Risk

Equity prices fell but failed to show the kind of Tudor-style follow-through that we wrote about Wednesday. Meanwhile bond prices continued to rise as yields soften - despite the comfortable tone from the FOMC's latest minutes. Gold prices were the outlier and jumped more than $20 per ounce. Quite why, remains the mystery. We're just guessing that at least some investors are looking to hoard the yellow metal for fear of signs of further economic slowdown.

One possible reason to satisfy this golden rationale is the performance of the dollar, which after a reasonably buoyant start, lost the plot and settled lower. On the other hand the story grabbing forex headlines on Wednesday was the continued bullish streak currently enjoyed by Japan's yen. The post-election euphoria continues to support the risk that the currency surges on two fronts.

As we noted following the DPJ's victory on Monday morning, the risk for the Japanese economy is that the Japanese nation starts to feel the benefits of a large spending program aimed at stimulating demand. Second, as is the theme of the last week or even since equities peaked last month, investors' aversion to risk rules the roost.

The likelihood of Japanese attempts to prevent a rising yen suddenly plunged over the weekend with the incumbent political party expected to allow yen strength as it turns its back on the business needs of exporters. They'd prefer to see a broad based and home-grown recovery. If the yen rallies, then so be it.

This new dynamic to the currency market is somewhat stealing the dollar's role as the place to be seen when the market turns ugly. However, the opposite occurred earlier in the year when the Japanese economy crumbled so badly that it made absolutely no sense to seek refuge there. So as we can see, things can and do change.

With the Japanese stock market sinking 2.4% overnight and the S&P on the cusp of what could be a nasty turn for the worst, it was left to the traditional gold bugs to scramble for gold lifting its price to a one month high. September gold rose to $978 per ounce and of course the very obvious target is now $1,000 per ounce. Gold mining share prices were also up sharply during the session.

The treasury market further exemplified some of the growing fears resurfacing in the market too. The 10-year U.S. benchmark yield slipped to around 3.30% as investors turned increasingly to worrying about earnings and normal market valuations, choosing to ignore recent healthier signs for manufacturing. The worry is fast becoming that the stimulus plans will be the 2009 highlight.

If that's true, then pick the day of the week when the price of gold will trade above $1,000 an ounce.

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