Buyers and sellers in a 'phony war'

Over the past few weeks, both economic and company-specific news have been very positive. Markets pushed up strongly on the back of this and recorded strong gains. Last week, however, some signs of weakness started to show.

On Monday, it was announced that purchases of new homes in the US had increased by 11% in June, the biggest gain in eight years. Given the importance of housing to the overall economic situation, one might have expected this very positive growth in sales to buoy equity markets, but news of a reduction in the average price paid overrode this. The market reality was a modest decline in equities in the hours just after the release, with a late rally just before close eventually dragging the Dow Jones into a slight positive for the day.

Consumer confidence and durable goods orders, on the other hand, were weaker than analysts estimated. Equity markets moved lower at first in response to the data, but recovered later on, remaining almost flat for the day.

To use a rather unfortunate analogy, buyers and sellers seem to be engaged in a "phony war" at present, neither side willing to push hard on either front, resulting in mostly sideways price movement on the indices.

Next Friday's monthly US unemployment figures may be the catalyst that will end this stalemate. The US is expected to show a loss of 340,000 jobs last month and an increase in the unemployment rate to 9.6%. US unemployment has not found its bottom yet, and this will continue to hurt the economy for longer than Wall Street seems to be pricing in at the moment.

Unlike equities, there was significant price action in oil last week. Last Sunday we wrote that, while oil was bullish, reasons for caution were emerging. This caution was realised very quickly with the release of the weekly US oil inventories.

The data showed an increase in supply to the tune of 5.2 million barrels, against an expected fall of 1.5 million. Oil quickly lost $2 a barrel and eventually traded down below $63 as traders scrambled out of long positions. By close of business on Wednesday, US light crude oil had lost more than 7%, or $5 per barrel, on the week.

US inventory stockpiles now stand at 348 million barrels, significantly up from the same time last year when there were 295 million barrels in reserve. It appears that Opec's supply cuts are not enough to match the declining demand.

Currencies look to equities for direction

Currency markets, and especially the EUR/USD, have stabilised enormously over the past two months. The "phony war" description perhaps suits the recent EUR/USD price movements better than most markets.

Currency traders are finding it difficult to predict which economic bloc will fare better in the current economic climate. The likelihood here is that the currency markets will remain range-bound and will look for strong direction from equity markets to inform their trading decisions.

We believe that equities are looking overbought at the moment and will begin to move back down in the not too distant future. If this happens, we believe the dollar's 'safe-haven' properties will make it an attractive purchase in an uncertain world.

If you believe this is a great value market to buy into, you may want to take a look back at the years between 1929 and 1933 on Wall Street, a period with striking similarities to our own recent history.

Starting in March of 1929, the Dow Jones fell by roughly 47% in just 71 days; then, in the next 155 days, it staged a 47% rally, before steadily falling off roughly 85% over the next two-and-a-half years.

This current market collapse took longer, 516 days, but fell 53% from the peak. We are now 143 days into a rally in which the market is up 40%. We believe we are still in the midst of a bear market rally, and if you share this belief, then all signs point to a great selling opportunity around these levels.