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Quote of the Day

Opinions should be formed with great caution...and changed with greater.

Josh Billings

As I mentioned in Tuesday's newsletter the rest of the week will be very volatile and the markets will be trading around the 30 second news snippets that hit the media airwaves from Europe. In addition the upcoming weekend is a long holiday weekend in the US and market participation and liquidity is going to slow down quickly as we get into the second half of the trading week. The EU news snippets quickly moved the US markets from a continuation of Monday's short covering rally back into negative territory in a very short period of time. The news that sent stocks and commodities moving lower on Tuesday was a Dow Jones report that the Greek Prime Minister said the nation is considering preparations to leave the euro currency.

Each time one starts to think that a Greek exit has been fully priced into the market one needs to always look back at the quick and decisive reaction to the downside that occurs each time a news snippets just mentions the possibility of an exit...as we saw in the last hour of trading on Tuesday. So yes some of it is priced into the market but I can almost guarantee that if it is announced that Greece is leaving the EU there will be a swift and strong sell-off. How deep it goes and how long it lasts is the unknown.

As I have been suggesting the rallies that have occurred are definitely not trend changers at this point in time. The technicals, market sentiment and sluggish macroeconomic data all support further declines in most risk asset markets in the short- to even medium-term. The selling will stop when the market is convinced that the uncertainty surrounding Greece and the rest of the sovereign debt issues in Europe are truly over and the macroeconomic data starts to improve. Short of that, the other turning point for the markets will be more stimulus from the US and China. I believe it will be more stimulus and easing that will finally be the catalyst for a turnaround and sustainable rally to the upside.

Global equity markets once again moved back into negative territory for the year as shown in the following table of the EMI Global Equity Index. Yet another huge sell-off (almost 3%) in the Brazilian Bovespa accounted for a major portion of the loss in the Index over the last twenty four hours. The Index is still up 1.2% for the week but the Index moved back to a 0.4% loss for 2012. Equities remain a leading indicator for the global economy and are highly correlated to all of the major risk asset markets. The global equity markets are still suggesting a period of slow growth in the global economy for the foreseeable future.

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