BB has highlighted one of the keys to understanding correlation or market influences - market context.
Back last year I posted about deflation and referred to it as the enemy of business - there was general chat about the possibility of deflation in EZ in late 2013.
On May 13 I posted again about such possibility, and linked to this story:
ECBās Praet warns of deflationary pressures - RTļæ½ News
The euro had just peaked 5 days earlier on May 8th at 3993.
So what was I seeing?
The answer lies in the CRB. By May 13th there were signs of a turn down on that index, I knew that that needed watching big time. By the end of May a H&S pattern was evident.
There was some relief in June, but by early July it was heading down.
So what was so big about this? - well if the raw material of business, that is commodities, are falling in price, and we already have low inflation, then further downward pressure will apply on prices. Itās the very nature of business to be competitive, and if I can lower prices without lowering profits then I will do so.
So why now, why this week, why does a leading UK broker talk this morning of a āperfect stormā?.
Again the answer lies in the CRB, it broke those lows of Nov 2013 this week.
But there is one other thing - the US Bonds and the S&P.
Stocks have been merrily rising, regardless of the lowering prices on commodities, now in the past 2 weeks everyone saw the huge disparity, also being highlighted by the Silver/Gold ratio.
Both precious metals, all things being equal should be falling at similar ratio, but the industrial aspect of Silver vs the currency aspect of gold propelled silver to fall faster than gold.
The Bond market as personified by the price of US10yr, in the meantime, was happily ranging from a low in Dec 2013 to a high in mid Aug 2014 - all was well.
Then the boat got rocked, the seeds being sowed from Monday past.
US10 yr priced went above the Aug high, nothing much, but the high was now support - yesterday - the daily tells the tale.
Thatās the past, are we seeing the beginning of a perfect storm? - I donāt think so, a lot will depend on earnings reports in the US, I suspect that the crb may slowly begin to rise, the S&P may continue to correct, Bond price will continue range and all will be well
Silver/Gold ratio P149 John Murphyās excellent book.
P180/181 for the current relationship between Bond Prices and stocks (Bond yields, the inverse of bond price, lead the stocks lower in 2010 and 2011)
Comparative charts free at
StockCharts.com - Simply the Webās Best Financial Charts
CRB at Thomson Reuters - Jefferies CRB Streaming Chart | TR/J CRB Index Real Time Chart
Post here back in May:
http://forums.babypips.com/newbie-island/65908-there-anything-else-besides-price-history-help-us-trade-4.html#post627859