Discombobulated Markets!

Thursday and Friday’s combined sessions were almost akin to a slow motion flash crash minus the gut wrenching downward price spirals. The extreme volatility in the major currency markets was also unprecedented. As previously stated, the reaction to Mario Draghi’s ECB monetary policy announcement was irrational and overdone.However, it took investors a day to reach a similar conclusion for themselves on Friday. As a result, most of the major equity indexes were able to finish the week in slightly positive/neutral territory. Exceptions to this were small-cap and transportation stocks.

Real estate assets delivered a strong performance on Friday, but the same could not be said for their weekly timeframe. The Home Construction Index barely changed for the week while the Real Estate Index, more representative of REITs, lagged well behind the residential market.

Crude Oil distinguished itself as the only rational market. It did exactly what it was supposed to do, which is decline significantly lower in price as the EIA’s latest energy report and OPEC’s minutes respectively confirmed that North American nor OPEC producers are showing any signs of tamping down production. Don’t expect any significant price changes without any significantly fundamental changes which restore equilibrium to the current supply-demand imbalance in the energy markets.

Then again, not all markets concluded the week in a rational manner. Gold, a non-interest bearing asset, was the top performer followed by 10-year treasury rates coming in a close second. These two assets are naturally polarized markets.

Meanwhile, the US Dollar Index lagged and took a senseless beating from the EUR/USD in lieu of a hawkish Yellen vs. a dovish Draghi. The only logical explanation that suffices for now is that Gold is oversold and the Dollar is overbought with both overdue for a price correction. Instead of a continuation pattern next week, I would expect both to retrace their gains and losses unless some solid fundamental news emerges to sustain their current market direction.