July 22, 2008:
This past week is a perfect example of a contrarian perspective at work. However, my timing again was way too premature. Along, not having enough time to follow up on the markets, I missed one of the biggest shorting opportunities for oil recently and a nice rally in the S&P500.
July 23, 2008:
Today’s morning is a great opportunity to show how sentiment can move markets, but not in a traditional sense. Early trading in the futures market showed significant bearish sentiment with the markets pricing in the bad news for today’s early trading with fair value at -8% or so. However, this became a large divergence as markets opened today 1.35% higher on the S&P500. Interesting the oil and equity markets inverse correlation is still holding. The continued drop in oil despite bearish sentiment in the futures market could have been a good indicator for a bounce to the upside in the equities market. (However, I have yet to calculate how strong this correlation has been for the past few months). The many divergences in between different markets maybe indicating stronger moves to the upside in the equity markets on the longer term charts.
From a Vietnam perspective, I will take a position on steel prices. In general, due to high inflation seen across the world demand central banks will be forced either to hold rates or to increase rates depend on the regions economic situation. I am in the belief of that steel prices are still correlated to the strong growth of emerging markets. As markets need to take a breather from all the speculation and high amounts of FDI inflows to these emerging markets, the price of steel now should be decreasing in the short term, the short term of slowed growth experienced possible through the end of the first quarter 2009 or even second quarter 2009. The growth prospects in general for Asian markets for 2008 seem much bleaker compared to its past years of growth, however looking forward the prospects for growth in Asian markets are still very good considering majority of Asia is still undeveloped and is lacking infrastructure. If the Asian markets can reign in inflation to reasonable levels, continued development will push the price of steel higher as demand picks up again. However, risks to this model are the continued inflation from food and energy prices. Which may make inflation continually prevalent.
In terms of inflation, for the US, it seems the Fed Reserve has put themselves in a very difficult position. As the continued weakness is coming from the financial sector along with its contribution to the deteriorating jobs market, along with other industries who are also now contributing to a weaker jobs market, due to economic slowed growth, the Feds have rashly and pre-matured lowered interest rates to 2%. As many other analyst argued, when rates were at 4-5% were still considerably low compared historically. Now with high inflation, and prospects of weaker growth or continuing problems from the financial markets, the Fed has to look to other means to provide liquidity and price stability as its main weapon, the Fed Fund rates, has almost run out of ammunition.
Perhaps this information may be of use for those hedging interest rates or for those trading interest rate futures. It is unlikely the US will lower interest rates any lower, unless they plan on going all the way to zero, like Japan for some time. With US interest rates this low, this is just an economic boom waiting to happen, what is preventing this scenario is the unstable conditions from housing, the financial markets, and other weak macro conditions. If conditions can stabilize in the year 2009, the year 2010 maybe looking better for strong economic growth and possibilities for increase in interest rates if inflation is not yet under control.