By: Elliot Turner
We are starting to see the first possible warning signs of the Dubai Crisis spreading to a larger scale flight to safety. What often starts as a slow process has the potential the snowball rather quickly. This morning we woke up to the news that Fitch cut Greece’s sovereign credit rating from A- to BBB+. In the wake up Dubai World’s default, Greece was one of the countries that experienced a rapid ascent in their default risk as priced by their credit default swaps.
Moving forward, traders need to focus on emerging market and small cap performance in order to gauge risk tolerance in the market place. With the dollar either bouncing or reversing, we are seeing the initiation of a safety trade and should that continue, there will be large consequences for the trades that have worked since the March bottom. Today we saw the Dollar Index close above the 50 day moving average. The attempted breakout did not hold in early November; however, with the combination of a reversal in risk tolerance this time may be different.
On the market indices latest push to new highs, we saw the Russell lag significantly and establish a lower high. Recently it regained its 50 day moving average to the upside; however, we are seeing some selling come into emerging markets right now in the wake of Dubai and Greece. Today I want to call attention to two charts: Russia (RSX) and Brazil (EWZ) in order to highlight this effect. Keep in mind, these are commodity intensive economies, so the sell-off in commodities does have an impact, although I believe there may be more than meets the eye when it comes to these two charts.
One last chart I would like to focus on is that of the Oil Services Holders (OIH). The inability of oil to follow the broader market and other commodities higher over the past month and a half hints at weak global aggregate demand. Oil bottomed well before the market did in March and the recent weakness has turned into aggressive selling over the last week. Should the OIH break the $110 level it could very well target that gap from early September.
In many ways, “selling begets selling” and as such, we must watch to see whether the broader market follows the risk trade, oil and the financials lower–these were the leaders on the way up. The action over during the remainder of the week will speak volumes as to the next move in the broader market. Taken together, the areas of weakness indicate that both demand for risk and overall demand in the economy are once again slumping.
