Tag Archive | "Volatility"

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Fed Governor Hawkish Talk Spills Equities


Comments by a hawkish Federal Reserve Governor tamed US equity markets and pushed the dollar higher on Friday, wrapping up a week of high volatility and leaving some investors cautious about the future. The comments also give insight into the tension from his peers that Chairman Ben Bernanke may be feeling. Bernanke is set to retire in the early part of 2014.

However, equity investors have enjoyed a remarkable run in 2013. The S&P 500 ended Friday on a  down note but still managed to record the strongest six months of any year since 1998. The S&P 500 fell 6.92 points after three days of gains. The Dow Jones fell 114.89 while the Nasdaq gained 1.38 points, closing at 3,403.25. The S&P 500 closed at 1,606.28, down for the month of June but still recording the first second quarter gain in four years.

Equity markets around the world have been volatile since May 22nd when Chairman Bernanke hinted that the Fed’s bond buying spree might be tapering down. His confirmation of that in June sent markets into a three day tailspin that has been marked by volatile shifts ever since.

Fed Governor Speaks Out  

Federal Reserve Governor Jeremy Stein and Richmond Federal Reserve President Jeffrey Lacker said on Thursday that the Federal Reserve’s historic accommodation policy could be reduced significantly sooner rather than later. Stein indicated that September may well be the month when Bernanke’s tapering begins.

The speeches unnerved equity investors. Steven Baffico, the CEO of New York’s Four Wood Capital Partners, explained the reaction; “The mixed signals from both the economic data and the Fed’s direction have caused a lot of anxiety and some opportunistic buying and selling, and it’s just created a much less predictive environment going forward.”

Friday volume was the second highest day of the year. 10 billion shares changes hands across the three major US exchanges. For the month, The Dow lost 1.4 percent. The S&P 500 shed 1.5 percent. Nasdaq also lost 1.5 percent.

Consumer Sentiment Running High

Defying the volatility, consumer sentiment improved in late June after Bernanke’s comments. Sentiment was extremely strong among high income earners but weaker in low income families. The Thomson Reuters/University of Michigan consumer confidence index registered 84.1, slightly below May’s 84.5 mark but higher than expectations.

The survey’s director said; “Consumers believe the (economic) recovery has achieved an upward momentum that will not be easily reversed. To be sure, few high or low income consumers expect the economy to post robust gains or think the unemployment rate will drastically shrink during the year ahead.”

Consumer sentiment is a key indicator because consumer spending accounts for 70 percent of the nation’s GDP. However, despite the optimistic view, household expenditures only grew 2.6 percent in the first quarter, well below government estimates of 3.4 percent.

The Institute of Supply Management – Chicago reported that Midwest business activity dropped to 51.6, a dangerous figure. 50 points indicates a contraction. These contradictory indicators typify the economy and add to the sluggishness of the recovery.

The Dollar Post Gains  

Equity market volatility is translating to solid gains for the USD. The dollar continued its upward march against the yen and the euro. The dollar befitted from Governor Stein’s comments.

Michael Feroli of JP Morgan said; “Stein’s remarks cannot be lightly dismissed and raise risks that some on the Committee may have already essentially decided on September. More generally, compared to remarks from Fed officials earlier this week, Stein’s speech was less geared toward calming market perceptions of Fed policy and did less to question market pricing of the first rate hike.”

The euro hit a session low of $1.2990 before closing at $1.3015. Against the yen the dollar rose again closing at 99.2, a gain of 0.9 percent. Dollar/yen activity surged to $4.0 billion. Euro/dollar trade reached $4.3 billion.

Markets are anxiously awaiting this week’s policy release from the European Central Bank. ECB president Draghi is expected to be more dovish than in the past.

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Bernanke and Fed Tapering Together


Federal Reserve Chairman Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

Bernanke and Fed Tapering Together

Federal Reserve Chairmen Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

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Global Markets Await Federal Reserve Report


The two-day Federal Reserve meeting will conclude on Wednesday with Chairman Ben Bernanke scheduled to conduct a press conference following release of the much-awaited report. Global markets have experienced great volatility since Bernanke’s mixed message released on May 22, 2013.

Ever since, Bernanke has been in the news. On Sunday, President Obama suggested that Bernanke would be stepping down in 2014 after serving 8 years as Chairman. Bernanke’s handling of his press release in May, stirred concerns in global equity and currency markets. It is expected a more carefully worded explanation of current monetary policy will be put forth on Wednesday.

Economic data released today would support a continuation of the existing $85 billion per month bond buying policy. New home construction signaled a stronger recovery in housing that was indicated with strong starts in April. Housing starts are up 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April’s report was also raised from 853,000 to 856,000 new starts.

New permits dipped below April’s strong performance but still reflect the largest number of permits for single family construction in five years. The construction industry has been hit hard by unemployment and contractors report difficulty finding qualified workers and a shortage of building supplies.

May’s 12-mointh core inflation rate remains below the Federal Reserve’s stated goal of 2 percent but does suggest stabilization. The overall CPI jumped 1.4 percent easing concerns about prolonged deflation. This data should not negatively affect the Fed’s decision to scale down its stimulus.

However, the “tapering” of the extraordinary support from the Federal Reserve will be forthcoming but with disappointing growth data from China, high volatility in Japan and unstable conditions in Europe, the dollar is expected to continue today’s improvements against international currencies.

Asian Currencies Decline    

In India and Indonesia, the strengthening dollar or the prospects of a stronger dollar have led to massive withdrawals by international investors. The Indian rupee closed in on another record low to 58.98 per USD compared to the record low of 58.69 set last week. India had attracted more than $12 billion in foreign investment since 2012. The fall could be more severe if markets get what they expect from the Fed’s two-day meeting.

In the last 17 trading session, foreign investors have been net sellers of more than $4.5 billion in Indian bonds.

Indonesia, another Asian entity that relies heavily upon a growing China, saw its rupiah fall 0.7 percent on Tuesday. The fall came on the heels of government action to reduce fuel costs. The central bank was forced to intervene.  The finance ministry was only able to raise 2.65 trillion rupiah of an 8 trillion rupiah offering.

Meanwhile, in the Philippines, the peso fell 0.8 percent to 43.22 USD. The Malaysian ringgit fell 0.8 percent to 3.1580 USD, its lowest rate since July 30, 2012.

If the Federal Reserve announces tapering of its stimulus, the outflows from these nations could be devastating. In Indonesia, foreign investors sold about $1 billion in bonds from May 31 through June 13, 2013. Foreign holdings decreased to 32.4 percent.

Dollar Rallies Against Yen  

Tuesday marked the second consecutive day that the dollar has made headway against the yen. Traders anticipate that Bernanke will extend the current buying initiative but add definition to the inevitable tapering. Tomorrow’s announcement should stabilize equity markets but also give strength to the USD.

Joe Manimbo, a senior market analyst at Western Union Business Solutions in Washington, echoed market sentiment; “The yen’s fresh leg lower today could be a sign that many investors think the Fed will signal a reasonable chance of a taper as later in the third quarter. The yen is seen vulnerable to less policy accommodation from the Fed, a move that would tend to put upward pressure on U.S. Treasury yields, burnishing the greenback’s allure.”

The USD rose 1.1 percent to 95.96 yen after falling to a two-month low of 93.78 yen on Thursday last week. The dollar has touched record highs against the yen since Prime Minister Shinzo Abe radicalized the nation’s currency policy by extreme monetary easing. The liquidity has given rise to Japan’s equities but has greatly weakened the currency.

The Euro Climbs

Despite disappointing data from Germany and the lowest demand for new autos, the euro rose to $1.3385. The climb was based on surprising report from ZEW data, a German analyst firm that showed investor sentiment was improved in June. The FTEU3 shares climbed 0.1 percent on Tuesday.

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Euro, Yen Surge Against US Dollar


More woes and strikes in Greece and disagreement about ECB policy in German high courts could not discourage the euro from posting four-month highs against the USD. The euro reached its highest point, $1.3346, against the US Dollar since February 20th. Meanwhile, a lack of a policy statement from the Bank of Japan (BoJ) about the volatility of its equity markets prompted global selloffs in equities. The yen continued its surge against the dollar falling to 95.16 before settling at 95.40, down 0.6 percent on the day.

Currency market trade was light on Wednesday but the concern about Federal Reserve policy outweighed the negative sentiment from Europe and Japan.

Athens in Upheaval

Demonstrations erupted in Athens as unions rallied in support of journalists after the Samaras government unexpectedly shut down the nation’s public television station, ERT, in the middle of the night. The closing of the liberal network eliminated 2,600 jobs including 600 journalists. The Helenic Broadcasting Corporation ETR has been up and running for 75 years.

The beleaguered station only has  a 13 percent viewing rate. Several dismissed journalists continued to occupy the building in protest of the shutdown. The Athens journalistic union ESTEA immediately announced a strike. Thousands of citizens protested in front of the Athens station and then proceeded to march on the capital.

The station was closed as a result of a ministerial decree and surprised many members of the divided Parliament. Prime Minister Samaras’ short reign has been marred by controversy and dissension.

The most recent setback was the revelation that a sale for the national gas company fell through. This failure puts Greece on the verge of default with its bailout commitments. Under terms of the bailout, Greece was obligated to terminate at least 2,000 state employees. The closing of ERT meets that stipulation. However, the government has failed to meet its commitment to liquidate state-held assets.

The closing of the state television network overshadowed more serious problems. MSCI reclassified the country as an emerging market. MSCI stated that the Athens bourse has been to small for a developed economy for the past two years. This could have serious repercussions with funds that have invested in Greek bonds. Optimists believe the reclassification will open up other investment vehicles.

Yields on Greek 10-year bonds nudge above the 10 percent mark when Athens announced failure to sell DEPA, the state gas company. Equity markets traded at two month lows following the reclassification.

MSCI’s world index slipped by 0.13 percent on Wednesday. The Euro STOXX 50 index dropped 0.62 percent to 2,666.52. The euro climbed 0.27 percent.

The yen gains were sparked by the Fed’s perceived slowdown in asset buying and the BoJ’s inference that it will continue its easing program. The markets has expected a pullback by the BoJ.

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US Equities Resist Good Jobs Numbers


The upward spike of US equities appears to have slowed despite good news from the employment sector. Beginning last Friday, the Dow Jones Industrial Index has flirted above the 14,000 threshold several times. Each climb above the benchmark has been met with disappointing resistance.

In January the DJ gained six percent. The Nasdaq and the S&P 500 also enjoyed substantial gains. However, the February marketplace is struggling to stabilize and has been marked by volatile swings.

Equity market analysts suggest that the volatility is an indication that stocks have peaked. Equity insiders, those investors holding stock inside the company to which they are employed, are reportedly selling shares. This indicates the belief by insiders that the value of their company’s stock are not sustainable.

While the bull market investors dominated January, the bears have gained a foothold in February. The Thursday morning jobless report posted good news for the economy that should have been welcomed by equity investors.

Initial claims for state unemployment benefits fell by 5,000. This amounts to a seasonally adjusted new claims application figure of 366,000. The volume of new applicants hit a five-year low.

However, analysts had expected even a bigger reduction in initial filings. An economist at Ameriprise, Russell Price, may have summarized the markets view of the figure; “The labor market is improving, but certainly not at a robust rate by any means.”

The employment report shows that the number of persons receiving unemployment benefits after week one climbed 8,000 for the week ending January 26, 2013. The four-week moving average for new claims dropped to 2,250 to 350,00, the lowest level since March 2008. Perhaps the biggest news is that several key, proposed layoffs were forestalled. This would indicate that the recovery, though paper thin, is progressing. A Labor Department spokesperson suggested that the volatility in January was subsiding.

Non-Farm Productivity

A non-farm productivity report covering the 4th quarter 2013 shows that non-farm productivity droppe3d to the lowest level in two years. This data comes on the heels of positive non-farm employment news during the quarter.

Analysts suggest the turbulent weather may be the cause of the low output. Non-farm productivity fell by 2 percent in the 4th quarter. Output rose by 0.1 percent. Hours worked increased by 2.2 percent.

This downturn could be attributed to the implementation of reduced spending by the Defense Department. The overall economy gave back 0.1 percent in the last three months of 2012. On the right side, hourly compensation rates increased by 2.4 percent in the quarter.

 

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Forex: Bank of Canada Stays Put On Rates


Canada’s central bank painted a dour picture for the world’s 11th largest economy following a decision to keep rates on hold at 1% – as well as corresponding deposit rates.  The move wasn’t all too surprising given the global market and its current headwinds.  But, what was surprising was the bearish sentiment going forward, which forced policymakers to lower forecasts for the near term.

As before, Governor Mark Carney pointed towards Europe’s financial woes as adding volatility and uncertainty to global markets, which are already being underlined by “greater than anticipated” contraction in China and other emerging countries.  The central bank noted the current situation as dampening commodity export growth, which the Canadian economy partially depends on for overall economic growth.  In addition, policymakers noted the current pace of government spending to be minimal in adding to the country’s expansion as consumers deal with “record high household debt”.

As a result, the central bank is foreseeing a 2.1% pace of expansion in the current year, with a slight increase of a 2.3% growth rate next year.  Both rates are lower than the previously anticipated 2.4% forecasted rate – with consumer prices remaining around 2%.

The decision and subsequent central bank text should place some downward pressure on the Canadian dollar in the near term, which is currently being fueled higher by positive correlations with crude oil.

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Jobs Report Hits Hard


Markets were caught off guard today when the US Labor Department posted its latest non-farm payroll report. The private sector added 69,000 jobs in May. Adjustments to March and April reports lowered job creation by 49.000 jobs. Unemployment rose to 8.2 percent from 8.1 in April.  The release triggered a steep sell-off in equity markets as the DOW fell more than 200 points by midday.  The S&P index fell 1.5 percent in the first half hour of trading.

Analysts had expected jobs to increase by 150,000 and maintain the 8.1 percent unemployment rate. With the crisis in the euro zone worsening by the day and with China experiencing a deeper than expected slowdown, global equity markets were volatile. The fact is that global economies are now under pressure.  The deeply rooted toxins of the euro zone crisis have worked their way around the world.

The data is disappointing but it would be unrealistic to believe that the world is not affected by the volatility in the euro zone. In a world dominated by supply and demand, the demand is extremely low so supply is pared and jobs fall by the wayside.

In May, China’s manufacturing rose slightly, missing projections. In the UK, output spiraled downward at the fastest pace in three years. Manufacturing fell slightly in France and Germany.  No matter how the cake is sliced, it is not a pretty picture.

In Washington, the President expressed concern.  Republicans tried to score points, but have no solutions. Obama has learned what Harry Truman meant when he said “If you can’t stand the heat, get out of the kitchen.” Mitt Romney hit the airwaves but nobody has an idea about what his jobs program would look like.  If the euro zone has taught us anything, it is that austerity will not solve the problem.  What the US needs is a combination of fiscal responsible solutions to income, including tax reform, expenses, including mandated programs and growth.

The Federal Reserve will meet on June 19 and June 20. The disappointing jobs report paves the way for another round of quantitative easing.  The performance of equity markets has caused the Fed to tread softly. It seems like QE3 is around the corner. The question is how will this money be spent.

Where it should be spent is creating American jobs. The US needs infrastructure programs that will bring the nation into the 21st century. The American people and especially the military need work.  The US is going to suffer lack of demand until the euro zone and China are on a level plain. QE3 should be all about jobs and nothing else.

The chances of that happening are slim.  First, it is an election year.  Secondly, the disposition of Congress is counter-productive.  Frankly, the best thing that could happen in this election year is for the voters to create a clean slate by voting every member of Congress out and replacing them with members that would cross party lines to act on behalf of the middle class.

Romney is quick to criticize Obama, but should he not also be criticizing Congress?  During all the Republican debates, not one candidate offered a defined program for job growth.  How many times can we bear to hear Democrats and Republicans present summaries of obvious facts.

  • We should increase exports.
  • We should increase jobs.
  • We should pare the government work force.
  • We should remove regulatory oversight.
  • We need to solve the real estate crisis.
  • We need to eliminate Obamacare.
  • We need to reduce taxes to unsustainable levels.
  • We need energy solutions.

Enough! Do not state the obvious. Politicians need to explain to the populace precisely what actions will be taken to remedy these issues.  No matter who is the President, the biggest challenge that remains is how to transform Congress into a functional body from a third-world body of government to a functional body that represents the masses not the special interests.  No matter your politics, the USA needs solutions and the political will cross party lines to solve problems. Let’s be clear. The President is a figurehead.  No President can succeed without a gridlock-free Congress.

 

 

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Mixed Signals Around The Globe


As U.S. Equity markets prepared to close a volatile week of trading amidst historic transaction volume, the markets held on to post a second consecutive day of gains.  The tumultuous week will mark the third consecutive week of losses and many analysts are neutral about the direction and volatility of the marketplace.

By 2:00 p.m. Friday, only 6 billion shares had traded. The daily average for the week was 16 billion shared traded.  The three-week losing streak is the worst three-week decline since March 2009.

On Thursday, the market reacted positively to an unexpected jobs report.  Last week, the number of Americans fell to a four-month low.  Initial claims fell 7,000 to a seasonally adjusted rate of 395,000, 5,000 below projections.  Many analysts suggested that this improvement indicates the economy is not headed for a double dip.

In support of that possibility was another surprising statistic.  Retail sales climbed by 0.5 percent in July.  The biggest jump since March. The U. S. Commerce Department revised the June retail report showing a rise of 0.3 percent. 

On the downside, consumer confidence fell to the lowest level since 1980 when the country was in recession.  The factors contributing to the fall in consumer confidence are high unemployment, rising fuel costs and most importantly the lack of confidence in government elevated during the increase in the country’s credit limit and accompanying spending cuts.

75 percent of respondents expressed negative feelings about the state of the economy.  The level of disappointment was just below the 1980 level of 82 percent. Survey director, Richard Curtin, said, “Never before in the history of the surveys have so many consumers spontaneously mentioned negative aspects of the government’s role.”

The public display of the worst of Washington preceded the month long vacation by the House of Representatives. This particular wing of government constitutes the most ineffective House in the history of the country.  Consumers see the only hope for the country to enact positive legislation to deal with unemployment is a remote hope that certain Republicans will work together with Democrats against the Tea Party and pass responsible jobs programs.

The relative quiet in Washington is greatly appreciated after the debacle that caused the country to lose its AAA credit rating.  At least the Cantor-Boehner media circus has stopped for a few weeks.

The desperation in Washington is equaled by the state of affairs in England and throughout the Euro Zone.  Citizens are in open revolt in London town as the economic crisis continues to escalate.

In Europe, French banks are under pressure because they hold a significant number of bonds in the Euro Zone’s southern tier.  The European Securities and Markets Authority pushed the European Union members to ban short sales. 

The ban against short selling was received with mixed feelings.  However, the STOXX Europe Index rose 4.5 percent as broader equity markets rose 3.7 percent. 

France, Spain, Italy and Belgium quickly imposed the ban against short selling.  Some of the major institutions rose sharply.  Societe Generale rose 5.7 percent, BNP Paribas climbed 4.2 percent and Credit Agricole added 2.1 percent. 

German Chancellor Angela Merkel, who is scheduled to meet with French President Nicolas Sarkozy, said the ban on short selling created the impression that the Euro Zone needed a rescue package.  Merkel is on the mark because the euro needs help. 

The current actions to help Italy and Spain fall far short of realistic bailouts.  The Euro Zone is in trouble and they members do not have the liquidity to reverse the situation.  It is difficult to imagine that a major austerity plan and some form of quantitative easing can be implemented.  Without these actions, the euro seems doomed.

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Swiss Franc at Record Highs


This month, the Swiss Franc touched a record high against not one, but two currencies: the US dollar and the Euro. Having risen by more than 30% against the former and 20% against the latter, the franc might just be the world’s best performing currency over the last twelve months. Let’s look at the prospects for continued appreciation.


As I wrote on Monday, the Swiss Franc has been one of the primary beneficiaries of the safe haven trade. With each spike in volatility, the Swiss Franc has ticked upward. Due to monetary and fiscal stability as well as political conservatism, investors have flocked to the Franc in times of crisis. Of course, the Japanese Yen (and the US dollar, of late) has also received a boost from this phenomenon, but to a lesser extent than the franc, as you can see from the chart above.

Personally, I wonder if this isn’t because the Swiss economy is significantly smaller than that of Japan and the US. In other words, its capacity to absorb risk-averse capital inflows is much smaller than that of Japan and the US. For example, the impact of one million people suddenly rushing out to buy shares in IBM stock would have a much smaller impact on its share price compared to a sudden speculative flood into FXCM. The same can be said about the franc, relative to the dollar and yen.

Ironically, the franc is also rising because of regional proximity to the eurozone. I use the term ironic to denote in order to signify that the franc is not being buoyed by positive association with the euro but rather because of contradistinction. In other words, each time there is another flareup in the eurozone sovereign debt crisis, the franc typically experiences the biggest bounce because it is the easiest currency to compare with the euro. In some ways, it is basically just a more secure version of the euro. This phenomenon has intensified over the last month, as the euro faces perhaps its most uncertain test yet.

It is curious that even as investors have gradually become more inclined to take risk, that not only has the franc held its value, but it has actually surged! Perhaps this is because it is expected that the Swiss National Bank (SNB) will soon hike interest rates, making the franc both high-yielding and secure. To be sure, some analysts think that the SNB will hike as soon as June. The fact the the economy has continued to expand and exports have surged in spite of the strong franc only seems to support this notion.


On the other hand, inflation is still basically nil. And just because the Swiss economy can withstand an interest rate hike hardly provides adequate justification for implementing one. Besides, the SNB hardly wants to give the markets further cause to buy the franc. If anything, it may even need to intervene verbally to make sure that it doesn’t rise any higher. Thus, “The median forecast among economists is for a rate increase in September.”

In short, I think the franc is overbought against the dollar. In fact, you can see from the most recent Commitment of Traders data that speculators have been net long the franc for almost an entire year, and it seems inevitable that this will need to reverse itself. On the other hand, the franc probably has more room to rise against the euro. The takeaway here is that it is less important to know where you stand on the franc in general and more important to understand the cross currency.

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Interview with Mike Kulej of FXMadness: “Trading the News is Akin to Gambling”


Today, we bring you an interview with Mike Kulej of FXMadness. Below, Mike shares his thoughts about the effectiveness of technical analysis, volatility, leverage, and more!

Forex Blog: I am intrigued by the fact that your blog is deliberately focused on “the exciting world of Forex outside the dollar.” Is there a strategic reason  for this choice?

At the time when I started the blog, everybody was talking about the Euro, the Pound, the Yen, so there was a lot of information available regarding the so-called “majors”. In principle, those are all of the main Dollar pairs. However, there were far fewer sources covering the crosses and exotic pairs. For example, everybody has an opinion about the EUR-USD, but not the NZD-CHF or the GBP-AUD. I wanted to offer information not easily found elsewhere and increase awareness that there are opportunities outside the US Dollar. Besides, that is what I trade…

Forex Blog: What’s the most undervalued/under-appreciated currency?

Among the most popular currencies, I feel that the British Pound is the most undervalued, followed but the New Zealand Dollar. The Canadian Dollar also has plenty of appreciation left.  Within exotics the Indian Rupee, the Russian Ruble and the Polish Zloty come to mind.

Forex Blog: Could you briefly explain your approach to analyzing and trading in the forex markets. Do you prefer technical or fundamental analysis, or a combination of both?

My analyses include both fundamental and technical views. After all, it is the fundamentals that drive the markets, forcing big money to flow in and out of given currency. Unfortunately, they are very imprecise, and not suitable for active trading. Acting on fundamentals alone is more like investing. Trading demands specific conditions to be met, for both entries and exits and that is offered by technical analysis. My buy and sell decisions are made based on technical factors, with awareness of fundamental conditions.

Forex Blog: It is always refreshing to read another trader/blogger discourage the use of extreme leverage, especially given that it remains one of the main selling points that brokers use to attract potential customers. Can you elaborate on your philosophy of leverage, and perhaps offer some advice in this regard to novice traders?

Yes, brokers overplay the availability of leverage. They manage to point out advantages, but not the risks. Leverage itself will not make anybody better trader, it will only magnify losses and gains. In addition, trading with high leverage adds to the already highly emotional nature of this activity. It is natural that a trader wants to make as much money as possible, but before using leverage, one should prove it to him/herself that the account is actually growing. I would suggest trading without leverage, at 1:1 for some time, at least 50 or more trades. If at this point the account shows gains, some form of leverage might be employed. Somewhere along the line a trader will discover the “right” leverage for own personality, one that will allow to take advantage of this tool at a correct emotional level.

With me, leverage changes depending on the time frame employed for any given trade. If I use daily/weekly charts and expect the trade to last weeks, than no leverage is employed. For trades based on 4h and 1h charts, the leverage is either 2:1 or 4:1. Vast majority of my trades are done on at these levels.  For very short-term transactions, using 5m charts, for example, my leverage can go as high as 10:1, but this is rare.

People often overlook that using low leverage per trade allows opening many different trades at the same time in one account. This diminishes dependence on any one trade. As long as the trades are not too correlated (like shorting all Yen pairs at the same time), using low leverage allows for diversification within an account.

Forex Blog: What do you think about the recent report by the Saint Louis Fed that concluded that the power/profitability of technical analysis in the forex markets is steadily declining? Do you think that this should serve as a warning to retail traders that they need to consider alternative strategies, or that they simply need to work harder?

This report focuses primarily on trend identification analysis, with moving averages in focus. For the longest time currencies had a reputation of instruments that trend very well, meaning the main trends last a long time and are relatively gradual. Under these circumstances, moving averages can be simple, yet effective, trading tools and this is what the report covers. It is just a matter of finding “correct” MA, which is always easier said than done.

Forex Blog: You revealed that some of your biggest trading profits were netted around the peak of the credit crisis. Were these trades based on fundamental factors, technical factors, or simply instinct?

Trend following strategies are typically used by the biggest trading entities, because their size forces them to trade that way. That was obviously very difficult during the last few years, as currency trends changed from relatively steady to very choppy.  The Japanese Yen, for example, had been getting steadily weaker for years. In summer of 2007, this trend became shakier, but prevailed. Many trend following programs were stopped out, so they had to adjust to a little more volatile conditions, by making stops wider. However, that was not enough for what came next year, during the 2008 crisis. Bigger price swings, losses and positions in opposite direction had to have even larger stops to account for prevailing volatility. Then the sharp corrections in early 2009 likely triggered even those extended stops. Comparing to those times, current environment is relatively quiet, so trend following systems are doing probably better and, who knows, might work just fine for years to come.  It will be interesting to see similar report in, say, 10 years.
Incidentally, all types of technical analysis will have good and bad times. Does not matter what indicator, pattern or charting method is used, nothing is 100% correct. The trick is to not to get discouraged during losing periods, which are sure to happen.

At that time fundamental analysis were just about worthless and amounted to not much more than guessing. When reading opinions and predictions by some of the biggest names in the business at that time, we can see just how diverse and contradicting they were. Those trades were technical, using large magnitude charts, mostly weekly. The strategies were common, only that they do not happen often on large time scales.  Of course, there was an element of “luck”, in a sense that I cannot replicate these results at will – right set of market conditions must be present, including extreme volatility. After all, how often does GBP-JPY move 2000 pips in one day?

Forex Blog: On a related note, you seem to enjoy volatility. Does volatility make trading more profitable, or simply more exciting? Do you have to adjust your trading strategy when the markets are especially choppy?

It depends on what type of volatility we are experiencing. When markets are changing direction without a rhyme or reason, I try to stay away. On the other hand, volatility expressed by an increased size in price swings after a period of consolidation is my friend. Most of my strategies depend on this type of volatility and yes, that is what makes my trading profitable. More exciting? To a degree, yes, although I try to keep emotions to minimum. But realistically, whom are we kidding? Every time real money is on the line, emotions are involved to some degree. The key is to control them.

Forex Blog: You’ve alluded to the possibility that a Tobin tax (on all forex transactions) could one day be implemented. As a trader, you are clearly against this. Still, do you think that this could serve any positive economic function? Do you think Central Banks and policymakers ought to pay any attention (and react accordingly) to exchange rates?

The Tobin tax is supposed to fund global environmental issues. Great idea but why single out this particular segment of population? Who would have a say in how and where to spend the funds? Can we envision the level of cooperation between countries, which would be necessary to implement any changes? Besides, a concept of a worldwide tax for any reason is simply too radical.

As far as central banks go, it is their function to pay attention to general financial conditions, which includes exchange rates of domestic currency.  All of their decisions effect exchange rates intended or not.  Central banks should be treated as another player in the market. If the currency is floating, the central bank has every right to “react accordingly.” Their success rate is not much better than any other group of market participants.  At least they are a “known quantity,” unlike central banks of countries, which do not allow floating rates.

Forex Blog: After rising dramatically in the wake of the natural disasters, the Japanese Yen appears to have fallen back. Even though you are not currently trading the USD/JPY, would you care to offer a short-term forecast?

Funny you should mention the USD-JPY. I had not traded it in a long time, other Yen crosses simply offer better opportunities – they move more. Recently, though, I covered a trade in this pair on the blog. It created a very clear, easy to spot, high probability trading set up, and so I took it. In my opinion, the USD-JPY has made a major bottom and I expect to see 90.00 within the next 1-2 months and 100.00 maybe before the end of the year. Anything beyond that will have to be decided as the price unfolds and new important fundamentals emerge.

Forex Blog: How does the possibility of interest rate hikes bear on your current trading strategy? Will you deliberately exit any relevant positions you on days that interest rate decisions are scheduled?

When trading short-term time frames, I avoid taking positions before major announcements. And yes, if in a trade, I often exit before these events, regardless of profit or loss. Currently the news releases, which have the biggest impact, are rate decisions by FED, RBA, RBNZ and BoC (Bank of Canada), as well as monthly employment data from these countries.  These are the most volatile and unpredictable. This list changes from time to time.  As a rule, I do not trade news releases with the intention to capitalize on them, for example getting in a position before the NFP data and trying to exploit what happens after. I find it too akin to gambling.

Forex Blog: Finally, what advice do you have for forex traders that want to beat the market in these uncertain times?

This may sound old and worn out, but always use stops. You will not get mega rich in a day, yet can go broke in one if, a stop is not in place… Preserve your capital.

1. I am intrigued by the fact that your blog is deliberately focused on
“the exciting world of Forex outside the dollar.” Is there a strategic reason for
this choice?

At the time when I started the blog, everybody was talking about the Euro, the Pound, the Yen, so there was a lot of information available regarding the so-called “majors”. In principle, those are all of the main Dollar pairs. However, there were far fewer sources covering the crosses and exotic pairs. For example, everybody has an opinion about the EUR-USD, but not the NZD-CHF or the GBP-AUD. I wanted to offer information not easily found elsewhere and increase awareness that there are opportunities outside the US Dollar. Besides, that is what I trade…

2. What’s the most undervalued/under-appreciated currency?

Among the most popular currencies, I feel that the British Pound is the most undervalued, followed but the New Zealand Dollar. The Canadian Dollar also has plenty of appreciation left. Within exotics the Indian Rupee, the Russian Ruble and the Polish Zloty come to mind.

3. Could you briefly explain your approach to analyzing and trading in the
forex markets. Do you prefer technical or fundamental analysis, or a
combination of both?

My analyses include both fundamental and technical views. After all, it is the fundamentals that drive the markets, forcing big money to flow in and out of given currency. Unfortunately, they are very imprecise, and not suitable for active trading. Acting on fundamentals alone is more like investing. Trading demands specific conditions to be met, for both entries and exits and that is offered by technical analysis. My buy and sell decisions are made based on technical factors, with awareness of fundamental conditions.

4. It is always refreshing to read another trader/blogger discourage the
use
of extreme leverage, especially given that it remains one of the main
selling points that brokers use to attract potential customers. Can you
elaborate on your philosophy of leverage, and perhaps offer some advice in
this regard to novice traders?

Yes, brokers overplay the availability of leverage. They manage to point out advantages, but not the risks. Leverage itself will not make anybody better trader, it will only magnify losses and gains. In addition, trading with high leverage adds to the already highly emotional nature of this activity. It is natural that a trader wants to make as much money as possible, but before using leverage, one should prove it to him/herself that the account is actually growing. I would suggest trading without leverage, at 1:1 for some time, at least 50 or more trades. If at this point the account shows gains, some form of leverage might be employed. Somewhere along the line a trader will discover the “right” leverage for own personality, one that will allow to take advantage of this tool at a correct emotional level.
With me, leverage changes depending on the time frame employed for any given trade. If I use daily/weekly charts and expect the trade to last weeks, than no leverage is employed. For trades based on 4h and 1h charts, the leverage is either 2:1 or 4:1. Vast majority of my trades are done on at these levels. For very short-term transactions, using 5m charts, for example, my leverage can go as high as 10:1, but this is rare.
People often overlook that using low leverage per trade allows opening many different trades at the same time in one account. This diminishes dependence on any one trade. As long as the trades are not too correlated (like shorting all Yen pairs at the same time), using low leverage allows for diversification within an account.

5. What do you think about the recent report by the Saint Louis Fed [
http://research.stlouisfed.org/wp/2011/2011-001.pdf] that concluded that
the
power/profitability of technical analysis in the forex markets is steadily
declining? Do you think that this should serve as a warning to retail
traders that they need to consider alternative strategies, or that they
simply need to work harder?

This report focuses primarily on trend identification analysis, with moving averages in focus. For the longest time currencies had a reputation of instruments that trend very well, meaning the main trends last a long time and are relatively gradual. Under these circumstances, moving averages can be simple, yet effective, trading tools and this is what the report covers. It is just a matter of finding “correct” MA, which is always easier said than done.
Trend following strategies are typically used by the biggest trading entities, because their size forces them to trade that way. That was obviously very difficult during the last few years, as currency trends changed from relatively steady to very choppy. The Japanese Yen, for example, had been getting steadily weaker for years. In summer of 2007, this trend became shakier, but prevailed. Many trend following programs were stopped out, so they had to adjust to a little more volatile conditions, by making stops wider. However, that was not enough for what came next year, during the 2008 crisis. Bigger price swings, losses and positions in opposite direction had to have even larger stops to account for prevailing volatility. Then the sharp corrections in early 2009 likely triggered even those extended stops. Comparing to those times, current environment is relatively quiet, so trend following systems are doing probably better and, who knows, might work just fine for years to come. It will be interesting to see similar report in, say, 10 years.
Incidentally, all types of technical analysis will have good and bad times. Does not matter what indicator, pattern or charting method is used, nothing is 100% correct. The trick is to not to get discouraged during losing periods, which are sure to happen.

6. You revealed that some of your biggest trading profits were netted
around
the peak of the credit crisis. Were these trades based on fundamental
factors, technical factors, or simply instinct?

At that time fundamental analysis were just about worthless and amounted to not much more than guessing. When reading opinions and predictions by some of the biggest names in the business at that time, we can see just how diverse and contradicting they were. Those trades were technical, using large magnitude charts, mostly weekly. The strategies were common, only that they do not happen often on large time scales. Of course, there was an element of “luck”, in a sense that I cannot replicate these results at will – right set of market conditions must be present, including extreme volatility. After all, how often does GBP-JPY move 2000 pips in one day?

7. On a related note, you seem to enjoy volatility. Does volatility make
trading more profitable, or simply more exciting? Do you have to adjust
your
trading strategy when the markets are especially choppy?

It depends on what type of volatility we are experiencing. When markets are changing direction without a rhyme or reason, I try to stay away. On the other hand, volatility expressed by an increased size in price swings after a period of consolidation is my friend. Most of my strategies depend on this type of volatility and yes, that is what makes my trading profitable. More exciting? To a degree, yes, although I try to keep emotions to minimum. But realistically, whom are we kidding? Every time real money is on the line, emotions are involved to some degree. The key is to control them.

8. You’ve alluded to the possibility that a Tobin tax (on all forex
transactions) could one day be implemented. As a trader, you are clearly
against this. Still, do you think that this could serve any positive
economic function? Do you think Central Banks and policymakers ought to
pay
any attention (and react accordingly) to exchange rates?

The Tobin tax is supposed to fund global environmental issues. Great idea but why single out this particular segment of population? Who would have a say in how and where to spend the funds? Can we envision the level of cooperation between countries, which would be necessary to implement any changes? Besides, a concept of a worldwide tax for any reason is simply too radical.
As far as central banks go, it is their function to pay attention to general financial conditions, which includes exchange rates of domestic currency. All of their decisions effect exchange rates intended or not. Central banks should be treated as another player in the market. If the currency is floating, the central bank has every right to “react accordingly”. Their success rate is not much better than any other group of market participants. At least they are a “known quantity”, unlike central banks of countries, which do not allow floating rates.

9. After rising dramatically in the wake of the natural disasters, the
Japanese Yen appears to have fallen back. Even though you are not
currently
trading the USD/JPY, would you care to offer a short-term forecast?

Funny you should mention the USD-JPY. I had not traded it in a long time, other Yen crosses simply offer better opportunities – they move more. Recently, though, I covered a trade in this pair on the blog
http://fxmadness.com/2011/03/20/general/long-term-yen-charts/ . It created a very clear, easy to spot, high probability trading set up, and so I took it.
In my opinion, the USD-JPY has made a major bottom and I expect to see 90.00 within the next 1-2 months and 100.00 maybe before the end of the year. Anything beyond that will have to be decided as the price unfolds and new important fundamentals emerge.

10. How does the possibility of interest rate hikes bear on your current
trading strategy? Will you deliberately exit any relevant positions you on
days that interest rate decisions are scheduled?

When trading short-term time frames, I avoid taking positions before major announcements. And yes, if in a trade, I often exit before these events, regardless of profit or loss. Currently the news releases, which have the biggest impact, are rate decisions by FED, RBA, RBNZ and BoC (Bank of Canada), as well as monthly employment data from these countries. These are the most volatile and unpredictable. This list changes from time to time. As a rule, I do not trade news releases with the intention to capitalize on them, for example getting in a position before the NFP data and trying to exploit what happens after. I find it too akin to gambling.

11. Finally, what advice do you have for forex traders that want to beat
the
market in these uncertain times?

This may sound old and worn out, but always use stops. You will not get mega rich in a day, yet can go broke in one if, a stop is not in place… Preserve your capital.

SocialTwist Tell-a-Friend

Forex Trading Articles by Forex Blog & Online Forex Trading

Posted in Currency News & AnalysisComments Off on Interview with Mike Kulej of FXMadness: “Trading the News is Akin to Gambling”