Ireland is not big enough

Despite the fact that I am a medium term bear it feels like European problems in this form is not enough to derail global equity markets and who cares about Irish, Portugese or Spanish equties that continue to slump. So turn the page but fold the corner just in case as I am sure we will revisit it in the nearest future, probably as early as next week.

The mounting social and monetary cost of bailing the US and Europe does not bode well with long term growth prospects and GDP growth for next year is likely to be zero for these countries. Coupled with monetary policy imbalances the risk remain on to downside.

I tend to lean towards deflationary environment in the coming quarters. Strangely enough recent US inflation data showed that in majority only the prices of products with developed futures markets rose... developing world and weak dollar is keeping the US on the edge. thank you, global trade...

Too much talk

All focus on Europe these days. There's just too much talk, but it does not feel like officials will be able to talk us out of this. Looks like the markets are testing too which extent the credit markets can be stretched until long term bond investors come in. Yet the resilient equity markets in Germany and the US suggest market is not yet pricing in contagion.  But it is spreading through higher interest rates that will separate boys from men. Which country is prepared to withstand interest rates hit? Feels like only Germany will be able to...

Otherwise mixed feeling about economy. But I still have questions that remain unanswered. Why China is not raising interest rates as its peers? Is there something we do not know? Is QE in the US a failure or success? Economic data post announcement disappoints but sentiment continues to rise.

Since the news are coming out almost hourly it is impossible to run charts and to have a view as most likely I will be wrong. So sit and wait for the moment.

Verbal Rhetoric Escalates

So far it has been an exciting day, despite very little scheduled economic data. Chinese reserve requirements rate hike came just in the middle of Ben Bernanke's speach in Frankfurt to defend QE. Did Chinese plan it? It is probably just too coincidental... Same goes for a number of comments from ECB, IMF et al on debt problems. I doubt they will be able to talk everyone out of this, as anticipation of eventual deal for Ireland is being priced in. I am not sure whether the deal itself will help as it opens doors for further bailouts for Spain, France, Portugal. Yields above 5% for any country will make IMF loan look cheap.

there are few ways out of debt laden economies in Europe: economic growth (valid only for Germany), deflation (yes here it comes again), outright default and full fiscal and tax consolidation (something we should have done long time ago) or as I call it "averaging down your costs. Issuing common Eurobonds might help, but, obviously Germany is against it. Anyway, it does not look like it is going to be a quiet end of the year.

No directional opinion on the markets yet, just watching the show.

Still catching up... It is all about interest rates markets

Today's post is rather useless as it mostly discusses old news, yet for the sake of catching up with the market developments it is worth mentioning.

It is all about interest rates these days and nothing else matters. Benchmark interest rates hikes in Asia and rising yields elsewhere are weighing on the markets. Obviously the underlying factors for yields rise should be taken into account. While Asia and Latin America performed, well, better then developed world, and interest rates increase is the proper policy response to inflation, growth of monetary base, etc, the rest of the world is simply experiencing higher interest rates through bond yields. There is nothing new in rising yields in peripheral Europe, but French yields are a concern, yet it is more likely due to relatively better growth.

(for some reason I tend not to like the US, sorry for this) The fact is that US yields are rising as well post QE2 announcement (10y chart is below):

And, according to FED there are not supposed to. Ok, I might admit that it is also a growth story... or another insolvent country story. put everything aside, there is a trend there and the way for it is up. It is also interesting to see that rising yields correspond to stronger dollar (correlation of 10Y with Dollar index is very high):

and ,watching the markets intraday, you can feel that it just knock down a chair under the "risk assets". While it persists, stronger yields will limit a rise in oil, metals and equities.

No charts or technicals today as I am still catching up with the markets.

Silence is golden, up until certain limit though

Well, this is my first post in over a month... Not taking into account recent 3 weeks vacation, the desire to keep this blog alive was overwhelmed by the fear of saying something stupid. No, I am not afraid to start talking against the trend and neither I fear to be wrong (up to certain limit though). I just did not know what to say and I honestly did not want to say anything I did not believe in.

This break allowed me however to focus on other things and I also had an opportunity to write a small article for an university magazine. I will publish it later as soon as it becomes public. This was a tough task as anything I write in this blog is, among others, simply a writing exercise - need to express my thoughts better.


Feeling of uncertainty prevails, so it is time to go back to page one in financial theory book - risk free rate. This is probably the most commonly used "constant" in finance. So what is it now? German or US bills? Just some years ago I would have said yes without any doubt. The problem is some years ago I was still in the university. The reality now is it is much safer to purchase not the US bills, but 10year bonds as US government will buy them as part of QE. And German bills are no longer so attractive as Irish and Portuguese bonds are. You can be sure that ECB will purchase them and make sure there is no default risk associated with them as we all can count on bailout without any loss to bond investors.

The reality is we do not know any more what risk free rate is. So how does DCF and Black and Scholes models should work then, if indeed Irish bonds are safer then the ones of Germany?

Loooking at big picture

We indeed had a great September. Bucking the trend equities had a best year in 70 years and commodities followed. Most of the currencies strengthened vs dollar.

Can great September turn out to be a miserable October?

Last days of September were mainly characterised by expectations of FED easing, but recent data suggests that the economy is not yet there to employ heavy artillery. I, personally, it will take an effort to pass any additional easing as politics get involved.

Well, longer term charts suggest we're still not there to call it a winning situation and a full blown market rally. First of all, S&P monthly chart:

Long term momentum still remains down and 1155 is area where many moving averages cross. Moreover last 4 months of trading look more like a correction rather then a firm trend upwards.

This coincides with 15 month moving average in EURUSD, which worked well previously:

which currently acts like resistance. These are long term charts, so trading off them is difficult, but at least this will help to identify long term trends...

Commodities put a very good month thanks to weaker dollar and improving sentiment, however having copper at $8000 and oil at $82 still suggests long term bear trend. Faltering equities might as well put a cap on recent rally.

End of the month trading might result in bearish reversal days for equities (if we close under 1140) and EURUSD. (under 1.3560). While beginning of the month usually involves big money going onto either side of the market, I would wait until next week to have a clearer short term view on the markets...

Did we misunderstood the FED?

I mean, honestly, what did FED say during its last interest rate decision? Nothing new compared to a month prior decision, except for the fact that it acknowledged lack of inflation. Since officials are now questioning the benefit of additional stimulus I think any new ideas will run into the wall of bureaucracy. Yet weaker dollar will bring inflation so needed by FED to help it pay for its obligations among other things ... The problem is, with inflation, we will see higher yields, so here it is, the start of the bear market in bonds..... And that is exactly what FED does not want... but you cannot have both, stupid. Since demand is not there, it will be a big problem going forward... but for the moment we bought ourselves some time

Will this turn out  to be another crisis? probably yes