The fact that several key markets are behaving as they are is prima facie evidence that something is up.
By PINCHAS LANDAUtech graph(photo credit: Courtesy)
Something very significant may have happened over the past few days in several key markets. Certainly, the fact that these markets are not behaving as they were very widely expected to is prima facie evidence that something is up. The comments and reactions of professional analysts, both from the technical and fundamental camps, suggest that this 'something' may be much more than the usual short-term market swings, perhaps even a change in the major trend.
The most obvious example of widely-held expectations being confounded is to be found in the behavior of the US dollar. Starting from a purely local vantage-point, it is fair to say that most Israelis are now convinced - as a result of intensive brain-washing by the local media - that the dollar is suffering a universal decline in its value, which is why the shekel is rising sharply. In fact, however, this has ceased to be true. The dollar is no longer falling sharply against major currencies such as the euro, sterling, yen, etc. True, all of these made big moves against the dollar - but those upmoves ended two-three weeks ago. Since then, the euro has made repeated efforts to rise to new all-time highs against the dollar, which would require it to rise to and beyond the level of $1.37 per euro. But it has not been able to do so. As usually happens in these situations, when repeated attempts to achieve a target fail, there is a relapse - and that is exactly what has happened to the euro and other currencies against the dollar. Meanwhile, the Israeli shekel has continued to climb against the dollar and hence against all other currencies - but that is a different, local story. The big global story is that the dollar has not collapsed, although everyone thought it would and should. That doesn't mean to say it can't still happen, but it hasn't yet - and that is very significant.
Then there is the metals story. There are two kinds of metals - base, like copper, aluminium and lead, and precious, like gold, silver and platinum. Both sorts have been in major bull markets for years, and most of the metals' prices have reached levels not only never before seen, but that were unimaginable even a few years ago. Copper, for example, had never traded higher than $1.20 a pound before 2004, but it reached over $4 a pound last year. For the most part, the massive price rises were demand driven, with the biggest single factor by far being - you guessed it - China.
Late last year, several analysts at some of the biggest investment houses stuck their necks out and predicted sharp declines in base metals prices this year, citing the prospect or reality of excess supply as the factor that would end the boom. However, in the first three-four months of 2007, prices of most metals soared by at least 20% and in some cases much more. Given the new reality of a gathering slump in the US housing market, it was clear that Chinese demand was now the dominant factor in the markets.
However, most metals - and especially the precious ones - have run out of steam over the past few weeks and prices have begun to erode, at a pace that gathered speed this week. For technical analysts, the last few days have been critical in gold, copper and other metals, as a series of technical indicators have started flashing red. Some of these guys are now warning that prices may drop by tens of percent over the coming weeks and months. The fundamental analysts are not surprised by all this, since this is what they predicted, at least for the base metals. The precious metal decline has taken pretty much everyone by surprise, since prices were confidently expected to keep rising.
Although the currencies and commodities markets have turned surprisingly weak, the rot has not spread to equities and bonds, where the boom is still in full swing. But the mere thought that it might - and the fact that there are several good reasons for bonds and equities to retreat from their current levels, which are widely regarded as overpriced - is reason enough to look around and rethink some assumptions which may have outlived their usefulness.
landaup@netvision.net.il
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