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The financial market has experienced one of its worst patches in over 70 years, as a housing crisis during 2007 led to a financial one, which then affected all economies from across the globe. While some are still comparing the current recession to previous ones, others are observing the market’s price movements, as 2009 has turned out to be an outstanding year for riskier assets, climbing to astonishing levels, only last seen prior to the economic downturn.
Stock indices have retraced to stable levels, while once known as “high yielding currencies”, have regained a fair portion of their 2008’s avalanche. The Aussie, for example, has jumped by over 50% since the start of 2009, as investors have taken advantage of the massive drop, seeking returns from high yielding assets.
By taking a glance at the chart below one can see that a sudden change in monetary actions, provided stability to high yielders at the start of the year. This was then followed by a massive rally as currencies such as the Aussie, yielding then a 2.5% rate, attracted cash that was sitting on the side lines.
 Furthermore, stocks indices have also soared throughout the second and third quarter, as large caps, ones which were able to store enough cash to withstand the economic downfall showed promising results and better than expected forecasts for the start of 2010.
Despite the recent optimism, fundamental data still isn’t at its best, as unemployment has soared to extreme levels.
Unemployment Remains a Key Factor in this Recovery
In October, the number of unemployed persons increased by 558,000 to 15.7 million. The unemployment rate rose by 0.4 percentage point to 10.2 percent, the highest rate since April 1983. Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points.
Even though economic growth is starting to shows signs of stability and inflation is still subdued, the unemployment situation is leading many analysts to believe that recent released figures are all due to government’s help – enormous amounts of cash in the system which is causing subsidized growth. According to Bloomberg news, similar to the U.S, the Euro-zone is now emerging from its worst recession since World War II, as exports from Germany and France helped compensate for households’ reluctance to increase spending. When taking a glance at the charts below one can see that despite the recent turnaround, unemployment and consumer consumption is still at extreme levels.
GDP Figures (y/y) are slowly turningUnemployment Rates are at their highest
If economic data isn’t backing this rally, then what does it mean for riskier assets?Over the last couple of months there has been a strong correlation between the Euro, Australian Dollar, Gold and Stocks all increasing, while the U.S Dollar has dropped to lower levels. Even though unemployment numbers shocked investors during July, when the figure showed minor improvement, the overall economic picture still looks pretty bad.
Similar to 2003, when the global market recuperated from a technology recession, lagging economic data continued to weigh on investors after the first rally of the cycle. This situation led to consolidation, as the major indices eased their pace due to profit taking and uncertainty going forward.
When observing the chart below one can see that similar to the previous recession, the Dow Jones has now reached its congestion area, one that could prevent the index from going forward.
Dow Jones Monthly Chart
Even though central banks are now more confident that the markets are heading back on to healthy path, others fear that the cost of this recession will weigh on optimists, giving bearish traders the upper hand, causing the markets to range, or even worse – to drop. Comments like, “interest rates remain appropriate” or “the economy is set to recover at a gradual pace”, from central bank members might be able to help back the current rally for a while longer, but when the financial markets work on a simple equation of; “buy the rumor, sell the fact”, it is hard not assume that all the rumors, which are associated with the start of a new bullish market are now already baked in the current price. If fundamental data, especially the unemployment situation doesn’t soon back up this enormous rally, things could come to a minor standstill.
From a technical point of view the Euro, Australian Dollar and Stock indices (S&P500) are all at critical resistance levels and seem to be forming double top scenarios. Even though the pattern is normally classed as a bearish reversal, one must note that recent major-market-moving economic data didn’t spark a major sell-off. Even if this market has got further strength left in it, caution should be taken, as it now seems that this current rally is running only on fumes.
Additional Technical Charts
Dow Jones – Weekly ChartEUR/USD –At resistance
AUD/USD – At resistance
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