It was a classic turnaround Tuesday on Wall Street as the bears stepped back and gave one-time momentum favorites in areas like big tech and biotech a chance to get off the mat. The tech-heavy Nasdaq led the major averages higher. But the tiny 0.1% gain in the Dow Jones industrials reveals the bulls didn't exactly have their heart in the buying effort.
They had good reason. Other markets such as bonds and currencies revealed a persistent "risk-off" attitude. Same story with precious metals, with gold taking the fight to its 50-day moving average for the first time since January.
With Alcoa (AA) starting a cloudy first-quarter earnings season on a mixed note (beat on non-GAAP earnings but missed on revenue), economic data disappointing on a pace not seen since mid-2012 and with tensions in Ukraine heating up again, investors have a lot to worry about.
But the moves in currencies, I believe, will become the main focus in the days to come. Early Tuesday morning, Asian markets were hit by lack of new cheap money stimulus out of the Bank of Japan. That spiked the Japanese yen and hit the U.S. dollar hard -- pressuring the yen carry trades I discussed back in March.
Japan's Nikkei stock index is once again threatening to fall through its 200-day moving average -- a level it has struggled to stay above since February. Some evidence also shows that investors have begun pulling their money out of Tokyo's markets, with foreign net selling of Japanese stocks reaching a pace not seen since 2011. The Nikkei is already down seven percent year-to-date.
Analysts are expecting monetary policy action over the next few months, but others expected action now. The folks at Societe Generale were looking for the expansion of the BoJ's bond purchase program overnight in response to both a loss of economic momentum as well as headwinds from Japan's recent sales tax increase, the first one since the late 1990s.
The central bank's policy statement was taken as somewhat hawkish, with the economic assessment unchanged for the eighth consecutive meeting, and it increased its outlook for industrial production slightly. Moreover, BoJ Governor Haruhiko Kuroda added that he didn't see a need for additional monetary policy easing at this time and that the sales tax increase was unlikely to derail the economy.
With Japan's export-boost-via-yen-devaluation strategy not bearing fruit, amid growth-reducing side effects like higher food and fuel prices, this disappointment could continue to weigh on Japanese stocks.
In turn, that could keep pressure not only on the dollar (as yen carry trades are unwound) but also on U.S. markets. Especially if the dollar's weakness kicks up high oil prices this summer and forces the Federal Reserve to tighten its policy stance.
For now, the beneficiary should be gold, silver and the related mining stocks as the dollar threatens to fall to levels not seen since 2011. So, I've added the leveraged ProShares Ultra Gold (UGL) to my Edge Letter Sample Portfolio.