[caption id="attachment_1430" align="alignright" width="150" caption="Photo by jenny downing"][/caption]
With each passing week, the case for a bearish reversal out of this stock market rally becomes stronger. For the time being, the bulls triumphed by breaking out of a potentially ugly double top pattern. This raging bullish sentiment pretty much sums up last week’s stock market actions.
The bulls are buttressed by the highest level of consumer confidence (up for three consecutive months) since last September. Investors are no longer stricken by fear with the volatility index (VIX) trending lower into the 30s.
Businesss conditions have also improved as the credit market thawed. A major indicator is the TED spread (difference between what banks and the US Treasury pay to borrow for three months overnight). It is often viewed as a measure of systemic risk in the economy and willingness of banks to lend to one another.
From a high of 465 basis points, it has fallen to only 48 basis points, near its long-term average of about 50 basis points. The return of liquidity is crucial for businesses to function and expand their operations.
Investors’ renewed appetite for risk and inflation fears have prompted an exodus from the safe haven of US dollar. In May alone, the greenback declined by about 5%. Not surprisingly, holders of US dollars and Treasuries are clamoring for higher interest rates to hold these “undesirable” assets. This does not bode well for the issuance of US debts nor its struggling housing market.
Reuters reported that surging government bond yields may spark credit crisis II, something which the Federal Reserve will try its utmost to prevent. For better or worse, we can expect more intervention from the Fed in the weeks ahead. Read more...