Markets Suffering from Withdrawal Symptoms

The problem with heroin, of either the literal or monetary type, is that once you're hooked it's a very tricky proposition to wean yourself off the addiction. Gordon Brown certainly seems to be having trouble even contemplating kicking the habit; his public calls cheering QE yesterday appeared to stand on the toes of Merve the Swerve and co.

The next few months will present an interesting test case as some of the healthier liquidity addicts start kicking the habit. Exhibit A is Australia. The country presents an interesting dichotomy; as a producer of precious and industrial commodities, it has been highly geared to the global liquidity cycle, and particularly that in China. At the same time, domestic demand has remained robust, at least partially fueled by relatively heavy debt burdens (which have obviously benefitted from ultra-low RBA rates).

So while Australia's export sector is more about developments in Chinese monetary policy than what the RBA does, households and the service sector are more clearly vulnerable to a tightening of policy. So it was with great interest that Macro Man saw that the NAB business confidence survey dipped from 18 to 14 last night. Admittedly, it's come from a very robust peak, and some normalization would be consisitent with still solid growth. But perhaps it isn't a coincidence that business confidence fell as soon as the RBA tightened; it will be interesting to track the evolution of this relationship moving forwards, particularly if and as the RBA starts going in clips of 50.South Korea is another country where policy is widely expected to tighten; with 3m month KORIBOR at 2.78%, 2 year onshore swap yields are currently 4.02%, up some 75 bps over the last six months. Over the same time period, the KRW has been the second strongest Asian currency against the dollar, rising 13.75% (trailing only the Indonesian rupiah).

Macro Man observed the other week that the Kospi had started lagging the performance of the KRW, and indeed the SPX. While the index is well off its recent lows, its broad underperformance has remained intact. Drilling down beneath the surface, it certainly looks like Korean stocks are under distribution (i.e., someone is selling).

One thing that Macro Man has observed recently is that the Kospi tends to open on its highs and trade lower during the day... even on positive days. Perhaps unsurprisingly, trends in this phenomenon (defined as the 10 day moving average of the difference between the daily closing price and the open) have tracked index price action pretty well over the last few months.

Interestingly, the magnitude of the recent distribution phase appears to exceed that of the orgiastic accumulation at the height of the summer rally. Now, perhaps this simply represents a nice profit-take on the part of global equity managers, who are re-deploying the funds in more lucrative markets. On the other hand, maybe Korea is a canary in the coal mine in terms of liquidity withdrawal and a sign that even apparently robust and balanced Asian economies are a bit more hooked on monetary heroin than some bullish commentators would like to admit.

Macro Man intends to keep a close eye on these two markets; the real-time laboratories in Australia and Korea may provide a useful guide to what we can expect when the seriously addicted patients start entering rehab.

Comments

[johnbee:]

If printing money is the easy way out of debt why haven't Governments always printed loads of money? It is correct that low interest rates have made people think things are not so bad along with nil inflation, but the US and the UK debt salvation will need be found in inflation and cheapening their currencies and they will be the two elephants in the parlour that will send us back into a W recovery the second half of which be a long time to happen.

Oct 13 12:04 PM

[Albertarocks:]

Every time I see Gordon Brown, I suddenly start to smell sulphur. Anybody with any vision at all can see that demon's tail twitching with glee in the back of his pants. That's a demon's alternative to wringing his hands together. This man is such a blatantly "in your face" shill for his dark lords (and I'm not talking about the BoE, but about those who pull the puppet strings of the owners of BoE) that I'm surprised anybody on this planet believes one word he says. I hope I live long enough to see him and his ilk get their dues.

Oct 13 04:54 PM