Tuesday, June 23, 2009

Positive momentum is breaking down across the risky asset universe

In Breakdown in EURUSD and Gold signs of things to come? on June 8 I stated that the break of the upward trendline in EURUSD and Gold "might well signal the start of a much broader correction across risky assets and be followed by a breakdown in the positive momentum in equity markets as well." In the meantime risk appetite has indeed taken a hit and just yesterday, a number of assets have broken through their former upward trends.
a) Equities: the S&P has broken through its former upward trend and also through its 200 day moving average (it broke through the 200 day moving average to the upside at the start of the month). Also the German Dax index has broken through its upward trendline (which it touched several times since early March) and the 200 day moving average. It is currently sitting just on the trendline (at 4727) and the moving average (at 4729).
Source: Tradesignalonline.com

b) Commodities: yesterday Gold broke through a more longer-term upward trendline which was in place since late October. However, more commodities have been sharing into the downward movement. Oil for example is now down some 10% from its recent peak and also broke through its upward trendline yesterday.

Source: Tradesignalonline.com
c) Credit: creditspreads have formed a bottom early this month and started to rewiden approx. a week ago. The 5y iTraxx Europe Index is approx. 25bp wider and the Xover index is a good 100bp wider than at its lows.

Overall, bearish technical signals are emitted by a host of risky assets (be it equities, credit or commodities) across the globe. With commodity prices receding as well, the latest inflation fears should calm down, helping break-even inflation rates incorporated into inflation linked bonds to moderate again. A key difference to the surge in risk aversion during Q408/Q109 is that this time gold is falling rather than increasing. I think this is due for one to receding inflation risks while at the same time - a key difference compared to Q408/Q109 - systemic risks in the financial sector promise to remain much more contained.

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