FOREX TRADING

Overview

More are belatedly coming round to our long-held view that some yield is better than no yield and only really top-notch securities will do. Yield curves are collapsing, some to their flattest in a year, and several benchmarks are trading at new record lows so that credit spreads are widening, a two-pronged attack as investors shirk poor quality while taking AAA to rock bottom yields. Irish ten-year sovereign debt is trading within 5 basis points of June’s record 311 over Bund, these hitting a new low at 2.40%; ten-year JGB’s just 0.975%, Swiss Confederation another record 1.265% looking increasingly like their Japanese counterparts, and Mexican Bonos a record low 6.27%. All stock indices except Mumbai’s sold off (see underlying themes), many forming ‘bearish engulfing’ candles in the process, the Nikkei 225 to its lowest since July 2009 and a key chart level at 9,050, hardest hit Athens and Russia down 5.50% and 4.50% respectively, the Hang Seng not far behind down 4.25%. The US dollar regained some of July’s losses, except against the yen which managed a 15-year low at 84.72 outperforming all currencies and taking yen crosses lower. The CRB index is down a little on metals yet Nymex Cotton at 87 cents per pound is close to the highest prices in its 40-year history.

Political and Economic Developments

The world is still very much split between the haves and the have-nots, at individual, corporate, state and national levels. Fabulous numbers from Germany, Q2 GDP rising at +2.2% Q/Q, the highest since unification, and +3.7% Y/Y and unemployment stands at 7.6% lowest since 1991. French Q2 GDP at +0.6% Q/Q and +1.7% Y/Y (same as the EZ16) though unemployment is running at a decade’s high of 9.9%. Irish unemployment 13.7%, highest since 1994 and many times the 2000 to 2007 average of 4.50%. Greek Q2 GDP shrank by -1.5% Q/Q and -3.5% Y/Y according to newly independent statistics office Elstat as tax rises and spending cuts hit, causing unemployment to reach 12.0% in May, a record high; meanwhile the new Slovakian government votes 69:2 against EU plans to help the Greeks. Eurozone Sentix investor confidence surprisingly rose to a two-year high despite the turmoil. The ILO says a record 81 million under 25 year-olds are unemployed. UK RICS House Price Balance turned negative, where it had been in 2008 and the first half of 2009. The US House of Representatives reconvened from the summer recess to pass a $26B bill in aid for states in financial straits. The US trade deficit widened to $49.9B on falling exports and higher imports of Chinese consumer goods. China’s foreign exchange reserves hit a new record $2.454T.

Underlying Themes

Some are saying a new gloomy attitude is creeping in; we welcome the more realistic standpoint. Tuesday Mr. Bernanke and the FOMC’s rate-setting meeting said, ‘the pace of recovery in output and employment has slowed in recent months… [and] is likely to be more modest in the near term than had been anticipated’ prompting them to reinvest maturing mortgage-backed securities into US Treasuries so as not to shrink their balance sheet. Wednesday Mr. King unveiling the Quarterly Inflation Report noted, ‘crises occur suddenly but fade only gradually… [and] we’re going through a long period of recovery that will take several years before we adjust back to anything we can call remotely normal’. Politicians and civil servants why try to hoodwink their citizens into thinking the good times are just around the corner are playing a very dangerous game which blights lives and leads to painful financial decisions, in turn damaging long term economic prospects. An Ipsos Mori poll measuring consumer attitudes to their economy found the Spanish the most pessimistic with 63% thinking things were ‘very bad’, followed by the Japanese at 41% and the British at 34%. At the other end of the spectrum are India, China and Brazil where 85%, 77% and 65% seeing their economic situations as ‘good’.

What to watch for next week

Monday Japan June Tertiary Industry Index, Q2 GDP, July Tokyo Condominium Sales, Eurozone CPI, US June Net Long-term TIC flows, August Empire State Manufacturing and NAHB Housing Market Index. Tuesday EZ16 June Current Account, UK July CPI, US PPI, Housing Starts and Building Permits, Industrial Production and Capacity Utilisation, plus German and Eurozone August ZEW Surveys. Wednesday just Minutes from the Bank of England’s August 4/5th MPC meeting and EZ16 June Construction Spending. Thursday Japan June All Industry Activity Index, July Tokyo and Nationwide Department Store Sales, German PPI, UK Retail Sales, Public Finances, Money Supply and Mortgage Approvals, August CBI Industrial Trends, US July Leading Indicators and August Philadelphia Fed survey. Friday only Japan July Convenience Store Sales.

Positioning and Technical Analysis

Stock markets will probably be subject to increasingly violent intra-day swings as fund managers are forced to reposition themselves. Quality bonds will increasingly trade like safe-haven rather than wise investments, rumours that ‘bad bank’ loans will have to be carried as sovereign debt hurting some more than others. FX markets should continue very thin, holding around current levels, while the Japanese authorities will be seen to be useless in preventing further yen strength.