Investors unload risky assets again on Fed's stimulus inaction
Updated: 2012-08-04 06:49
By Puru Saxena(HK Edition)
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Federal Reserve Chairman Ben Bernanke did not unleash any additional stimulus after the FOMC meeting on Wednesday and this prompted investors to sell risky assets. It is notable that over the past couple of days, global stocks have been sold off but I continue to believe that this ongoing consolidation will probably be resolved by an upside breakout.
For now, Wall Street is trading above the 200-day moving average and as long as this is the case, the benefit of doubt can be given to the upside.
There can be no doubt that major economies are slowing down and America is deleveraging. Nonetheless, with interest rates at record lows, global stock markets are refusing to fall apart. Moreover, with central banks on the verge of additional easing, risky assets continue to be well supported.
Turning to over-valued sectors, I am of the view that the social media stocks are still absurdly priced. For instance, the market's darling (Facebook) is still trading at 115 times reported earnings! Given the fact that Facebook recently reported a quarterly loss and does not even have a viable business model, I believe that its stock will continue to slide. Thus, nimble traders and aggressive investors can try and profit from the stock's unwinding.
Over in the commodities complex, it appears as though the recent rally in the CCI Index has ended and a new down leg has commenced. It is worth noting that after hitting resistance at the 200-day moving average, the CCI Index has resumed its decline and I expect further weakness over the following weeks. Looking at specifics, the price of copper is declining and it seems as though crude oil has also resumed its downtrend. I suggest that investors continue to avoid this cyclical industry.
Looking at precious metals, both gold and silver are currently in a down trend. The lack of stimulus at the FOMC meeting has prompted liquidation and I believe that there is now a real chance that both gold and silver will break below the important support level. Thus, if you own any gold, you may want to set a protective stop around the US$1,500 per ounce level and for silver, the stop could be set around the US$26 per ounce level.
In the currencies patch, the US Dollar is advancing and this trend is likely to continue until the Federal Reserve unleashes the third round quantitative easing (QE3). At present, the US Dollar Index is trading above the 50-day as well as the 200-day moving average and it is probable that this rally will take the greenback to the 88-89 level. Elsewhere, the Euro remains weak and further declines are likely. Thus, I suggest that you keep your cash savings in the US Dollar.
Finally, over in the debt market, US Treasuries and German Bunds are staying firm and apart from periodic pullbacks, the uptrend is likely to prevail for several years. In the corporate bond market, I see value in US Dollar denominated high yield debt and income-hungry investors should focus on issues from the developing world.
(HK Edition 08/04/2012 page2)