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Commodities and dollar dive

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by Peter Switzer

Now today is going to be a real test for the ‘buy the dips’ brigade with a hell of a lot of tumbling going on with financial markets overnight. This all gives credence to my long-posed question: do we sell in May and go away?

Let’s recap and put you in the picture about which markets succumbed to gravity.

The Dow Jones lost 139 points, or 1.1 per cent, to end at 12,584.17. The S&P 500 dropped 12 points, or 0.91 per cent, to 1335.1.

But wait, there’s more. As I write, our dollar is now 105.9 US cents and oil has gone below US$100 a barrel, which was the lowest close since mid-March. US light crude went as low as US$99.60 a barrel before ending at US$99.80 but that was an 8.64 per cent dive in one night!

This slump coincides with a general dumping of commodities as economic signals point to slowing economies in Europe and the US. However, it should be pointed out that these are only early signs that maybe earlier forecasts were simply a little too high. It doesn’t mean that economic disaster lies ahead but maybe simply a more moderate economic and market advance than was once expected.

Worrying signs

Let’s have a look at the worrying signs to gauge how panicky we need to be:

German industrial orders dropped in March and this was a surprise.
The ECB indicates no rate rise in June, which also raised doubts on the strength of the Eurozone economy.
Oil prices have fallen for four days in a row and have shed over 12 per cent.
The US weekly jobless claims hit eight-month highs.
Other job figures out in the US this week, ahead of tonight’s jobs report, have not been encouraging.
First quarter non-farm productivity rose 1.6 per cent but it was down on the 2.9 per cent reading in the fourth quarter.
Some investors would be getting nervous about June looming when QE2 ends and the US economy will be on its own to grow without the central bank’s monetary stimulation.

That’s about it but things could get nasty if tonight we see a lousy unemployment report out of the US.

Buying opportunity

Against the negative stuff, retail stores in the States have fared better than expected.

Thomson Reuters looks at 25 retailers and has found an 8.9 per cent gain in April, which topped expectations.

To me this a buying opportunity and if the job numbers are bad, stocks will go lower but I can’t see a big reason yet to doubt that the rally cannot resume after this sell-off, which regular readers will recall I tipped.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, May 06, 2011

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