Is the Currency and Equity Rally a Mirage?

In every major bear market, there are relief rallies and that is what we have seen today. The Dow Jones Industrial Average dropped more than 300 points during the US trading session before reversing violently to end the day up more than 550 points. The major turnaround in equities has forced the US dollar to give back its gains.

However as much as I would love to see the global unwind come to an end, the continued weakness in US economic data makes me really skeptical of this rally. Nothing is behind the move other than short covering. Therefore this could be more of mirage than a bottom for currencies and equities.

Ask Your Neighbor About Retail Sales

Jobless claims rose 516k last week to the highest level since September 2001 and it has a direct correlation with consumer spending. Retail sales are expected to contract for the fourth consecutive month. The recent bankruptcies and profit warnings confirms that US retailers are already struggling. Both ISCS and SpendingPulse reported a sharp decline in sales while various independent studies across the nation report that consumers are cutting back. The recent drop in oil prices means that gasoline receipts will fall as well. The average price of a gallon of gasoline has fallen close to 50 percent from its summer highs. We don’t expect consumer spending to recover until well after the holiday shopping season. Just ask your neighbor and he will probably tell you that he is cutting back his spending as well.

No V Shaped Recovery

Expectations for a V shaped recovery or sharp turnaround is unrealistic because there is still a very tough road ahead for the US economy. Nouriel Roubini, a NYU Professor who was one of the first people to forecast the recession now believes that the downturn could last well into 2009 and expects the unemployment rate to hit 9 percent. George Soros the infamous speculator that broke the Bank of England in 1992 takes things one step further by saying that we may even see a depression.

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Both men believe that when the US economy hits a bottom, it could stay there for some time which means that we could have more of a U or L shaped recovery. In this troubling market environment we continue to expect the US dollar and Japanese Yen to outperform, but with expectations skewed strongly in favor of disappointments from retail sales and the G20 meeting, the risk certainly lies to the upside.

EUR: Recession in Germany
GBP: Will the UK Step in to Support the Pound?
CAD: Trade Surplus Shrinks
AUD: Rises 7 Percent Against the Japanese Yen
NZD: Recovers as Risk Appetite Improves
JPY: Yen Crosses Soar as Dow Sees 900 Point Intraday Recovery

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