The markets settled down and launched an assault on the long-term moving averages in an attempt to arouse the prurient interests of capital in its quest for fertile returns on capital that has been teased far too often with risk-based returns. The S&Ps and Dow joined the Nasdaq and closed above the 200-day moving average. Only time and consolidation will tell if it is to be sustained so as to entice money back in after the rape of May 6. As risk was in vogue, all the other risk elements joined the party and a good time was had by all.
Interestingly, GOLD, which has been acting as a counterweight to risk–the ultimate haven–shed its prophylactic garb and joined the risk-on club. GOLD needs to be watched for if it acts positively as a haven and as a risk on trade it may signal that prices are heading higher. The EURO performed well even though the investor confidence numbers released by the ZEW Center for European Economic Research for Germany were horrid. There is no question that the European debt crisis is impacting the confidence numbers in European economies. The only question is how much of this has been priced into the currency markets already.
The Federal Reserve also announced today that it sold $1.15 billion in depoits in its first test of the TERM DEPOSIT FACILITY. The FED said that they received $6.14 billion in bids for 14-day money that was to receive an interest rate of 0.27%, a mere 2 basis points above what the FED is paying on excess reserves. We really don’t know what to make of this effort to test the credit-tightening tools that the FED would like to use in order to drain some of the emergency credit from the system.
This is a nice story for the pundits but we really don’t think it amounts to much. Let’s see what happens when we leave the instructional leagues and head to the bigs. We believe the FED ought to be selling MBSs as the long rates have dropped in order to ease the effects on its overwrought balance sheet. The European debt crisis is going to be a burden going forward, so the FED is going to need room to move if the EUROPEAN crisis hits another turning point on the road to balance sheet repair. The crisis is far from over but the respite is more than needed for the global financial system.
Tags: Euro, European Debt Crisis, Fed, Gold, MBSs, SPS, Term Deposit Facility
June 16, 2010 at 7:08 am |
Could you give a simple explanation of risk on risk off. I hear this all the time; but it makes no sense to me since I believe it is all risk all the time when you are competing with algos and depreciating currencies in anything you buy or sell.
June 16, 2010 at 11:47 am |
I will dom–good question but i will tackle it for you later—but just remember it is pure safety versus some modicum of risk—-haven versus a higher return based on some riskier asset—tbills or aussie dollars and then break it down from there
June 16, 2010 at 11:53 pm |
Hey Yra,
Love the blog…so neat to read older posts and see what has happened. Liked your daughters paper too! Very scary stuff there….I think anyone with a sense of history sees that going horrible. I found it interesting that it is all being managed by supposedly “smart” firms….The Quest for higher returns will never end…
if your daughters single…..hmmmm…….j/k
Keep it up!
June 17, 2010 at 7:05 am |
easy brendo–she is only 14 years old–HAA ha ha—but thanks for the kind comments
June 17, 2010 at 7:06 am |
dom are you ready for the risk on risk off discussion
June 17, 2010 at 4:05 pm |
dom—the risk on risk off is premised on the comfort level of money–global flows ,to chase higher yields or to run to safety and take lower levels of return.As capital controls around the world have come down the ability for aggressive money to seek higher returns in more risk oriented assets —when the money gets nervous it heads for safer domains—in today’s uncertain environment and the developement of algorythmic trading models to track these flows have speeded up the process—and after days like may 6th capital is that much more volatile
June 18, 2010 at 2:05 pm |
Thank you!