That was no ordinary night. The $US doesn’t bounce 2% without some serious spur. And the entire commodities complex (CRB) down 3.5%! This is a similar signal to the flash crash of last year, which presaged the sell off into the double-dip funk of mid last year. Here we have the first signal of the triple-dip funk.
We are witnessing the crossing into a market dislocation. One of those moments in which the growth narrative that enabled the traders to climb the wall of worry suddenly ceases to make sense. In short, the inflation trade, based on a falling $US, rising euro, Asian growth and commodities rally just fell apart.
Why, you might ask? Pretty straight forward. The US has just had two days of shocking economic data. Yesterday’s ISM services index collapsed for April. Today, weekly unemployment claims jumped as well. We’ve got the actual employment figure tomorrow and a strong figure may calm the market some, but I don’t think it will last. And here’s why. The other pieces of the puzzle last night were dovish comments from the ECB, which pushed out expectations of rate hikes in Europe and coming out of last week’s Fed meeting, we have confirmed an end to QE2, unless things change. These last two factors mean that in the relative battle for reserve currency status, the euro is suddenly in doubt as a rates play, even as the Fed has tightened expectations ever so slightly. The dollar just got strong!
We all know where this is headed. It’s the infant cry of a global market for its milk money. The weak $US narrative must be fixed or the markets will continue to wail. And there’s only one way to fix it. Only one man that can. He’ll need to hear a louder cry than this. But the baby knows what it wants and how to get it. A tantrum is what it will take. It may ebb and flow. But it will win in the end.
Start warming the milk, steam up the bottles, lay down the baby. Daddy’s coming with milky wilkies, a bottle full of QE3.
