The ominous skyline of New York provides the perfect backdrop for Wall Street. This week has damaged several hedge fund accounts, confidence in the stock market, and hopes for a recovering global economy.
The two key themes this week were dollar strength and commodity weakness. The news about the Chinese economic slowdown suffocated copper and the other metals. A weakening China, does not bold well for commodities and Asian markets. As a result of panic, investors ran to the U.S dollar and Treasuries.
Before it is all said and done and investors square up for the weekend, too many headlines provide doom and gloom scenarios. The inevitable Greek default, whether it is this quarter or decade, has never and will not, have an easy fix. The concern for European banks remains high. U.S. unemployment hovers at 9.1 percent and could move higher by the end of the year. Outlooks for the U.S. economy remain abysmal. Wall Street firms have nothing but bad news to report, whether it is changes in management or expected job cuts.
The political showdown between Democrats and Republicans will remain a key story. President Obama’s ideas and tax plan for the rich will not be agreed upon by the Republicans. While, supply side economics might be what this economy needs, that is not likely to occur until we have a new president. This lack of a clear position by the U.S. government will not allow for companies to plan for future hiring. While housing appears poised for further weakness, the Federal Reserve may have kept mortgage rates low due to operation twist. However, a rebound in housing is unlikely as many Americans will not be approved for loans or fear further weakness in home prices.
There will be a moment when, an appetite for gold will return, and when the market will price in another round of quantitative easing (which could trigger a major dollar selloff). Until then, hedge funds are scrambling, margin calls might trigger more selloffs, and serious downside risk remains for the U.S. economy, stock market and risk-currencies and metals.