News

July 21, 2008

The Market Knows Nothing: Gold Up, Base Metals Down, And The Fundamentals Still Sound

By Rob Davies

Wild swings in capital markets over the last week, particularly in equities, are a clear demonstration that the visibility about the economic outlook is as cloudy as it has ever been. Attention has mostly been focussed on shares, and especially banks, as they seek to plug holes in their balance sheets. Mid-week the bearish trend was sharply reversed when the US tightened rules on short-selling. While that makes for a good short term patch it does nothing to change the long-term outlook for these institutions. Financial data from the banks is mixed with some results above expectations, and some below. And such a divergence of signals is making harder than ever to digest what the prospects are for the rest of this year and next.

Two things are clear though: inflation is high and rising, and bond markets are starting to sense that there is going to be an avalanche of paper coming its way. European inflation reached four per cent, and in the UK it was reported as 3.8 per cent, although though no-one believes that figure. Inflation in the US at 5.02 per cent is the highest for 17 years. That probably suits the US Treasury as it works out how to incorporate US housing loans onto its balance sheet. The deterioration in the...