7pm TUESDAY 12TH OCTOBER 2010
A sharp pullback in virtually all risk assets - in which category I now have to include the 'safe-havens' of gold and silver - is close at hand.
THE DOLLAR IS THE KEY
The weakening dollar has been a major factor in the rise of all risk assets over the past month, due to assumptions about the Federal Reserve's anticipated new flood of free money - so-called 'QE2' - coming in November. Investors have largely priced their best expectations in to markets already and are vulnerable to the slightest disappointment - which, with sentiment on the greenback at a multi-year low, could spark a dollar surge and an unwinding of speculative positions.
Unless a major shock hits markets, I see the downside potential for stocks over the next three weeks as noteworthy but not overly dramatic - between 4 - 8%. I would expect a steadying of the ship at that point and residual buying to then bring us back up close to these levels. We will then have to decide whether what we're looking at is a much longer term peak (as I have been anticipating) or an economic outlook which has materially improved and which justifies a break up towards or beyond the highs set back in April.
Gold and silver, which are currently flying at nosebleed altitudes, will prove highly vulnerable to a rising dollar along with industrial commodities such as oil and copper. Emerging market countries and their currencies can also expect to be in the firing line.
This is a brief note in advance of more detailed analysis - I will return to update with charts and full explanations shortly.