Traders Alert: Market Volatility Is On The Near-Term Horizon

Another first Friday of the month has come and gone and, with it, new non-farm payroll and employment data. In case you missed it, 175,000 jobs were added, a tick above expectations, and the unemployment rate ticked up, as well, to 7.6% from 7.5%. Analysts were not impressed.

Jim Paulsen, chief investment strategist at Wells Capital Management, summed up the opinion of many stating, “It probably solved nothing in terms of the Fed. It certainly calms you down that we're not going to have another Spring swoon this year like we've had the last three years. All in all that's probably a good thing for the stock market. In some ways it came in right as expected and pleased no one. Those who were hoping for better and those that were hoping for worse; no one got it."

Stocks gained a bit on the news, but the Euro gave back a little of its feverous upward thrust of late. The “EUR/USD” currency pair had shot up over 150 basis points on Thursday, after the European Central Bank (ECB) backed off its controversial policy change of a negative savings rate. The ECB maintained its benchmark interest rate at 0.50% and deposit rates at 0%, foregoing a reduction in either economic lever.

Europe remains in recession, although Mario Draghi, the head of the ECB, continued to uplift market expectations with his optimistic comments regarding economic growth in the region in 2014. For many investors, however, 2014 is a long way away. Central banks have spent the past five years printing money and flooding the market with liquidity. Bankers, however, have refused to invest in small to medium-sized businesses, the one sector that could ignite a stable economic recovery.

As the economies of the developed markets of the world continue to flounder tepidly, the fear of asset bubbles in many asset classes across the globe is beginning to get more traction from pundits in the industry, as well as from government officials on high. In the latest economic outlook report from the IMF, economists are very concerned about the potential unwinding by central banks of their excessive extremes in monetary easing policies. Cheap money may have prevented a deep depression across the globe, but the inevitable de-leveraging could produce shock waves in capital flows, i.e., market volatility to beat the band.

In the world of forex, experts have been astounded at the apparent resiliency of the Euro. Many have predicted its demise, some forecasters claiming that parity with the greenback was a certainty. Central bankers, however, disdain currency speculation and have done their level best to foil even the best-intended Euro shorting strategy. The $1.31 level had been a crossroads where the market demanded positive GDP growth in Europe before higher levels would even be considered. The Euro now hovers just above $1.32, but its future still remains uncertain.

Global investors have benefited greatly from the cheap money supply that has existed for the past five or more years. Marc Faber, the publisher of the Gloom Boom & Doom Report, recently opined in a “Barrons” interview that, “Money-printing boosts the economy of the people closest to the money flow. But it doesn't help the worker in Detroit, or the vast majority of the middle class. It leads to a widening wealth gap. The majority loses, and the minority wins.”

Faber adds that the cheap money went into the high-end asset market of “stocks, bonds, art, wine, jewelry, and luxury real estate.” A further misallocation of capital could prick a few bubbles, sooner rather than later.

Fasten your seatbelts. It could be a stormy ride!

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.