Investors seem to be flagging as they nervously climb the famous 'Wall of Worry' that characterizes bear market rallies. Chinese markets are wobbling as the authorities fret over yet another liquidity driven bubble in stocks, and US economic indicators are mixed at best with disturbingly low inflation indicators, cratering consumer confidence, stubbornly high jobless claims and lower than expected Leading Indicator readings.
Meanwhile, on this side of the Atlantic, the somewhat delphic Bank of England MPC seems to maybe know something frightening which we don't, as their only bone of contention seems to be just how much quicker the printing presses need to turn. Finally, German inflation figures may presage a calamitous decline into deflation.All in all, the foregoing imply a distinctly unfriendly global cocktail of declining consumer demand and continued labour market slack, leading to weak demand and declining price pressures.
Fears abound that the fiscal stimuli implemented in most OECD countries may be losing their traction on economies still stifled by sclerotic banking systems unable or unwilling to facilitate the vital circulation of money from central banks' gushing taps to individual and commercial borrowers that recession-hit economies desperately need. Against this backdrop it seems likely that Investor fatigue will set in, with earnings figures flattening out as the one-off inventory rebuilding and cost cutting effects that flattered to deceive in Q1 and Q2 disappear, leading to oxygen starvation and increasingly frequent, and violent, bouts of Equity market profit-taking in the final months of 2009.
This will create an increase in risk aversion, leading to USD strength against the EURO and the Pound but, in all probability, mild USD weakness against that other perennial favourite of the wobbly investor-the Japanese Yen. Expect to see EUR/USD close to 1.30, GBP/USD at 1.50 and USD/YEN at 90 as we approach Christmas. In parallel moves, government bond markets will out-perform, as deflation becomes a market pre-occupation again. Expect to see 10-yr yields in US Treasuries, UK Gilts and German Bunds slip by 50bp. Similarly, any prospect of hikes in Central Bank base rates, in these regions, during 2010, will be increasingly priced out of short-term futures markets. Time for investors to give up the climb before they slip?
