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Stocks Moving Lower - China Curbs on Inflation in Focus

November 19, 2010 – The futures are indicating lower openings for the broader markets this morning as the Street reacts to China’s moves to curb inflation. There aren’t any significant economic data on tap this morning and we have now moved officially out of Q3 earnings season so the focus in today’s session will likely be on international factors influencing U.S. and global economic growth.

The dollar is basically flat against the euro this morning, with the euro trading at $1.3664. The debt crisis in Ireland appear to be being dealt with and we had thought that attention would turn back to the U.S. dollar, and the impact the national debt, at $13.8 trillion (publicly owned portion is $9.2 trillion) and the impact Bernanke’s QE2 program would have as well. We thought this would create substantially more weakness in the dollar than we are seeing now.

At some point, short of drastic changes to policy in Washington, this has to happen. And it is doubtful that any such changes are possible. Put simply – too many political jobs are on the line for a majority subject to future elections develop and ratify and real policy with teeth that could actually materially reduce the debt. Just look at Obama’s debt commission and the kind of criticism it is drawing from both sides of the aisle. And that would only cut the debt by a third!

Gold is off $8.30 to $1,344.70. Given the dynamic that we outlined above regarding U.S. debt, we see continual uptrend in U.S. debt spending that will test the professional bounds (competency is already being tested we think) of the ratings agencies. They have told us in the past week that the U.S. debt is not in danger for at least another year of being downgraded but did note that the current trajectory is not sustainable. This is pretty clear code for the fact that there is more systemic risk being built into the system. This is a bullish catalyst for gold.

Oil prices are down $0.62 to $81.23. The primary factor weighing on oil prices this morning has to do with concerns about the impact China’s inflation curbing policies will have on economic growth, and hence, demand.

 In terms of what we expect in today’s session, look for stocks move lower heading into the weekend. Movement has been pretty schizophrenic lately, which isn’t too surprising given the fact that there is little to be convicted about at current levels (although ours remains clearly in the camp that there is more downside risk to stocks than upside). Next week will likely see less volume than usual given it is a holiday shortened week so keep that in mind in your trades this morning, as well as the fact that we are also heading into tax selling season.


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