strength    
corn   cotton
coffee   sugar
Metals charging higher    
Palladium   Platinum
Copper2   Silver
Gold profits from Dollar weakness    
Gold   USD

The Fed wants higher inflation and the ongoing easy money policy i.e. the US printing press might just do that trick.  The markets are currently following suit with rising asset prices across the board.  Sadly, that is happening on the back of a gradually weakening Dollar. 

Recommended Video 
If the charts didn’t make the effects of QE2 clear enough, please consider this concise explanation below.  In no uncertain terms, Axel Merk explains what QE2 means and what we can expect once the Fed’s printing press is running at full speed again. 

Good luck and good investing!

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