A Perfect Storm!
By Mike Conlon | May 25, 2010
World financial markets are facing a “perfect storm” as a combination of geo-political and financial uncertainty is driving risk-aversion. The first issue is coming from the Euro zone as Spain seeks to shore up its banking system. A series of banking mergers aimed at pairing weak banks with stronger ones has caused investors to fear that indeed contagion from the debt crisis has taken place.
Secondly, news out of Asia that N. Korea may have been responsible for the sinking of a S. Korean vessel has heightened political tensions in the region. Whether or not there will be consequences remains to be seen but N. Korea has been known to make idle threats which are intended to destabilize the status quo.
Lastly, news out China that Secretaries Geithner and Clinton are making headway with the Chinese regarding Yuan revaluation may be picking up has brought further uncertainty to the marketplace as there is no telling what the lasting effect may be IF such actions were taken.
This all adds up to MAJOR risk-aversion in the markets in a continuation of yesterday’s selloffs and flight to safety. Libor rates (the rates at which banks lend to one another) have increased to levels last seen during the initial banking crisis here in the US from 2008. Both Asian and European stock markets have sold off to the tune of 2.5-3%, and both gold and oil are trading lower.
In the forex market:
Aussie (AUD): The Aussie is lower on risk aversion. While the economy in Australia has been strong, the unwinding of carry trades has punished the Aussie dragging it down to 10-month lows. Should China effectively attempt to slowdown its over-heating economy, the economic situation in Australia could change dramatically for the worse.
Loonie (CAD): The Loonie is also lower this morning, taking cues from oil prices which are below $68. Economists are still predicting a rate hike at next week’s rate policy meeting, though global economic uncertainty may derail that plan. However, since the Loonie has been beaten up by risk-aversion, this may actually be a good time to sneak in a rate hike that won’t strengthen the currency too much.
Kiwi (NZD): Same deal for the Kiwi; risk aversion dragging it lower. The RBNZ reported its 2-year inflation outlook that was largely in line with expectations.
Euro (EUR): First Greece, now Spain. The moves taking place in Spain’s banking system have put investors on high alert, though it must be noted that Spain has not sought out any assistance as of yet. File this under the, “where there’s smoke there’s fire” sentiment. In the meantime, Industrial orders in the Euro zone were higher showing signs that they are benefitting from a weaker Euro. Stay tuned.
Pound (GBP): UK GDP figures came in largely in line with expectations, indicating that the UK economy grew .3% in the last quarter on the back of the highest manufacturing gains seen in 4 years. The Pound is still vulnerable to any fallout from the Euro debt crisis, but BOE policy-maker Posen said that the UK was at a low risk of experiencing the type of economic stagnation that plagued Japan in there “lost decade”.
Dollar (USD): The Dollar is higher as the rush to the flight to quality is in full effect. Yesterday, existing home sales came in better than expected, but it was not enough to reverse losses. Later this morning, we are going to get consumer confidence and the home price index which will show whether or not a consumer-led recovery may be taking place.
Yen (JPY): The Yen is the best performer this morning as the un-wind of carry trades has increased demand. In addition, a sell-off in Japanese equities has also increased yen demand as the yen experiences a similar correlation to its stock markets as in the US. As tensions heat up in the region due to N. Korea, people forget that almost a year ago, N. Korea fired off nuclear test missiles in the direction of Japan. They are a major destabilizing force in the region and the former policies of trying to appease and placate them may have run its course. The yen is fast approaching its 2010 high vs. USD, just above 88.
I call what is taking place in the markets right now the “perfect storm” because there is much uncertainty due to events that can’t be quantified. It is one thing when there is bad economic data for a region or two; however when there are political threats that could potentially cause a war, all bets are off.
And while N. Korea has been known to posture and bluff its position in order to gain, this time it could be different. No one wants to see military action in the region, but N. Korea is such a wild card that no one knows what to expect.
In addition, world recovery has pretty much been driven by Chinese demand and should they slow down, it could affect the nations which have been experiencing economic recovery.
Oh yeah, don’t forget about potential sovereign debt contagion in Spain, which could potentially be a MUCH larger problem than what was seen with Greece.
Meanwhile, everyone rushes to the safety of the US dollar and Japanese yen and both countries government bonds as it is better to earn almost no interest than to lose out entirely.
Are we having fun yet?
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Topics: What To Look At In The Market | 2 Comments »
Kim Jong Il is at it again as North Korea fires off more missiles!
By Sean Hyman | May 26, 2009
While we had Memorial Day in the U.S., North Korea was firing off missiles and testing a nuke! Even as late as this morning, they were still firing off missiles.
They continue to defy U.N. warnings against such activity. So they will undoubtedly suffer sanctions from many countries of the world.
I’m sure what they hope for is the ability to sell weaponry to other evil governments that will help to offset the strain that the sanctions put on them.
Then, once again, they will probably do like before and “promise to be good boys” while they have their fingers crossed behind their backs.
You can’t “reason” with evil and therefore you can’t reason with Kim Jong Il.
He’s a confused puppy. He wears glasses that only Elton John could love…and wears his hair like Elvis! He tries to poof his hair up as much as he can to help to compensate for height.
So if Obama, the U.N. or any others think they can “truly” reason with him and bring about long term change, they are kidding themselves.
Therefore, expect for there to be surprises in the currency market here and there as they point missiles towards Japan and towards South Korea. Expect it to gyrate the yen and won from time to time.
However, ultimately, his effect upon currencies will be temporal and not long lasting…thankfully!
Stay tuned to this saga and see where it goes, because it could gyrate things in the mean time and money can be made off of something you or I can’t control…which are the actions of this “mad man”! Click on the pic to enlarge it. 
Tags: blog, currencies, currency, currency market, forex, forextrading, fxedu, Il, Japan, Jong, Kim, missile, money, North Korea, nuke, rate, Sean Hyman, ssi, time, trading blog, U.N, U.S., warning, Yen
Topics: What To Look At In The Market | No Comments »
North Korea launches another missile. See how it affected currencies!
By Sean Hyman | May 25, 2009
Just a quick Memorial Day note…on a day when we’re supposed to be honoring our fallen soldiers and those in our miliary, North Korea launches a missile. Coincidence? I think not! They love the attention…and no better way to get it than with most of the markets shut down and not much going on in the world. This way they get the “maximum exposure”. They’ve defied U.N. warnings. We’ll see if anything happens. Since the missiles are usually pointed towards Japan..the yen takes it on the chin the worst, as money runs to the defense of the dollar. Click on the chart to enlarge it and to see its impact…as the yen tanked hard vs. the dollar. 
Tags: blog, buck, dollar, dow, forex, forextrading, greenback, Japan, launch, market, missile, money, North Korea, nuke, ssi, U.N, U.S., warning, Yen
Topics: What To Look At In The Market | 1 Comment »