Bailout for Ireland

Since the uncertainty was expelled confirming a bailout for Ireland, the Euro has reversed its downward trend against the US Dollar.

Foreign indexes have reacted positively to the news and the JSE ALSH is up 0.54% this morning at 31567.

The lowering of our interest rate is usually a boon for retail stocks. Also the holiday season lies ahead which could also give them a boost.

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Repo rate cut by 50 basis points

It is all about the US Dollar

Fears that Ireland would default on its debt have sparked a sell off in world markets during the past week.

The correlation between the EURUSD and market direction is very strong.

When Ireland accepts assistance in the form of loans or a bailout, expect the Dollar to weaken again which should send commodity prices soaring. Our market is commodity driven, so expect the JSE to rally.

Local retail statistics released yesterday was positive, but could be a deterrent for the Monetary Policy Committee to lower the repo rate today. The decision will be broadcast at 15:00 local time.

Lower interest rates would favour retail stocks and one could see cash flowing to the equity market looking for yield. ZAR should weaken if the market reacts rational to a lowering in repo rate, but let us see what the decision is.

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Heading for a fall?

Debt fears out of Eastern Europe have sparked a sell off in the Euro, and it looks like the markets are following suit.

The Euro is currently trading at $1.36 which is down about 4.5% from a high just above $1.42.

Our market is down 1% at the moment with the FTSE100 down over 2%. The American futures are also down around 1.5%.

One must remember that we're still in a bull market, and that if there is a reversal it will be sudden, since the downard trend has not yet established itself.

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The second gold rush

With the announcement coming from the US Federal Reserve last week that they would print a further $600 billion in order to acquire longer tern Treasury securities, alternative options such as gold are trading at new highs in dollar terms.

The new injection of US billions is in addition to bringing interest rates to nearly 0% and purchasing more than a $ trillion dollars of Treasury Securities and US backed mortgage securities.

The dual mandate of the US Federal Reserve is to promote a high level of employment and low, stable inflation.

Gold is a safe haven asset and in times of uncertainty, ultra low interest rates, demand has continued to push the price up.

The last real bull run was in the 1970’s when gold started the decade at around $35/oz and peaked at over $850 in early 1980. Most of the price appreciation occurred in the last 2 years of this bull market as the price moved up sharply from $200 at the beginning of 1979 to the $850/oz just over a year later.

The chart below superimposes that rally with the current price starting in 2001, producing one view of the possible further upside for the yellow metal.

Source: Sarasin, Ned Davis September 2010

Be long, but dance close to the door

Last night we saw the US Federal Reserve announce $600 bn in additional stimulus plus renewing the current stimulus of between $250bn-$300bn.

What does this mean for the markets? Well, cheap money is going to flow into stock markets and push prices higher looking for yield.

As you can see from the graph above, the JSE Allshare has made a turnaround from its last dip, and have continued it's rally upwards.

With the US dollar continuing to trade weaker, we can see commodity prices going upwards in anticipation when inflation kicks in. Thus it will be a boon for commodity related stocks.

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Priced to perfection

This is the ALSI futures end of day graph.

It's looking to break to the downside and and looks to run out of momentum.

A break downwards will confirm our view, and a close/trading below 27 000 could confirm the trend.

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