Last week was a very difficult trading week as all the capital markets lurched first one way then the other under the mounting pressure of gloomy and depressing news which continued virtually unabated. As a result risk markets sold off with both stocks and commodities suffering their worst weekly performance since late 2008. Greece, of course, continues to dominate the news but the fundamental reasons for the market slump remain the deterioration in global demand and consequent lack of growth in all the major markets.
Last week’s low point was the FOMC statement, released on Wednesday, which duly sent investor confidence plummeting as the central bank clearly stated that it viewed “significant” downside risks to the US economy over the next few months. As investors panicked and risk appetite evaporated, the US dollar and US treasuries, coupled with the Swiss Franc and Japanese Yen were the main beneficiaries of the panic selling. What is interesting, however, is that both gold and silver also sold off sharply with silver ending the week a massive 24% lower and with gold a relatively modest 8% lower, having declined over the last few weeks of $1900 per ounce to close at $1620 per ounce.
Meanwhile in last week’s forex markets all three of the commodity dollars, namely the Canadian, Australian and New Zealand currencies all came under significant pressure, selling off sharply and ending the week heavily oversold. These currencies are heavily dependent on the mining and extraction of base and precious commodities and, as such, they tend to have a relatively close correlation to commodity prices and oil, gold and silver in particular. However, it is interesting from our indicators that these currencies are now reaching a short term extreme level and, as such, we may expect to see a recovery in these, particularly against the risk off currencies such as the Japanese Yen and the US Dollar, so from a trading perspective the Kiwi, the Aussie Yen and the Cad Yen may offer us potential trading opportunities early in the week.
Moving to Europe, whilst the problems with Greece continue it seems increasingly likely that EU leaders will eventually agree yet another bail out package which will allow the stricken country to receive the next instalment from the EU and IMF aid fund, thus preventing an imminent default once again. With a further sticking plaster in place we can expect to see the euro recover somewhat and a return to a modicum of risk appetite later in the week.