by Ryan Puplava, Financial Sense:
Shift Happens. More so in the last two years, sector rotation is happening on a very short time horizon as the market sways and swells from economic fears, to policy response. Since the jobs data last Friday, cyclical industry groups are showing renewed strength as portfolio managers rotate into energy, industrials, and materials – late stage cyclicals. These are also the groups that typically perform well on QE speculation and implementation. Recall the top sectors in the second half of 2010 when the Federal Reserve started buying Treasuries under QE 2.0? They were the same as the groups performing well this week. Sector shift is happening, right before our very eyes.
The April FOMC minutes released in May set the ball in motion as more Fed governors moved into the accommodation camp in the April meeting. This was seen as an incremental shift in the opposite direction of policy and gold jumped on the news a day after it had hit new lows this year. Then, the June 1st payrolls data confirmed what many were thinking: the U.S. was slowing and we’re going to need more stimulus. Gold closed at $1,626 from $1,568 the previous day, the biggest 1-day rise in three years. We’ve had FOMC minutes, meetings, and Fed Governor speeches from then that have all continued to hint at easing in our near future, but nothing has been as grabbing as Bullard’s paper in July of 2010 – except maybe Draghi’s mention of outright QE at the last ECB meeting last week.
Here’s the problem: if everybody else eases while the U.S. stays pat, then that would create a catalyst for a stronger dollar. If we know anything about currency wars over the past 10 years, it’s that this would be a bad catalyst for U.S. exports, the euro, and risk assets due to a widening policy gap between the U.S. and the world (everybody else is easing). Perception is everything in the markets.