An Understandably Spooked Market

May 26, 2010

The obscure but critically important corners of the international banking system, which seized up in 2007-8, may be performing more normally, but segments of the financial system that are followed by average folks increasingly resemble a chaotic casino game.  Wide swings in equities and the euro not only between days but within them are becoming commonplace.  There’s money to be made but not much by placing one’s faith in the long term.  It’s a buy low/sell high world, and the interval in between can be fleeting indeed.  Last year Washington was lectured incessantly about neglecting the dollar, and investors wake up this year to find the dollar has no serious competition.

Intuition has become an essential skill for the market player.  No economy has experienced debt problems for more time and more extremely than Japan, yet the yen and Japanese government bond prices, with a 10-year yield of 1.22% despite GDP growth of 4.5% annualized between 3Q09 and 1Q10, have been huge winners during the financial crisis.

Since the onset of the financial crisis in August 2007, the euro has traded between 170 yen and 108.85 yen, a 56%-wide range, and between $1.6038 and $1.2146, a 32%-wide corridor.  At JPY 110.3 and $1.2219, the euro is presently at the very weak end of those bands.  Since the euro was born at the beginning of 1999, it has been as strong as $1.6038 and as weak as $0.8228, a high-low spread of 94.5%.  Likewise, the euro has soared as high as JPY 170.0 and plumbed to as low as 89.5, a spread of 89.9%.

Stocks around the world have experienced a better time today than yesterday, but confidence is weak that the more upbeat tone will last out the week.  Indeed, performance shifts dramatically as one adjusts the frame of reference.  The DOW is down 10% since April 26 but up roughly 54% since March 9, 2009.  That index remains 29% below its October 2007 high of 14,165 and 14% weaker than the January 2000 peak set slightly more than a decade ago.

Uncertainty seems to be an overused word in market parlors, until one considers the breadth a major imponderables that are currently in the mix.

  • Relations between the Koreas has rarely been this strained since their civil war some 60 years ago.
  • The oil spill in the Gulf threatens to dwarf the Valdez ecological disaster and could change the whole debate over energy.
  • Sovereign debt problems in Europe are grabbing most attention but represent a more universal issue faced by other key advanced economies.
  • Proposed financial regulatory reform legislation has chilled relations between politicians and the banking industry.
  • Taxes and spending programs also face broad change.
  • The growth gap is widening  between politically authoritarian emerging market regimes and the advanced democracies. 
  • It may not be possible to forestall Chinese inflation without curbing its growth excessively.
  • The failed Times Square attempted bombing might be a harbinger of a new and more disruptive kind of terrorist risk in the West.
  • The Fed, ECB, and Bank of Japan are probing for a safe time to lift interest rates.  Many expect a Fed move late this year.

Market chatter likes to talk about a new, new environment. In reality, each day finds a fresh landcape or at least one with an infinite number of elements on which market players can cue their actions that particular day.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary transmission without express permission.


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