Markets Enthusiastically Welcome The Bernanke Liquidity

by: Ralph Shell

As many suspected, the poor U.S. Non-Farm Payroll report for August was the catalyst that motivated the Fed Governors -- the time for QE3 had arrived. The Fed is now going to buy $40B of mortgage backed securities per month until employment in the U.S. improves. From the markets' response, traders are hopeful the newly released cash is going to be reallocated to equities and commodities.

The equity bulls are not confined to the U.S. The Hang Seng Index in Hong Kong was up 2.9%, The Spanish IBEX 35 was up 2.58%, and the Italian MIB Index forged ahead 2.12%.

Commodities also got a boost from the Fed's intended injection of liquidity, but the political tensions and fighting in the oil producing Mid-East is of equal relevance. After trading above $100, West Texas Crude is now trading at 99.54, and Brent is now above $117.

The bull run in the grains, caused mostly by the most severe drought in the US since 1956, continues. Corn futures are now trading 7.80 per bushel, and soy beans at 17.60 a bushel. Will the weakening USD help exports of these two commodities?

Part of this week's USD weakness may have been the big specs exiting their long USD short euro positions (EURUSD, FXE, UUP,UDN). On the last COT report, they were net short over 105K futures contracts. We felt this pair had a chance of trading above 1.30, and it exceeded our target.

Serious economic problems remain in the eurozone. Money is pouring out of the south to the creditor countries in the north. Consequently, Germany can borrow for practically nothing, and the Med countries, where they have sovereign debt problems, must pay dearly for money. Eventually, this will result in inflation in Germany and depression in Spain, and possibly Italy. With the new Hollande socialist government in France, they may become a candidate to join the Club Med.

The EURUSD has blown through the 200 day SMA, probably a signal for more shorts to exit. Until the last nervous short is gone, or new shorts are found to take their place, the EURUSD is a tricky trade.

Earlier this week, we suggested that should Bernanke start QE3, the Bank of Japan would be more inclined to take actions that would weaken the yen at their meeting scheduled September 18-19. Others may have the same opinion, as the yen (NYSEARCA:FXY) has rallied from 77.12 to 78.33 versus the USD in the last two days. The yen has also losing to the pound.

The British pound (NYSEARCA:FXB), a big trading partner with the ailing eurozone, has been a mystery. Futures traders have flopped back and forth between the long and the short side. The UK economy is not strong, but it looks like the economy is getting a boost from money moving from the euro area, Russia and the oil rich Arab countries.

In a fashion, expensive English real estate is a safe haven for those with accumulated wealth. In London, One Hyde Park has been the UK's most expensive development. There is currently a 9,000 square foot flat on the market for £65M. Many other super high end developments are under construction. Another home, with 45 bedrooms, owned by a deceased Arab diplomat, is rumored to be coming on the market. The price tag would set a UK record at £300M. But it is a very fashionable London neighborhood.

Considering the recent strength of the pound and the increasing probability the BOJ will attempt to weaken the yen, consider a long position in the GBPJPY. It looks like this pair has been building a bottom since around the first of June. With a little help from the BOJ, we might see a run back to the 1.31-1.32 area.

(click images to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.