Quote of the Day
Simplicity is the ultimate sophistication.
Yesterday was the largest one day decline for a variety of risk asset classes this year as the ongoing headwinds finally caught up with the bulls. This was the first correction this year that can be categorized as a bit of a sentiment changer. Market participants finally started to digest the plethora of data that has been suggesting that the global economy is slowing down while inflation risk is rising as oil prices still hover near the year to date highs on the evolving geopolitical risks in the Middle East.
In spite of the declines in commodities and equities, the uptrend that has been in place all of 2012 is far from over as the declines are still viewed as downside corrections while all of the important uptrend lines and technical indicators remain in play. The market will now be looking for further signs about the health of the global economy with the next big event coming on Friday when the US Labor Department will release the latest monthly nonfarm payroll data and the headline unemployment rate. The market is expecting a net gain in jobs of about 220,000 while the unemployment rate is expected to hold steady at 8.3%. A miss to the downside will definitely result in another round of profit taking selling.
Oil prices declined yesterday on a combination of an easing of the tensions between Iran and the West along with help from a sell-off in equities and the euro. The west (including the US) has accepted Iran's offer to resume negotiations and Iran is now offering to allow the IAEA inspectors access to the site they prevented them from visiting when they were last in Iran a few weeks ago. For now I would say we are still clearly in my Scenario 1 which should limit the widening of the risk premium for the time being. As long as both sides are talking it pushes the potential for military action by Israel or the US further down the road. At the moment it seems that diplomacy and sanctions will be in the forefront. I must say we have to be cautious about setting any major expectations from negotiations as all previous attempts have gone nowhere.