The World Gets a Cold

There’s an article in the New York Times this morning on the rebound in the stock market and declines in commodities future on the markets in the wake of the Fed’s actions of the week:

For months, wary investors bet their fortunes on the metals and raw materials that make up the commodities market, pushing prices for oil and gold into record territory even as stocks languished.

But a wave of upbeat economic news helped reverse that dynamic on Thursday, as commodity prices plummeted and stocks on Wall Street soared.

There are several possible explanations for the moves in the various markets. By far the most likely IMO is that money is just chasing money. The money that had been poured into commodities futures is now being put into stocks, presumably in the anticipation of increased consumer spending buoying the profits of U. S. companies.

I found the explanation given in the article rather interesting:

Many investors had expected the Fed to cut by a full percentage point, which would have sent down the value of the dollar. For months, with the dollar in free fall, investors have plowed their funds into commodities, which are likely to go up as the dollar falls.

But the Fed’s smaller-than-expected rate cut sent the dollar up, and it has since extended its gains against the euro and the yen. The European currency fell more than 1 percent on Thursday to $1.5429

As a result, investors who had viewed commodities as a shrewd hedge against inflation were scrambling to get out of their bets. “The precious metals markets and all commodity markets had built in a higher cut,” Mr. Steel said.

But there’s another explanation that’s barely hinted at here:

The June contract for gold was trading around $925 a troy ounce in New York on Thursday morning, down more than 8 percent from its $1,008.80 closing price on Tuesday, as demand for the precious metal appeared to drop in some regions. “We had a battery of data showing a real erosion in jewelry demand in India and China,” Mr. Steel said.

Is it possible that flagging consumer spending in the U. S. has resulted in a reduction in orders placed overseas and that, in turn, is affecting the expectations of the businesses in other countries?

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