Given the slightly better than expected US NFP data from Friday and subsequent US equity rally, I think it’s helpful to provide some context for what happened. Here are my “Quick Hits”:
• Markets loved the US data on Friday because they were better than expected and indicate moderate expansion.
• European debt crisis remains a major issue, but it’s likely to be put on hold until September.
• China is in process of easing monetary and regulatory policy to re-start growth.
Key Point: To me, it looks as investors are too under-weight risk and too over-weighted safety.
Granted, this is August and we’re attempting to interpret movements when most are on vacation or wishing they were on vacation. Whoever is left over is probably watching the Olympics. In the currency markets, this is how we can get 48 hours of 200pt+ intraday movements and end up back where we started. It’s also why certain hedge fund managers get frustrated and return funds back to investors.
Note here the erratic, but positive trend to the S&P since the beginning of June.
Can the rally continue? Yes. My central thesis this year has been that policy makers will act to eliminate downside financial market contagion and downside equity market risk. For Europe, the best development is the fact that the ECB is engaged, prepared to act, and going to act in September. For China, the best development is that they recognized they have a slow growth problem and are beginning to act on it. For the US, the best development is the agreement to fund government for six months, avoid a government shut-down and address the first component of the fiscal cliff. Therefore, a large portion of downside risk has been either eliminated or drastically reduced.
The true test of my thesis will come in September when numerous deadline events will occur in Europe. For now, we’ve got three to four weeks of trying to interpret comments by either central bankers or politicians.
