Weekly Market Wrap: 11 Jan 2013

This regular column serves as a review of general market conditions and covers stocks, commodities, precious metals, currencies, bonds, and other areas that may be of interest such as rare earth elements and graphene.

Stocks

From time to time it’s good to step back and look at the big picture. That’s because, in spite of a 76% rise since March of 2009, the FTSE 100 index remains more than 12% below the all-time high it reached back in December 1999, more than 13 years ago.

A 20 year (daily) chart of the FTSE 100 index (Click on the chart for a larger version)

A 20 year (daily) chart of the FTSE 100 index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As the chart above shows, the FTSE (along with the DOW, S&P 500, and other major stock markets), is stuck in a broad trading range known as a secular bear market.

These long-term bear markets may not appear too destructive, however those still stuck in the buy and hold mindset of the late 80’s and 1990’s, these periods can prove very destructive indeed. As noted previously, secular bear markets last on average 16 years, and although the FTSE is only down 12% in nominal terms, adjusted for inflation it is down around 40%.

Based on historical president the current bear market should end around 2016. In the mean time conditions favour nimble investors and trend followers who are able to capitalise on the violent swings that are typical within this kind of market.

Commodities

Copper

Having advanced 239% from its March 2009 low, copper entered a long triangle consolidation pattern. Now however, thanks in part to the renewed strength of the Chinese economy, Dr Copper looks to be breaking out to the upside.

A 4 year (weekly) chart of copper (Click on the chart for a larger version)

A 4 year (weekly) chart of copper (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Precious metals

Platinum

On 31 December 2012 the price of platinum made a low of $1,519.10. Since then however, it has rallied by more than 7% thanks to a rebound in China’s exports and a weaker US Dollar (see below). In December Chinese exports grew at the fastest pace in seven months. The platinum group metals have also benefited from the improving picture in US auto sales.

A 6 month (daily) chart of Platinum (Click on the chart for a larger version)

A 6 month (daily) chart of Platinum (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

Currencies

The US Dollar

The US dollar, as measured by the US Dollar Index, fell sharply yesterday after comments from European Central Bank President Mario Draghi lowered expectations that the Eurozone would cut interest rates again soon.

A 6 month (daily) chart of the US Dollar Index (Click on the chart for a larger version)

A 6 month (daily) chart of the US Dollar Index (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The US Dollar Index is particularly susceptible to a rise in the Euro since the index measures the value of the greenback relative to a basket of foreign currencies, including the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss franc. However the index is heavily weighted towards the Euro (some 57.6%), and Draghi’s upbeat economic outlook gave the single currency a boost.

Bonds

On 3 January 2013 the US Federal Reserve Bank released the minutes from its latest mid-December Federal Open Market Committee’s (FOMC) meeting.

For the first time since the Fed began its Quantitative Easing (QE) programme, several members of the FOMC’s board have voiced their concern about the Fed’s rapidly growing balance sheet and the risks it may pose to the general economy. As a result of their concerns some members are calling for reduction in the purchases of Treasury bonds and mortgage-backed securities before the end of 2013.

As the chart below shows, these hawkish comments caused Treasury yields to spike and although they have since given back most of the rise they remain well above the all-time low they made on 24 July 2012.

A 1 month (60 min) chart of the 10-Year Treasury Note Yield (Click on the chart for a larger version)

A 1 month (60 min) chart of the 10-Year Treasury Note Yield (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

The fact is, the Fed (and other central banks), are caught in a trap. If they stop buying-up Treasury bonds then yields will rise, and even a 1% rise would be very damaging adding around $170 billion to the US budget deficit. On the other hand if the Fed continues, they may be able to keep rates artificially low for a while longer, but eventually the size of their balance sheet will scare away foreign investors forcing the Fed to monetize an even higher percentage of their debt.

At this stage in the game both options are likely to end badly and investors should consider using any rally in bonds to get out of them.

Some analysts refer to the FOMC as the Federal Open Mouth Committee because they seem to try to influence markets to their advantage. Investors should watch what the Fed does, not what they say.

Rare Earth Elements

Rare earth metals, or rare earth elements (REEs) as they are also known, are a collection of seventeen obscure metallic elements that have become vital to our modern way of life. Used in the manufacture of high-tech products such as flat-screen televisions, mobile phones, hybrid cars and wind turbines, their unique properties have enabled high-tech products to become smaller, lighter and more efficient.

Currently around 95% of the world’s REEs are supplied by China. However several countries are trying to reduce their dependency on China, especially since these vital metals are also used in military applications such as radar, radiation detection, advanced optics, and communication systems.

Today the BBC reports that “The US Department of Energy is giving $120m (£75m) to set up a new research centre charged with developing new methods of rare earth production.”

In late 2010 and early 2011 the price of rare earth metals exploration companies entered a mini-mania, with the price of many companies rising several hundred percent. However, in the latter half of 2011, and throughout 2012, the price of these companies fell dramatically.

The chart below shows the Rare Earth/Strategic Metals ETF (REMX) which is provided by Van Eck.

The fund, which was listed on the NYSE on 27 October 2010, is designed to give investors exposure to the mining, refining and manufacturing of rare earth and strategic metals. It currently contains 23 publicly traded companies that are engaged in a variety of activities related to rare earths and strategic metals.

A 2 year (daily) chart of the Rare Earth/Strategic Metals ETF (REMX) (Click on the chart for a larger version)

A 2 year (daily) chart of the Rare Earth/Strategic Metals ETF (REMX) (Click on the chart for a larger version)

Chart courtesy of stockcharts.com

As the chart shows the sector now looks to be trying to form a base, and it may eventually provide a decent entry point. For the time being however, rare earths should likely be avoided, and the sector remains extremely volatile.

Investors should also be aware of a recent report published by the Financial Services Authority (FSA). The regulator has issued a warning over certain rare earth metals investments that are marketed to consumers, saying it is “yet to be convinced” that there is a viable market for retail investors to make money, and that there is a “strong possibility” of fraud.

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