I … Introduction
The Euro Yen carry trade and the Aussie carry trade faltered, sending European and Asian stocks lower sharply lower.
US stocks fell moderately lower as bank shares fell.
US Treasuries rose.
The testimony of the US Federal Reserve Chairman given before Congress confirm that the world is in a debt deflationary bear market, where the banking core of the world’s financial system is being destroyed by falling currency values, with the exception at the current time of the Swiss Franc, the Japanese Yen, and the South African Rand.
The greatest debt deflation is coming to Spain with its ill-liquid banks, and the US where banks are loaded with toxic and unproductive debt, as well as to Australia where housing prices are terrifically inflated and banks are having difficulties.
II … The US Federal Reserve Chairman gave testimony stating that recovery is “unusually uncertain”.
There had been growing expectations on Wall Street that the Fed chairman would give a clearer signal about additional steps the central bank might take to spur the economy in the face of growing weakness.
Instead, his semi-annual testimony offered little new policy direction, focusing on expectations that economic growth would allow the Fed to eventually pull money out of the system and raise short-term rates, as the economy improves.
And while he acknowledged growing signs of weakness in the recovery, he gave a vote of confidence that the economy would avoid falling into another recession in the near term.
“We don’t think a double-dip [recession] is a high probability,” he said.
Some economists have questioned whether the Fed has run out of options by keeping rates near 0% for the last 18 months.
Bernanke said the Fed still has tools necessary to spur growth, even with interest rates unable to go any lower. But he gave few details about what the Fed might do if it decides the economy needs more help.
“We have not come to the point where we can tell you precisely what the leading options are. Clearly each of the options have potential drawbacks,” he said in response to questions. “They’re not going to be the conventional options. We need to look at them carefully to make sure we’re comfortable with any steps that we take.”
III … The euro yen carry trade faltered at 2:00 PM July 21, 2010, falling lower to 110.06.
The EURJPY traded on July 20, 2010 at 112.80. But gapped open lower today July 21, 2010 at 111.80, and then traded lower to 110.06, taking the European shares lower. Chart shows today’s fall in the EUR/JPY:
Chart shows today’s fall of the Euro and rise of the Yen.
The Euro, FXE, closed down 1.3% at 127.27.
The Yen, FXY, closed up 0.5% at 113.80.
IV … The Australian Dollar carry trade faltered at 2:00 PM on July 21, 2010.
The chart of the Australian Dollar, FXA, shows it fell 0.6% lower on July 21, 2010 to 87.99
V … In other currency news and commodity news:
The South African Rand, SZR, rose 1.0%.
The Swiss Franc, FXF, rose 0.3%. Ambrose Evans Pritchard reports in Swiss Endure Safe Haven Agony From Euro Flight that Switzerland is fighting a losing battle to stop massive inflows of funds from investors fleeing sovereign risk in the euro area and the rest of the world, raising the risk of a violent spike in Swiss franc if global debt jitters return.
The US Dollar, $USD, rose 0.6% to 83.27 today.
Competitive currency devaluations commenced June 18, 2010 when the US Dollar, $USD, fell below 86. It was shortly there after on June 21, 2010 that the Russell 2000 shares, IWM, experienced severe debt deflation falling below 66 to 65.89. Chart shows the US small caps fell much faster than the Emerging Markets, EEM, and the Brics, BIK; and in fact the performance of the US small cap shares fell below the performance of the basic material shares, XLB. Chart reveals that the very core of the US, IWM, like the periphery of Europe, EWI, and EWP, is experiencing severe financial meltdown compared to the emerging markets like India, INP, and Brazil, EWZ. The words of Nicole Gelinas writing in ResearchMag.com article Europe’s Debt Crisis And Ours, give a clarion call that on both sides of the Atlantic, politicians are failing to face up to economic reality.
Today’s 1% rise in base metal commodity prices, DBB, kept basic material, XLB, loss to 0.3%.
VI … Finviz Screener shows losses were greatest in Europe, then Asia, then in the US:
European loss leaders:
EWP, -3.9% Spain is at the epicenter of the Europe’s banking system difficulties.
Pacific loss leaders:
EWA, -2.2 Think of Australia as the banking ETF of Asia as this ETF is composed largely of banks.
US loss leaders:
VII. Stocks that fell the least today included the following; seen in this MSN Finance chart
VIII … Debt And US Treasuries exploded higher July 21, 2010:
IX … Proshares Bear Market ETFs gained as follows:
JPX: +4.8 .… 200% inverse of Asia
SRS: +4.0 …. 200% inverse of Real Estate
EPV: +3.9 … 200% inverse of Europe
SSG: +3.8 … 200% inverse of Semiconductors
SJH: +3.8 … 200% inverse of the Russell 2000 …. This has been one of the most consistent bear market performers; along with the Direxion 300% inverse of the Russell 2000, TZA … as the Russell 2000, IWM, has suffered the most debt deflation since the currency traders sold the world’s currencies, DBV, against the Yen, FXY, on April 26, 2010, as concerns grew to a climax over the European sovereign debt crisis.
Disclosure: I am invested in gold coins