Wednesday, September 29, 2010

Navigating Global Capital Markets

Trading FX is right now is like navigating the Amazon River, 'Grey Swans from Extremistan' lurk around every land mass..... As the often quoted John Maynard Keynes once advised, "The market can stay irrational longer than you can stay solvent."
    Credit Default Swaps on Irish, Portuguese, Greek, and Spanish Debt continue to widen. Anglo Irish debt was downgraded by Moody's on Monday and now needs another lifeline of 5B Euros.  Yet, the Euro continues to strengthen.  Mr. Bernanke and Mr. Obama must be smoking a fine Cuban cigar at the moment because they are the only 2 policy makers of recent memory to weaken their currency without  significant lip service.  The Japanese MOF should take the lesson...start a trade war with China and watch your currency tank...There is much fear in holding US Dollars at the moment.  Mr. Guido Mantega of Brazil is right, we do have a full fledged currency war of devaluation and the U.S. is winning.
      Also of note, Mr. Yu Yongding an advisor to The People's Bank of China spoke in Singapore  of a full fledged dollar crisis, to quote the man, "Such a huge amount of debt is terrible and the situation will be worsening day by day.  I think we are one step nearer to a US Dollar crisis."  Cheers to you too mate.
        This morning AUD is off its highs of .9780 levels seen in Tokyo trading overnight and has pulled back toward .9700 levels.The AUD continues to test new highs as it inches towards parrity with the USD and makes new highs against the JPY.  Though, the latter has internal economic issues of its own which continue to put downward pressure on any of the Yen's major pairs.  The appreciation in large is due to sustained demand for Australian base/industrial metals from China and ASEAN countries in general.  Also, Australia maintains the highest nominal interest rates, currently at 4.5%, of any G20 country and thus is perfect for a reverse carry trade involving the USD.  Ironic how times have changed.  I can remember the days when U.S. assets became the beneficiary of an Asia Pacific carry trade.  And then we had a realestate market collapse in correlation with all other asset classes for that matter....Low rates, continued AUD strength!
          Meanwhile, the only commodities that want to rally are precious metals...Agri commodities crashed like the titantic yesterday and continue to hit icebergs today.   This is possibly due to the recent sanctions China placed on imported U.S. Chickens.  Chickens love grains as a main source of their diets.  Also, the recent run-up in Agri prices does justify a correction if prices are to move higher in the 4th Quarter.  Natural Gas is trading lower and Oil cannot hold on to any incremental gains.  Though API data from last night was somewhat bullish, and DOE data should help prices firm a bit, but their is no support in sight. Nat Gas is suffering from a lack of supply scarcity.  In fact new inventories appear every day and remain above our famous 5 year average range.  Yet, this makes little sense considering storage capacity and new LNG technologies make storage and shipment of the energy easier and cheaper than ever. I will note that Sugar, Cocoa, and Coffee performed well in yesterdays session largely attributed to you guessed it, dollar weakness.
            Bill Gross published a grim outlook in his October outlook letter.  He highlighted Stan Drunkenmiller's retirement as a Harbinger of things to come in the fund management industry.  He argues that the days of double digit returns are over due to a lack of asset inflation, increased regulation, and deregulation.  Indeed these things are all true.  One must take Mr. Gross' comments with a grain of salt as he manages the world's largest bond fund in PIMCO.  His comments do coincide with a 10% workforce reduction at DE Shaw, one the world's largest Hedge Funds with approximately $21 B of assets under management.  HF's are struggling to produce alpha these days.  According to HFN Hedge Fund Aggregate Index funds are up only 0.14% YTD through June 2010.  The FT reports Hedge funds are up 1.45% YTD.  Times are grim when the best managers of money can't make a buck.
              It is understandable that there is an underlying current of fear surrounding the developed markets of the world.  Emerging Markets were thrust into the spotlight during the most morbid of days during the credit crisis and have been in the spotlight since.  OECD economies continued to point to Emerging Market Demand and growth as the way of the future and how this shift is a 'structural' one that will change the way the global markets do business.  All I can say is, not so fast jack.  Without demand for emerging market exports from developed economies there will be no new growth.  Unless of course the ubiquitous Emerging Markets can create a sustainably contempory domestic demand system for domestically produced goods.  I doubt Malaysia needs all those those textiles and garments they continue to churn out.

              Undoubtedly, big corporates still reside in developed markets.  Inventories have refilled after bone dry levels spawned a rampant increase in production over the last 2 quarters.  Thus, unless OECD demand returns to the global marketplace, emerging markets will not be able to maintain their 'robust' growth systems and will inevitably slow down.  Global 'Austerity' is in order.  We should all trade accordingly.

              Patrick M. Ambrus

              Sources: Financial Times, The Gartman Letter,,, The Black Swan,

              No comments:

              Post a Comment

              This Blog has been developed by Analyze Capital LLC, and as an independent organization we provide “AS IS” information without warranty. The ideas and opinions expressed by the contributers of this blog are personal and do not represent the actions or policies of Analyze Capital LLC. The contents of this blog do not intend to assert recommendations or to offer advice of any kind. We are not responsible the consequences, be they gains or losses, that may result from using any of the information from this blog.