S&P 500 INDEX

A Hollywood script-writer would have had a hard time forecasting fallout from a meltdown in Asian equity prices any better than the way Monday's events turned out in reality.
 
Equity prices fell with the S&P 500 index remaining hemmed in a narrow six point range after the onset of an opening 20-point decline. Equity market volatility shot up around 15% as measured by the so-called fear gauge of the VIX, which reached almost 29 -- surprise, surprise.

Treasury prices rallied as money fled stocks at home and abroad with investors reaching for the safety of government deficits -- oops, I meant to say bonds.
 
The dollar rallied and so did the yen. Haven't we heard this story over and over before? It's just too well choreographed to be even amusing to those watching the markets.
 
Fears for global growth have been rising steadily recently. Despite a return to growth in the second quarter for the Eurozone and most recently Japan, which rebounded by 3.7% according to Monday's data, investors are still more prone to look elsewhere.
 
Specifically the prospects for China remain uncertain, but not because of the failure of its own stimulus program. Indeed the Chinese authorities must be very pleased with the intermediate pace of expansion that's helped boost demand in mainland China as global markets failed to provide a venue for Chinese manufacturing.
 
Ultimately, everyone seems to have their eyes firmly fixed on the U.S. consumer. Accounting for more than two-thirds of a near $12-trillion economy, such behavior is enough to make or break the back of any economy - no matter how large.
 
It was that manner of thinking that kept pressure on global equity prices through the end of the first quarter. Fears that global economies couldn't decouple from that of the U.S. meant pressure remained on global stock markets. Signs of independent life in China proved that stimulus worked and immediately set off rallies around the world as those shackles were broken.
 
It's unquestionable that the worst is behind us in terms of the depths of the recession. However, no rally can go without a break and right now that's what this feels like. What we cannot say with any certainty is how long or how deep the correction might last.
 
But we will not be surprised if later in the week the scrip reverses itself with investors once again snapping up all of the usual victims. Gold, crude oil, equities and commodity-related stocks will likely have a couple of good days as investors dig their heads out of the sand.
 
In the mean time, the rally in treasury prices might yet come unstuck. The market as you know has a strong tendency to run to extremes, we're not at all sure that a slump in yields is as deserved as the knee-jerk suggests. Sure, a fall to below 3.5% at the 10-year area of the curve, which we saw on Monday, is justified when stock markets slide, but we're a little bit concerned by what happens when the move runs its course.

Bearish on U.S. government bonds?
Readers of the Global Resources Alert
know which bond-based ETF to buy.

The Supreme Council of the Secret Order of Jurojin

Tyche Research