FYI | Jun 21 2011
By Rudi Filapek-Vandyck
The world's eyes are firmly focused on Greece and what European political leaders might and can come up with to prevent a sovereign debt default, even when more and more experts are leaning towards the view that default has now become inevitable. If it aint happening in the short term, it will surely happen in the longer term.
In the background, behind daily Greece-inspired headlines and concerns, two major developments are taking place that are not receiving equal coverage. Maybe they should because they are likely having an even greater impact on future market directions than Greece has today.
Firstly, global growth projections are being wound back, leading a growing number of experts to predict that commodity prices have peaked this year. It happened in April when global risk appetite was commensurately high. Commodity analysts at Citi are the latest in a rapidly growing list of experts to re-base their outlook for commodity prices, which resulted in the statement that "metal prices will struggle to push through their recent highs and our view and forecasts are that metal prices will be lower in 2012 than in 2011".
Another disconcerting trend is that, after seven-eight weeks of selling pressure, many risk assets have been breaking through all kinds of technical and psychological support levels, leading chartists all over the world to state that most technicals for most risk assets currently simply look "ugly". Hence the widespread expectation that any upside is likely to remain limited for the time being and we will see lower levels before we can start looking forward to another leg upwards.
Note that several equity markets in leading, high growth economies are now "officially" in bear market territory (as they have broken through long term support and kept on falling since).
One of the more outspoken market experts, Dennis Gartman, last week declared that US equities were heading into another bear market, which would not bode well for equities elsewhere. Gartman, market trader by profession, has been negative on the outlook for US equities since May and today he has only one regret: not to have positioned himself more aggressively to benefit from the market's weakness since.
This week, Gartman noted there are only two commodities that have withstood the downtrend: gold and orange juice. He anticipates we will see lower levels before a bottom will be seen for the complex overall. He is bearish on the outlook for the euro.
One of the charts Gartman uses in his daily newsletter, The Gartman Letter, is one showing copper's price behaviour in the weeks past. Gartman believes the pattern will continue in weeks ahead, which does not bode well for equities and other commodities (copper is seen as a leading price indicator).
On Friday, Gartman reminded his readers he doesn't like to make bearish calls, but at times they are the correct calls to make. In memory of a an old friend, Gartman recalls that "Bears don't eat well", simply because the game of investing is intrinsically a bullish game. Unperturbed, however, Gartman remains stoic in his assessment: a new bear market has begun. Any rallies in the short term should be considered the equivalent of pigs with lipstick on.
One observation in support of his view is that leading economic indicators have all been deteriorating rapidly in the weeks past and during that process these indicators have equally damaged and breached long term support lines.
When it comes to commodities, Gartman is at present locked in a pair trade: long gold versus short copper.
Note: strategists at Citi have now lowered their target for the ASX200 to 4900 by year-end. BA-Merrill Lynch has reiterated the view that "fair value" is at 4800.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
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