Stalled Recovery

Equities: Ben Bernanke's comments today highlighted the fragility of the economic recovery, although equity markets rallied on his comments that rates would be kept to an all time low for an extended period. His comments were overshadowed by data coming out that showed new home sales fell 11%. Economic data coming out over the past week has been more bad news than good, indicating that worse news could soon follow. My forecast is for further weakness in equity markets coming from the possibility of a double dip recession, or at least a U shaped recovery.

Currencies: The Dollar fell on Bernanke's comments, but later rallied at by close was relatively unchanged from the previous day against the Euro and Pound. An interesting article in today's FT estimated the size of the Dollar carry trade at 1.5 trillion stemming from exceptionally low rates in the USA. This could be interesting if equity markets fall, and investors start to unwind carry trades, we could see the Dollar strengthen on these unwinds. A similar story occurred with the Yen from 2007-09. I maintain bearish forecasts for EURUSD & GBPUSD for reasons mentioned above as well as weakness in European countries. Europe and the UK have registered worse growth than the USA, and also suffer from large budget deficits putting further pressure on their respective currencies. The Greek crisis is still to play out, and could see further EUR weakness.

Commodities: Gold is modestly lower today, nothing in particular seems to be a driver of this. Gold could be going either way, its main risk is to the downside on potential Dollar strength. Oil is up about 1% today, this despite weekly inventories rising by 3m barrels, above market expectations. The oil market has rallied in the last couple of weeks, which seems to go against the fundamental data coming out, mainly inventories have been rising, implying a weak market. A stronger Dollar could be bad for oil, but again, this hasn't been the case in its recent rally. I am bearish on oil in the medium term as recent rises seem to lack a strong fundamental basis.