The Battle is over finally over in Egypt, after 18 days of relentless protesting! U.S. markets shot up to 52 week highs as the rally continues. This was very much priced into the market as treasuries continued to sell, driving yields to their highest levels since April. Egypt doesn’t impose systemic risk, and you can see this in the way the dollar is acting.
Usually market uncertainty equals a flight to quality bid in the dollar, but we can see continued weakness in the dollar. We never saw risk come out of the market- which usually happens when money goes into gold, bonds, and the U.S. dollar and out of stocks. Instead of being fearful, traders just waited it out. The bigger story is the cause of this crisis, food inflation.
Food inflation forces a dictator to retire as Egyptian protesters emerge victorious. eyes will shift towards the other nations in the middle east. Will the pot be stirred up or will there be peace? Traders are sitting on their hands for now but have their trigger fingers ready. It smells as if there is more to come.
In times of uncertainty gold acts as an inflation hedge. Since the Egyptian situation posed no immediate threat, we should have seen gold sell off, but defying all odds gold has continued higher on the news. It looks as if its going to make its way to new heights.
The week ahead. Equities are still due for a five to ten percent pullback, but as the bulls and bears both want the market to pull back the opposite tends to happen. One thing to note as crude got whacked on Monday as Gold stayed very strong. It might be catching a bid into the decision congress will make about raising the debt ceiling as well as European debt roll-over in March.
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