The threat of war emanating from the North Koreans is of grave concern to the public as well as the marketplace. Whether or not the young leader of the North means what he says remains to be seen. Often, war drives us out of economic downturns, but at what cost?War is not the answer if it can be avoided.
It would be a fatal mistake on the part of North Korea to attack U.S. interests in the area. I doubt very much, as with the Korean war, that China would be on the side of North Korea this time. However, any retaliation by the United States for an attack by North Korea would have to be tempered so as not to rile the Chinese and Russians. We will have to see what develops, but for now global markets are concerned, as exemplified by the flight to the relative safety of the U.S. equity markets.
Now for some actual information to help readers in developing trading strategies…
Interest Rates: June Treasury bonds closed at 144 13/32nds, down 5/32nds but up nearly 100 basis points from last weeks closing of 143 15/32nds. The move to treasuries is usually a precursor of anxiety prompted by either economic news or in this case geopolitical concerns. We continue to view treasuries as in a trading range between 140 and 152. However, should hostilities break out on the Korean peninsula we could see sporadic wide price changes in treasuries as well as equities. On Thursday first time unemployment came in at an increase of 16,000 to 357,000 for the week. The U.S. also released the final revision for fourth quarter economic growth at only 0.4% on an annualized basis, below the expected 0.5% forecast by economists. That could continue to provide the impetus for further treasury bond strength and lower yields.
Stock Indices: The Dow Jones industrials closed at 14,578.54, up 52.38 points and a new all time high exceeding that of five years ago. The S&P 500 closed at1,569.19, up 6.34 also establishing a new all time high. The tech heavy Nasdaq however remains 40% lower than it’s all time high closing Friday at 3,267.52, up 11.00. Markets were closed for Good Friday and Thursdays action was a combination of shortcovering for those of us expecting a market correction and selloff, and position squaring for those concerned over any potential North Korean move over the three day holiday. We remain convinced that the U.S. equity market has gotten way ahead of itself and we are not alone in expecting a sharp correction. Given the magnitude of what could result from a North Korean attack on the South and/or U.S. bases, we prefer the conservative approach for now. The North Korean "kid" leader is boxing himself into a corner with his threats and may have to try to save face somehow regardless of the ramifications to his country and its people.
Currencies: The June U.S. dollar index closed at 83.13 on Friday, down 28.1 points on a pre-weekend position squaring profittaking after the sharp gains from the January lows around 79.80. The dollar was also helped to some extent by the increase in U.S. personal income and the better than expected rise in consumer confidence by the Reuters/Michigan consumer sentiment index. We have favored the dollar for some time and now with the possibility of war on the Korean peninsula, a flight to the safety of the U.S. dollar could continue to provide dollar strength. The currencies gaining on Friday were the euro closing at $1.2826, 44 points, the Swiss Franc $1.0542, 46 points, the japanes yen 0.10629, 27 points, the British Pound $1.5190, 68 points and the Canadian dollar 9826, up 5 ticks. The Aussie dollar lost 29 points to close at $1.0354. The Bank of Cyprus said that depositors with over 100,000 Euros could lose up to 60% and that did not bode well even as attempts to obtain a $12 billion dollar loan from the EU is conditional on sharp austerity proposals. We see additional problems developing in the EuroZone so stay with the dollar.
Energies: May crude oil closed at $97.12 per barrel, up 54c tied to the weak dollar but with better than expected U.S. economic data demand may improve. Declining inventories also suggest renewed demand and prompted short covering coming into the three day holiday weekend. We continue to prefer the short side of crude based on our ongoing expectation of a return to global recessionary trends.
Copper: May copper closed at $3.4040 per pound, down 3.95con weaker demand from the worlds largest consumer of copper, China. Concern over the ongoing Euro zone debt crisis also a factor in the recent weakness for copper. For the month copper prices declined 4.3% and for the quarter has lost 4.9%. Global copper inventories are at a nine year high as expectation for stronger economic growth prompted inventory buildups. We have been bearish for copper and no reason to change for now.
Precious Metals: June gold closed at $1,596.80 per ounce, down $10.40 and lost almost 5% for the first quarter. A rally in U.S. equities prompted the shift from the "safe haven" precious metals but our expectation for a "bubble" in equities could prompt shortcovering and renewed interest in the "safe haven" commodities such as precious metals. We prefer the sidelines but for those that must have a precious metal, try silver, which over the years has outperformed gold on a percentage basis. May silver closed at $28.315 per ounce, down 29.7c. July platinum closed at $1,575.70 per ounce, down $7.80 or 0.5% while June palladium lost $3.85 per ounce, or 0.5% closing at $772.15. Stay with the long palladium, short platinum spread.
Next page: Ags and softs