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In an innovative TV
commercial for Barclays Bank, a man walks down on Wall Street but discovers
that nearly everything is a fake movie set. The huge investment houses and
international banks are all made of paintings on cloth or Styrofoam while the
people are mannequins. The nightmare ended with the man finding one real bank
which is Barclays Bank.
While the institution claims to bit
more substantial, the truth is that all banks have one commonality: they are
built upon illusory paper wealth with an unstable foundation.
The financial crisis has made people
aware of the vulnerabilities in institutions they trust with their life
savings. There are a lot of developments that make these vulnerabilities even
more apparent including the following:
- Politicians
and the media propagating economic recovery even as the unemployment
rate remains stuck at around 10%. Meanwhile, underemployment is around
20%.
- The
US national debt is ballooning by $100,000 every three seconds. The once
unimaginable debt load of $24 trillion can actually be exceeded in ten
years.
- China
and Japan are the two biggest holders of US debt. Until now, they have
covered the big-spending tab for US politicians. But as they encounter
economic problems of their own, doubts about the United State's ability
to pay are increasing.
Given this situation, the inevitable
outcome would be higher taxes and cost of living. The government-induced
monetary inflation will reduce the value of the dollar. For some people, the
answer lies in converting their dollars to other currencies while for others,
it is turning to gold.
Investors are struggling to deal with
ballooning US Treasury yields, which are supporting the dollar. The rise in
yields acts as a stabilizer but there are inflation concerns. As Treasury
rates rise, the dollar becomes more appealing to investors. This could damp
the prices in dollar-denominated commodities such as silver and gold. On
Tuesday, it can be observed that the bullion suffered swift profit-taking.
The jump in yields may also indicate a
more worrying trend - that there are widespread concerns about the US's
fiscal position. According to Moody's and Fitch, the nation's budgetary
outlook will suffer from adding $1,000 billion to the US deficit from tax
cuts.
The dollar also continues to benefit
from problems in the Euro-zone. Barclay's economist said that Ireland's
austerity package is "likely to weigh on the euro" over the short
term because the next general election would cause uncertainty over its final
passage and form. Anxiety remains in the "peripheral" bond market.
Also in Europe, the FTSE Eurofirst 300
is up by 0.4% while London's FTSE 100 fell 0.2% because of mineral sector
losses. Germany's Dax Index went down 0.4% because of news that the country's
exports fell in October.
In Asia-Pacific, shares were mixed in
the region but it has a downward bias. The weak yen helped Japanese exporters
and the Nikkei 225 hit its highest levels in seven months. It's average rose
by 0.9% but other major hubs are under pressure. China's Shanghai Composite
fell 1% while Hong Kong's Hang Seng Index shed 1.4% on fears of new monetary
tightening in Beijing. FTSE Asia-Pacific Index was down 0.8%.
According to Steven Major, the global
head of fixed income research at HSBC, "you could argue that we are at a
new stage where the global cost of capital goes higher and higher."
Yields on 10-year US Treasury bonds hit 3.33% which is up by 0.39 percentage
points from Monday. It is also 1 percentage point higher than its October
low. Meanwhile, the Japanese five-year yields likewise rose the most in two
years. Germany's hit 3%. David Ader of CRT Capital said that, "people
are getting out of the market and moving to the sidelines, feeling
shell-shocked at the speed of the rise in yields."
Although yields remain relatively low
when compared to long-term trends, investors are starting to worry that they
might continue its sharp upward trend. Paul Marson of Lombard Odier, which is
a Swiss private bank, "yields at this level are clearly
unsustainable."
These market movements came after
President Obama agreed with Republicans in Congress that the Bush-era tax
cuts should be extended. It will also be combined with $120 billion payroll
tax holiday. However, investors remain divided as to whether these decisions
are enough to explain the recent global increase in yields.
Among the reasons why growth
expectations have increased include improved economic data as well as the
"second stimulus" by the US government. But some argue that these
movements may be due to fears that the Fed will not follow through on asset
purchases or because of high government deficits. Mr. Major, for his part,
said that "it's probably all three."
Speaking of the U.S. Economy, let's
take a look at the very-long-term chart of the S&P 500 Index (charts
courtesy of http://stockcharts.com).
 
The S&P 500 Index in Wall Street
went up by 0.4%, which remains near its two-year high. The long-term chart above
shows that the SPX S&P 500 is at a crucial resistance level. The 61.8%
Fibonacci retracement level might provide a strong resistance. No bigger
rally is projected unless a verified move above the 61.8% line becomes
visible. At this point we have seen a small move higher but it was not
significant enough to be considered as a true breakout.
The sharp increase in yields is
crippling rally in other assets including commodities. The FTSE All-Would
Equity Index was down by 0.4% as of December 8, 2010 and the traders'
favorite, gold, is now pulling back from its record highs. Last
Wednesday, gold dropped to $1,381 an ounce while silver at $28.36 an ounce.
As of December 13, 2010, gold has since rallied to $1,395 per ounce while
silver closed at $29.55.
Gold's very long-term chart is almost
unchanged from last week. The consolidation period for the precious metal has
been visible for nearly 2 months. It began in October after gold breached the
upper border of the long-term trading channel. The $1,600 is still valid,
however we don't expect a substantial rally to emerge until prices break
about the multi-year resistance level marked above with the thick blue line.
Rosanne Lim
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