In last week’s update we wrote “It is in reality a joke that the US still holds this status as their debt levels are already beyond the point of no return and the fact that the US still holds the triple A rating shows how much of a joke the rating agencies are.” This weekend has seen the S&P downgrade the US from their triple AAA rating for the first time in history. This may have a considerable effect on global markets over the coming months and other rating agencies will likely follow suit and possibly begin downgrading other Countries as well.
It’s been a very dramatic week in the markets, which has seen volatility spike higher and stocks move lower, falling to the new levels of the year. The trend for stock indexes is now down. The trend also remains down for the US dollar and is mixed for commodities.
We wrot e last week “The current formation on the S&P 500 is of a very large head and shoulders pattern. We may see move lower towards the neckline of the pattern and key support around 1250 on the September contract. If that level is reached and support taken out we may see a further decline all the way to the 1125 to 1150 area, approximately 140 to 165 points lower than Friday’s close.” When writing that I did not expect that we would fall almost to that target within the next week but that’s not far short of what happened as the S&P 500 fell to 1163.5 on the September contract before mounting a partial recovery on Friday. Perhaps significantly the market closed below 1200. Other indexes were also sharply lower.
We indicated last week that the $90 level would be watched closely as it represented the lower end of the short term trading range and this level was tested and support ta ken out, leaving Crude with a heavy decline for the week.
December gold added 1.26% for the week and reached new all time highs yet again, this time at $1684.9 before falling back to the close on Friday at $1651.8. Silver did not fare well and ended the week lower, falling below the $40 level. The trend for silver looks as though it is in danger of coming to an end, at least for now as short term support is well within range.
As a general rule, the dollar comes into favour during times of crisis. This is primarily because it is the world’s reserve currency and is perhaps erroneously viewed as a safe haven. This has been the case for quite some considerable time but is not so much the case now. Previously the chaos and panic selling seen in the markets would have led to a sharp rally for the dollar and whilst the dollar has rallied against several majors, the gains for the week wer e perhaps less than many would have expected.
The dollar index fell just short of declining to our short-term downside target at 7330 and recovered a bit but still ended the week down. The dollar has fallen to all time lows or multi year lows against several currencies this past week, underlining how bad the plight of the dollar actually is.
We also wrote last week “Another popular safe haven currency is the Japanese Yen, which has continued to climb of late and is now at levels last seen when the Bank of Japan intervened to prevent the Yen from appreciating further. Further intervention may follow this week from the BOJ.” This week saw intervention once again from the BOJ, right on cue and this weakened the Yen initially but Friday did see another gain for the yen. One wonders how long the BOJ will be able to keep intervening but for now this looks as though it may continue around the 7700 dollar/yen level. The Swiss national bank also intervened to weaken their curre ncy, dropping rates to zero. The impact of this was short lived and the Swiss Franc still ended hitting new all time highs.
Interest rate futures
Interest rate futures rallied sharply at the beginning of the week as the long-term uptrend continues and rates continue to fall to new lows for the year. Friday did see some weakness though with Bear sash reversal patterns being seen on the daily charts for the 10 year T note and 30 year Bond. What happens this week will be very interesting to see as the markets grapple with the US downgrade.