Following up last night’s post, Arthur left a note on the blog linking an article from Bloomberg Businessweek, written by Brendan Greeley. The language of the article is crystal clear and provides another example of a Euro policy maker claiming far more insight than the collective wisdom of Mr. Market. “Investors ,he told the Bundestag, are ‘charging interest rates to countries they perceived to be the most vulnerable that [go] beyond levels warranted by economic fundamentals and justified risk premia. This fear is “unfounded. The market is wrong.’”
Since the onset of the European sovereign debt crisis, markets have been told they were wrong. As Greek interest rates soared, the 2-year note soared above 100%, the markets were wrong. The Chinese Sovereign Wealth Funds promised the eurocrats that they would purchase billions worth of sovereign bonds only to renege upon further review. Let us give President Draghi some latitude and allow his economic analysis about mispriced bond prices to be unchallenged. The problem then becomes political risk and for that Mr. Draghi has no model to assess that risk premia.
The problem for Mario Draghi is that even in an interest rate-starved financial world, Spanish bonds have a problem even upon offering a yield of 5.7%. Even the Brits get away with a 1.8% 10-year GILT. For Mr. Draghi the Keynes aphorism stands: Markets can remain irrational much longer than you can remain solvent.
***Quick hitter: Many markets are testing their 200-day moving averages. I look at the 200 days as a good measure of mean reversion and are most important in my trading on a weekly closed basis. As the markets correct, the 200-day provides a perspective on price. I do not claim to be a sophisticated technician but I like the idea of mean reversion to tell me when a market is highly overextended either on the short or long side. So I advise traders to be aware and do some work as to attaining a technical picture on the pricing of all the markets we discuss. The following markets are testing their 200 days:
1. The Nasdaq 100;
2. The Aussie Dollar;
3. The Gold/Silver ratio;
4. The Aud/Cad;
5. The Cad/Swiss;
6. Nikkei Index
There are many others but i just want to remind market participants to be aware of where we are coming into the final two months of the year. This week we have had the YEN and U.S. 10-year notes struggling to hold the 200-day m.a. and then get some nice follow through moves upon the violation of the moving average.
***There is a Reuters story that we have reported on for the last 18 months: “Brazil admits to a Now Dirty Float.”
It was a policy of Brazilian President Dimla Rousseff to weaken the REAL
so as to help jumpstart the struggling Brazilian manufacturing sector. The issue of an overly strong currency forced the Brazilians to enact some restrictions on the inflows of foreign money and to also bring down interest rates by lowering the overnight rate by 5% during the last year. The hot money flows have slowed as the currency weakened especially as Brazil’s real interest rate went from a strong 6% to probably just above breakeven.
The slowdown in global commodities have also weakened the REAL but the policies of this present government have done far more–just look at the continuing strength of the Aussie as a comparative analysis. The Aussie is higher on the year while the REAL is about 6.5% weaker–both heavily traded as commodity based assets with far different results. As Brazilian Finance Minister warns, “our system is a dirty float like everyone’s. For us the ideal is a floating currency, without manipulation …. But if the whole world is going to manipulate their exchange rates, we will too.” The policy of QE by the developed countries has far greater ramifications than the theoretical mathematical models reveal.
***A heads up for all traders. There is a very powerful trading algorithm at work and it is based on keyword headline releases. My friend (hat tip JA) pointed out that various trading programs are being developed that react to headlines and set trading in motion. This afternoon was a case in point. The new Governor of the Reserve Bank of New Zealand, Graeme Wheeler, gave a speech at 3:00 p.m. CST and as the speech was released the headline story was, “RBNZ’s Wheeler says bank has scope to cut rates if needed.”
Upon reading the body of the speech the headline was far from accurate but it didn’t matter for the KIWI
had dropped 50 bips from its price a minute earlier. The Aussie/Kiwi cross also rallied from 1.2605 to 1.2660. The power of these algos is evident and I am just alerting my readers to the effects of such programs. Good traders and investors always few markets through a dynamic lens, so as usual we will adjust and utilize the newest market tool to our advantage.
Tags: AUD/CAD, Aussie Dollar, Brazil, CAD/SWISS, Draghi, Euro, Gilt, gold/silver, Nasdaq 100, Nikkei, RBNZ, Real