New issues will have to be addressed, such as the rising inflation and Pension Fund losses in addition to the current mortgage problem and credit crunch. In adversity, one must search for opportunity as the best opportunities arise then.
Market Overview
Currencies: On Euro/USD, I found the previous week low. It stands at 1.4647, and the Euro might touch 1.4620. I expect the currency to bounce back from those figures to about 1.4980/1.5020.
The CHF, likewise, finds a temporary top at 1.1010. CHF might touch 1.1020. That’s a rise of 1000 points completing one trend. I expect it to retrace to 1.0740/20. The trend would continue after that to approximately 1.1320-1.1380. Euro could come down after the current retracement to approximately 1.4380- 1.4280. It is my experience that once the market is in a trend it ignores fundamental analysis as well as technical analysis; not completely, however. Current movement is more profit taking to me, rather than the opposite.
Eurozone: The Eurozone will be affected, but much less. The Eurozone economies are still not very well integrated and hence imbalances will occur to varying degrees in different markets.
I expect the Pension system to be the latest focus in the months to come and could aggravate the crisis in the future. The following countries would particularly get affected: United States, Canada, Japan, UK, Sweden, Denmark and in the Eurozone, Netherlands. (Source)
US: The pressure continues to raise rates, not only to contain inflation, but also to stop outflow of capital to higher interest rate regions. Looking at current PPI and core PPI data, inflationary pressures seem to be building up in the US. We need to watch further data. US wholesale prices are at a 27-year high measured by the PPI, which indicate rising inflation. (Source: Times of India)
For purposes of analysis and checking what the Feds could do, I have categorized inflation as follows and use this chart to anticipate the Fed’s move:
Growth Push Inflation - Measured by GDP*, Unemployment & NFPR* Figures
Price Push Inflation – Measured by PPI* & CPI* figures
Wage Push Inflation – Measured by Average Hourly Earnings and ECI* Figures.
Demand Push Inflation – Measured by Retail Sales Figures
In my experience, for the central bank to move in and hike interest rates, it is important that out of the above four factors at least three should indicate rising inflation. Even if two of the above four indicate that there is a rise in inflation, there is a possibility that the central bank may move to hike interest rates. With three factors indicating inflationary pressures raising interest rates is almost certain.
BSE: The bounce on the Bombay Stock exchange has been good, but I still expect it to change 11,000 and then 9,000. (An estimate till December 2008.) There are a couple of key sectors one should look at for example the power and infrastructure sectors, especially since India needs to invest about 100 Billion USD in the coming years in infrastructure.
USD/PLN: Should range between 2.05 to 2.20 before touching 2.30.
Gold: Correction was rapid and 770 has more or less been achieved. Might touch 770 in coming week. I expect a bounce from current level. Gold would then test the level of 750. That should be the bottom for resumption to a target of 1150. Here’s a brief history on gold: The last time it peaked was January 1980 at $850 (USD) an ounce. Since then it’s been trading between $400 to a low of $262. Gold touched $1032 in March this year. I would predict the next target for gold to be at $1150. Some factors that will help achieve this goal: Firstly, gold is in a bull run. Global uncertainty in the stock markets and currencies make gold a safe haven. Secondly, it’s a hedge against inflation and against uncertainty. Thirdly, 70 percent of gold demand comes as a result of jewelry. First half of last year saw an 11 percent jump in this demand, despite high prices. This can also be attributed to prosperity in India and China, which like Japan are large buyers of gold. As far as USD goes, I think given the choice between inflation and recession, the FED would choose inflation, which would drive gold up.
OIL: The price for oil might come down to $100 per barrel. For now, I do not see it going lower. Largest producers of Oil in the first quarter of 2008:
Russia: 9.5 million barrels per day (mbpd)
Saudi Arabia: 9.2 mbpd
US: 5.1 mbpd
Iran: 4 mbpd
China: 3.8 mbpd
Notes:
*PPI = Producer Price Index.
*CPI = Consumer Price Index
*GDP = Gross Domestic Product
*NFPR = Non Farm Pay Rolls
*ECI = Employment Cost Index
Comments can be directed to my email at m.sharma@interglobalfb.com.pl
Disclaimer: Any opinions, news, research, analyses, prices, or other information provided by the author are provided as general market commentary, and do not constitute investment advice. Neither WBJ nor the author is liable for any loss or damages, including without limitation, any loss of profit which may arise directly or indirectly from use of or reliance on such information. Investors are advised to consult their broker before making a decision on buying or selling a particular security, product or currency pair. These articles are opinions and should be treated as such.
