A further down move would not be surprising next week, but we’re unlikely
to see a repeat of August’s panic selling, and certain stock groups are still
attractive buys, writes MoneyShow.com senior editor Tom
Aspray.
After a see-saw week, stocks were punished on again Friday. The action was
even worse than what we saw before Labor Day weekend.
This time the financial media reported that stocks were lower because of
Obama’s job plan, the surprise resignation of Germany’s top representative on
the ECB’s executive board, and worries over a default by Greece.
From a technical standpoint, last week’s action just completed the rebound
from the August lows. The sharp drop after the Labor Day weekend caused further
deterioration in the technical outlook.
The mid-week rebound—in reaction to a sharp rally in the German Dax
index—created another good selling opportunity. The German market was boosted
when their constitutional court rejected lawsuits filed to block Germany’s
participation in the Eurozone rescue funds. Thursday’s lower close set the stage
for Friday’s drop.
If the key support levels are violated early this coming week, it is likely
to trigger another wave of selling—but I doubt it will have the panic qualities
of what occurred in August.
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There was little apparent reaction in the equity markets last
week to the surprising decision by the Swiss National Bank to stem the Swiss
franc’s sharp rise. The safe haven status of the franc has caused a dramatic
surge in the currency, not only against the US dollar but also against the
euro.
This long-term chart from the Financial Times shows that the Swiss
franc has had a dramatic rise against the euro since early in the financial
crisis, when it was trading at 1.6 francs/euro. Early attempts to intervene were
unsuccessful, and finally they stopped in 2010.
Last month, the franc surged versus the euro and hit parity. After pulling
back from these extremes, the franc again started to rally last week, which
prompted the Swiss to act. After some slight weakening, the franc started to
again turn higher.
The decision to stop the franc from dropping below 1.2 per euro caused a
sharp rise in other currencies like the Norwegian krone, as investors looked for
another safe haven. While Norway can cut rates to help stem the Krone’s rise,
Brazil and Japan have fewer choices.
Brazil just cut rates in the hope that it could escape a global slowdown,
while Japan’s rates can’t go much lower. As I discussed last
week, Japanese investors have been making a large bet on the Brazilian
economy, and negative sentiment on the emerging markets by US investors is
making them ones to watch.
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