Friday, 21 May 2010

Ten reasons for current market turmoil

The recent near panic conditions across all asset classes showed no signs of abating yesterday with evidence of acceleration.
Even though my area is technical analysis, and I have a certain skepticism for much of the "reasoning" that is put forward to explain what is currently troubling markets, there are certain things that seem obvious to me. Here are my ten observations on the current turmoil facing markets

  • 1. The Eurozone architectural framework is deeply flawed and to suppose that a monetary union can survive without proper fiscal and political integration was something the architects were clearly wrong about
  • 2. The current austerity measures being insisted upon, primarily by Germany - which is required to pay the most in the EZ bailout - will only act to reinforce deflationary tendencies in the global economy
  • 3. Markets are often irrational. How else can one explain the extraordinary love affair that many asset managers have had for the Australian dollar, currencies from emerging markets and EM funds in general.
  • 4. A massive FX carry trade unwind is taking place that has very little do with "market fundamentals". It has more to do with quant funds that have been synthesizing investable funds to play with in the algorithmically based equity markets
  • 5. Politicians should never say that they are going to take on markets - don’t bite the hand that feeds you.
  • 6. Uncertainty surrounding financial regulation is keeping financials under pressure
  • 7. France and Germany are not seeing eye to eye over the future direction of the EU and both countries are doing their best to protect the balance sheets of their own private sector banks which have huge exposure to debt from southern Europe
  • 8. Inter-market correlations/alignments are far more significant as causes behind the mayhem than one month’s job claims number - although yesterday’s US numbers do suggest that the notion that the global economy is on the verge of "growing" itself out of the sovereign debt crisis is highly suspect
  • 9. Valuation of assets based on fundamentals, P/E multiples etc. goes completely out of the window when investors behave viscerally which is why TA is so useful
  • 10. Central banks can only prop up a flawed currency, i.e. the euro, for so long before markets lose total confidence in its integrity. The capacity for damage to global financial confidence from a disintegration of the EMU and the euro, is enormous and still has not been factored into current asset prices.

The S&P 500 faces a key test at 1050 and a close below that level would suggest that a large scale correction is under way with targets eventually down to 870 needing to be tested. Interestingly the 1030 area is an area indicated on the weekly Ichimoku chart as perhaps more fundamental technical support.

The clue to near term direction for US equities is more so than at most times to be found in the FX markets and in particular the direction of the euro and the yen.

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