Global Stock Markets Continuing Their Sell-Offs

Equity markets are expected to remain under pressure today as optimism over the U.S. economy is fading. Traders are also selling out positions ahead of a potentially bearish earnings season. Finally potentially bad news regarding the U.S. banking system is triggering a “sell first, ask questions later” scenario.

Global stock markets are continuing their sell-offs following a sharp drop on Monday which began after Mike Mayo of Calyon Securities said the U.S. banking sector problems still have further to run before they reach bottom. He also said that U.S. government action may not offer as much help as expected. His report triggered a profit-taking break in banking sector stocks which spread to the broad-based equity markets. Repercussions from the release of this report yesterday are still lingering in the market overnight.

Adding additional pressure to the stock markets are comments from billionaire investor George Soros who was referring to the U.S. when he stated in an interview that the “banking system as a whole is basically insolvent.” He also added that the U.S. economy is in for “a lasting showdown.”

There are still concerns about comments from U.S. Treasury Secretary Geithner who alluded in an interview over the weekend that the U.S. government may get more involved with the operations of U.S. entities that receive taxpayer/government aid. This is making equity traders nervous since it borders on nationalization. Investors clearly don’t like the idea of the government getting too deeply involved with the private sector.

These three comments have eroded the optimism that had been building in the global equity markets the past four weeks because they represent doubt. Putting doubt in the minds of traders in this fragile environment leads to fear and fear triggers selling. The pessimism that was in the U.S. equity markets on Monday is continuing overnight and helping the U.S. Dollar benefit as traders once again looked upon the Greenback as a safe haven currency.

At the close on Monday one could sense the fading optimism about the global economy. This usually happens at the end of rallies that are built on emotion and not sound economic factors. Once the global community begins to embrace the idea that the global economy is in bad shape and expected to weaken further, it can begin to take steps to fix the problems. By stripping away the optimism and eroding investor appetite for risk, traders will be forced to focus on economic factors. At this time there is nothing from an economic standpoint, just emotion, to support the recent break in the Dollar which leads me to believe a new rally may be in the works.

Money leaving the equity markets is moving back to the safety of the Treasuries despite concerns that the U.S. may not be able to finance its debt.

Gold is also benefiting from the decline in equities although I sense this morning’s strength appears to be more short-covering following a sharp decline. Just about anytime banking issues are mentioned in a negative way, gold bugs come back into the market. Many still feel that long gold is the position to have as long as there is the threat of a collapse in the U.S. banking system. Although the possibility is remote at this time, some traders none-the-less may feel owning a little gold is not a bad thing.

Crude oil could remain under pressure as traders realize that this market needs increased demand to sustain the rally, not just optimism over the possibility of an economic recovery.

The U.S. Dollar is expected to continue to benefit from the break in equities. This morning the Dollar is expected to continue to attract buyers seeking safety as trader appetite for risk is decreasing.

Forex traders are looking at the economic fundamentals and seeing more problems ahead. The Japanese Yen could see a slight gain today in a bear market as the Japanese government announced a plan to increase funds to commercial banks. This should be a short-term counter-trend move as the main trend remains down.

Overall, look for downside pressure on equity markets while safe haven markets such as the Dollar, Treasuries and gold show upside improvement. The rise in the Dollar is expected to limit gains in gold and put downside pressure on demand driven commodities such as grains, crude oil and the softs complex.

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