Bond Market and Commodities diverging from the stock market

The market has pulled back from the Osama Death rally. Typically gains from these kind of events are given back pretty fast as they are really nonevents from an economic perspective atleast for the short to intermediate term. If this event helps in breaking the back of terrorism then it will  be economically beneficial over a long period of time which is very hard to quantify.

The manufacturing ISM data from yesterday was mostly in line and today’s retail sales numbers were mostly inline, factory orders released at 10AM ET were better than expected – all pointing to a moderately growing economy. The manufacturing ISM data is actually running pretty strong but since manufacturing now makes up less than 15% of our economy it doesn’t have a very large impact on economic performance or the jobs picture anymore(US is still the largest manufacturer in the world).

I had mentioned this in one of my previous posts but we are seeing some interesting divergence in various markets. So while the stock market has been hitting new highs, over the last month we have started to see a drop in treasury yields. Typically this is a sign of risk aversion or less growth(due to lower risk of inflation from slow growth). Another interesting sign is that some commodities like Copper, Sugar, Zinc and a few others have actually started to drop over the last few months in spite of the drop in the dollar. I think these could be early signals of a global macro slowdown. Emerging countries like China, India and Brazil have been raising rates for many months now to control inflation. It is possible those efforts are now working in curbing inflation but also reducing growth. The s&p 500 is a global index now as almost 50% of earnings for the s&p 500 companies come from international operations. So if we are going to get a global slowdown that could have a sizable impact on earnings estimates. This is something to keep an eye on.

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