Daily Archives: January 25, 2010

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A fairly momentous week all round as a series of macro economic and political news hit the wires and created turmoil in Equity markets. Basically there were three stories.

1. China cooling down it economy by instructing banks to shut down lending.

2. Governments declaring pay back time on banks with a variety of policy suggestions.

3. Widening of Credit Default Swaps.

All three combined throughout the week to hit various sectors of the equity markets and cause a sharp selloff. Analysis of the S&P shows that only small further falls will see the whole of the rally from November taken out. 80% of it has gone in just 2 days. Equity markets hate uncertainty and there appears to be little to soothe those worries in the coming week.

For the more inexperienced trader it can become problematic in understanding, not only what all these things mean, but also how it affects the markets they trade.

So to point 1. China cooling down primarily affects commodities and therefore mining stocks and the Australian Dollar. On a broader front, China’s huge boom last year must clearly slow down as its current rate of growth, the economy would double in just 7 years. This slow down affects would economic growth.

Point 2. From Obama’s crackdown on proprietary trading, raising reserves, and a desire to make banks smaller, to Europe’s re-ignition of the Tobin tax, all point to the political need to persecute banks. They have not helped themselves by awarding large bonuses or having an arrogant attitude at the American hearings last week. My own view is the market has overreacted, but the war will continue between the two sides and continue to worry equities. The real problem would be if the plans were forced through (unlikely at present) and cause different parts of money market participants to engage in de-leveraging and leveraging at the same time. This is exactly the sort of problem that got us into the mess of 2008 in the first place.

Point 3. Regulatory and equity uncertainty are fuelling what is already an increasingly dislocated Credit Default Swap market. Greece has hit new highs, Spain reached its highest level since July last year, and America saw a move to a six month high.

So what does this mean for the Dollar and currencies in general? Normally equity weakness equals Dollar strength, but its performance on Thursday and Friday was relatively poor in view of the falls in stocks. However, the general trend remains up, which is negative for commodities, and a slow down in world growth (if it pressure equities severely), is also Dollar positive. It is Yen positive as well. When taken against the problem in Europe which equals Euro weakness, it is clear that last weeks breakdown can continue its trend. Poor statistics from Canada, the desire of the central bank to restrict Canadian Dollar strength, and further equity falls also point to Dollar Canada having further room to rise. The mooting of a fresh mining tax on Australian producers, plus its susceptibility to correlate with stocks, means this currency can also come under pressure. All three currencies against the Dollar broke down last week and changed there major trends on the technical measurements I use. Therefore, my strategy (the trend is your friend) is to use the times when economic statistics are released to take advantage of any Dollar weakness that moves to my support points. For now the macro political arena should overwhelm the normal economic statistical one.

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