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Bonds Fall And Stocks Rally As Currency Traders Buy Yen Based Carry Trades

Financial market report for September 1, 2010.

Currency traders went long the yen based carry trades the first day of September 2010. They bought the Australian Dollar, FXA, the Swedish Krona, FXS, the Canadian Dollar, FXC, the Russian Ruble, XRU, the Euro, FXE, the Mexico Peso, FXM, the Brazilian Real, and the British Pound Sterling, FXB, while selling the Swiss Franc, FXF, and the Japanese Yen, FXY.

The AUD/JPY, seen in the chart of FAX:FXY, rose, causing a rise in BHP Billiton, BHP and Australia, EWA.

The EUR/JPY, seen in the chart of FXE:FXY, rose, causing a rise in European Financials, EUFN, Spain, EWP and Ireland, EIRL  

The rise in the Swedish Krona, caused a rise in Sweden, EWD.

Today’s rise in major currencies carry trade is seen in the chart of DBV:FXY; likewise, the rise in the emerging markets carry trade is seen in CEW:FXY

The world currencies, DBV, rallied stocks globally, sending Financial Preferred,  PGF, and Ford Motor Credit Co, FCZ, to new highs. Stocks rising strongly included small cap value, RZV, homebuilders, XHB, Las Vegas Sands, LVS, Semiconductors, SMH,  Small Cap Consumer Discretionary, XLYS.

The Yen, FXY, closed lower at 117.30, down from its August 31, 2010 high of 117.83. The Euro, FXE, closed up at 127.56. 

The US Dollar, $USD, closed down at 82.49.

Steel producers, SLX, Coal Miners, KOL, Metal Manufacturers, XME, Copper miners, COPX, Energy services, OIH rallied strongly.

The world currencies, CEW, rallied the emerging markets, EEM, and sending countries such as Thailand, THD to a new high.   

The purchase of the yen based carry trades on September 1, 2010, rallied commodities, DBC, causing a rise in Tin, JJT

Volatility, VXX fell, severely damaging a number of the 200% stock ETFs such as SMK, SJH, SSG and EPV; as well as the 300% ETFs such as FAZ, and SOXS. 

The purchase of the yen based carry trades on September 1, 2010, rallied stocks, ACWI; and turned the tide on bonds, BND, sending them lower, establishing August 31, 2010 as a high in bonds – establishing August 31, 2010 as peak credit.

The interest rate on the 30 Year US Government bond, $TYX, rose strongly today, September 1, 2010. 

And the interest rate on the US 10 Year Note, $TNX, also rose strongly today September 1, 2010.

September 1, 2010 marks the transition from “the age of neoliberal Milton Friedman based credit liquidity” to “the age of the end of credit”; this also means ”the end of entitlements” and “the beginning of world wide austerity”.

The 30-10 yield curve,$TYX:$TNX , began to flatten on August 11, 2010, reversing a trend that goes back to early 2000. This signals risk aversion to sovereign debt. The flattening of the yield curve came as a result of the Federal Reserve Chairmans announcement of August 10, 2010 of the purchase of mortgage-backed securities. Then on August 27, 2010, the Federal Reserve Chairman stated the possibility of an even larger purchase of debt. This caused the bond rally in US Treasuries, TLT, that began April 6, 2010, to fail today September 1, 2010 sending bond prices lower and interest rates higher. The safe haven rally in debt that began with the onset of the European Sovereign Debt Crisis is over. Investors see Mr Bernanke’s plans as monetization of debt; and have gone short US Treasuries, especially the longer out ones such as ZROZ.

The Emerging market bonds, EMB, are now in their second week of decline.

Corporate debt, LQD, Municipal bonds, BND, and California Municipal Bonds, CMF, turned lower today September 1, 2010.

Junk bonds, JNK, turned sharply lower August 10, 2010.

Today, September 1, 2010 gold mining stocks, GDX, manifested bearish engulfing and falling 1.4%, on a day when stocks, ACWI, rallied 3.0%.  The gold mining stocks generally make market turns lower with debt. This is seen in the harami in chart of the precious metal mining shares, $HUI, relative to US Treasuries, $USB … $HUI:$USB.

The junior gold mining stocks, GDXJ, rose some, forming a lollipop hanging man candlestick, suggesting that their rally has come to an end. 

The rise in the 100% inverse of the Canadian gold mining shares, HIG.TO, suggests that gold mining stocks are disconnecting from the price of gold.  As the world goes into double dip recession, carry trade disinvestment will rapidly come out of these high PE stocks.

Distressed securities, traded by Fidelity Capital and Income, FAGIX, are the type of debt acquired by the Fed through its QE TARP facilities; these turned lower May 4, 2010; but closed up 0.8% today. 

The 300% inverse of the 30 Year Treasury, TMV, rose from its August 31, 2010 hammered bottom.

The 200% inverse of the 30 Year US Treasury, TBT, also rose from its August 31, 2010 hammered bottom.

Debt deflation came to stocks, ACWI, April 26, 2010, when the currency traders sold the Euro, FXE, against the Yen, FXY, causing the US Dollar to rally to $82. Today, September 1, 2010, debt deflation has come to Bonds, BND.  

Debt deflation is the contraction and crisis that follows credit expansion.  One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion.  The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares.

It was on April 26, 2010, the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010


Commodities, DBC, turned lower on May 15, 2010 as China announced credit tightening. Now that commodities, DBC, stocks, ACWI, and bonds, BND, have turned lower, the world has entered into Kondratieff Winter. Wealth can only be preserved by investing in gold bullion, $GOLD, and silver bullion, $SILVER.

Disclosure: I am invested in gold bullion