Last week the world seemed intoxicated on high hopes that the global recession was ending. In just one month ended Aug 7, world indices gained 12%. Wow; incredible rally.
Over the past few days though, sobriety appears to be kicking back in. The barometer of world shipping, the Baltic Dry Index, has now fallen 25% over the past 9 days; now back to May levels. The VIX or volatility index has spiked more than 12% since Friday; emerging markets are pulling back and the US dollar and high quality bonds are seeing inflows again.
At present levels, the S&P 500 is pricing in a significant earnings rebound for 2010 and emerging markets have been pricing a hearty resumption of western consumption. Both of these assumptions are seriously in doubt.
Today the Singapore Minister of Trade and Industry threw a blanket again on resurgent decoupling hopes, saying there were “few signs of a decisive turnaround in final demand in Singapore's key export markets.” Without buy-happy western consumers, Asian growth will be much slower than desired.
This time, thanks to the massive credit overhang, rate cuts alone are not able to revive the housing sector. Without the housing catalyst to kick-start and lever renewed consumption, growth has a massive headwind. See the following clip, Housing Mess is not over, for an update on US housing:
I fear that the next few months could astonish those thinking markets have recently hit a “permanent new plateau.”
Cory’s Chart Corner
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