Stimulus Stimulus
Looks like market optimism is not jet ready to vane. On the back of falling dollar the gold reached new highs, and equity followed. It looks that the speculation on extension of some stimulus measures played most important part in this mini rally. Looks like dollar, gold, crude oil and equity correlation have become a part of computer algorithms and almost perfect inverse relationship will continue. Not indefinitely, I’m sure. It looks artificial.
Chart 1. Gold Futures
At the moment I don’t believe that the inflation is bound to accelerate, at least till the end of the 2010. The spare production capacity of around 35% in the US, declining credit leading to subdued consumer and investment demand cannot spark price growth needed to accelerate inflation. The wage growth is integral ingredient of inflation. It lookse that the weakness in the labor market excludes every proposition of wage growth. In terms of FED balance sheet expansion, it’s enormous, but if we look at BOJ balance sheet during the Japan’s lost decade we will see that in terms of the balance sheet compared to GDP the FED could double or even triple the balance sheet without sparking inflation. The dollar weakness is another story. I do not believe that the macro situation in the major currencies countries is better than in the US, the crisis is global. The dollar is bound even, lower judging by the sentiment, but I wouldn’t be surprised if we see a reversal of the trend in dollar soon.
Chart 2. S&P 500
I was looking to re initiate my SPY put option position, but it never felt right, so I decided to wait a little bit. We have no market moving economic data this week.
Asian markets ended higher on the back of US market performance, no major news. Europe is trading marginally higher.