Stock Market In Ben We Trust

By: Kevin_George

Global indices have been powering higher, led by strong U.S. equities and a falling dollar, which has seen the largest September rise on Wall Street since 1939. This has been bullish for all ‘risk’ correlated trades with commodities and foreign currencies being strongly bid.

One of the main drivers of this rally is the expectation of ‘QE2’ from the Federal Reserve, as it continues large interventions in the capital markets. The chart below from Oliver Jakob at Petromatrix, shows the correlation of the Fed’s POMO operations and it’s correlation to equity prices.

The first large bout of buying helped to put a floor under equities at the March ’09 lows and the current interventions have helped to drive equities to their recent highs, as market volume continues to fall.

The Bernanke effect has put a floor under equities, despite a backdrop of debt concerns in Europe, with Ireland experiencing further problems and some weak data from both the U.S. and Eurozone. The irony now is that weak data is actually a driver for stocks, with it being seen as further confirmation that quantitative easing will return.

The surge in stocks is doing no harm to the Fed’s attempts to offload its various stock holdings. A sale of a 5% holding in Citgroup has brought a $1bn profit for taxpayers, with an exit strategy on AIG, timed for a month ahead of the November mid-terms. Some may see the timing of this stock rally as being more than just coincidence.

Investors are now playing a dangerous game if they fail to read between the lines and get caught in the hysteria of the recent rally. The sovereign debt issues are not going away and if they are also naïve to the fallibility of leaders, whose policies helped to create the crisis, they may be in for a nasty shock. The current rally in the Euro/U.S dollar rate, for example, is only going to make things harder for Eurozone members who are trying to implement austerity and produce positive growth. The higher these ‘risk’ assets go, the further they would have to fall in a return to negative sentiment.

By Kevin George

kg-publishing@hotmail.co.uk

I am an independent financial analyst and trader.
© 2009 Copyright Kevin George - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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