On September 13, 2010, currency traders went long the Euro-Yen carry trade, Australian Dollar carry trade, and the Swedish Krona carry trade, on global acceptance of the Basel III Accords, causing stocks, VT, to rise.
Financials, the most currency sensitive countries, and the most carry trade sensitive ETFs rose strongly. These included Banks, KBE, Sweden, EWD and Australia, EWA, Small Cap Value, RZV, Copper Mining, CU, and semiconductors, XSD. Tin, JJT, which rose to a new high above 52. Junk bonds, JNK, rose strongly on carry trade investing.
Many country ETFs, rose without support from their country specific yen carry trade. For example, Brazil, EWZ, India, INP, and Mexico, EWW, rose, without support from their respective carry trade, BZF:FXY, ICN:FXY. FXM:FXY. Tata Motors, TTM, rose to a new high.
Investors continued a flight to safety in Hong Kong, EWH, Singapore, EWS, Frontier Markets, FRN, Brazil Small Caps, BRF, Internet, FDN, Emerging Market Small Cap Dividend, DGS, and Food, FUD, that began September 7, 2010. It was at this time that the money that ran out of bonds took flight to a new home.
I believe that the The S&P, SPY, and World Stocks, ACWI, in rising to their August 9, 2010, values, has reset them for a fall lower in an Elliott Wave “3 of 3 of 3” down.
In an article for his Baseline Scenario website, Simon Johnson, a professor of entrepreneurship at the MIT Sloan School of Management, claims: “The ultimate result of Ireland’s bank bailout exercise is obvious. One way or another, the government will have converted the liabilities of private banks into debts of the sovereign (that is, Irish taxpayers), yet the nation probably cannot afford these debts.” … … “In total, the debts of Irish banks could easily result in a charge to government debt equal to one third of GNP,” says Johnson, who wrote the piece in conjunction with fellow economist Peter Boone, an associate at the London School of Economics and a principle in hedge fund Slute Capital Management. While there had been growth in GDP, Boone and Johnson said that GNP – a measure which excludes the expatriated profits of multi-nationals – had contracted, as had tax revenues and employment.” … … “Ireland, simply put, appears insolvent under plausible scenarios with current policies. The idea that Ireland, Greece or Portugal can cut spending and grow out of overvalued exchange rates with still large budget deficits,while servicing all their debts and building more debt, is proving – not surprisingly –wrong.”
EuroIntelligence reports that Hypo Real Estate needs another € 40 bn guarantees: Another shocking example of the German government’s incompetent handling of the banking crisis came over the weekend, when it emerged that Hypo Real Estate needs another € 40 bn in state guarantees. The political reaction in Berlin is one of shock, according to FT Deutschland, which carries the story on its front page. The bank wants to create a bad bank, but there are huge risks associated with this endeavour because many of the banks’ assets are denominated in foreign currency, and risky categories. And Wolfgang Munchau writes on European banks: In his FT column, Wolfgang Munchau says the Irish banking crisis is the tip of an iceberg, the resulted from the failure to resolve the banking crisis. He writes specifically about Ireland and Germany, two countries with fundamentally weak banking sectors, which is now left in some limbo, under capitalised, yet not officially bankrupt. A resolution for Ireland would consist of nationalisation, and for Germany of a massive consolidation of Landesbanken, and local savings banks. Yet, the governments are not pushing this, and Basel III’s implementation period is too long to force the change in the foreseeable future.
Since the announcement of the bailout agreement for Greece investors have found safe haven in a select few investments. The MSN Finance Chart of the Small Cap Pure Value, the Russell 2000 Value, the S&P, Europe, Emerging Markets, S&P Developed Property Excluding The US, Emerging Market Small Cap Dividends, Singapore, Frontier Markets, and Food … RZV, IWN, SPY, FEZ, WPS, EWS, DGS, FRN, FUD from May 10, 2010 to September 13, 2010, shows that since the EU Finance and State Leaders convened the Eurozone May 2010 Summit and announced European Economic Governance, seigniorage aid for Greece, and called for a Monetary Union with seigniorage authority to issue eurobonds, investors have found safe-haven in the agriculture commodities, FUD, and the frontier markets, FRN, Singapore, EWS, and the Emerging Markets Small Cap Dividends, DGS, while those invested in the US Small cap value shares, IWN, being exposed to the financial sector, have suffered great loss. And Small Cap Pure Value, RZV, has experienced great debt deflation, losing 15%.
A flight to safety from the European Sovereign Debt crisis, has propelled Food, FUD, 22%, which has seen strong gains in Corn, CORN, Grains, GRU, Coffee, JO, and Sugar, SGG, … FUD, CORN, GRU, JO, SGG …. all rising higher on bidding for Potash. And Frontier Markets FRN, has risen 18%, Emerging Markets Small Cap Dividend, DGS, 10%, Singapore, EWS, 10%.
It’s reasonable to believe that when debt deflation starts to rage again that the Frontier Markets, FRN, will maintain their value better than Europe, FEZ, and the Russell 2000 Value, IWN, as the emerging market currencies, CEW, are likely to retain their value better than the major currencies, DBV, as seen in the chart of DBV and CEW. The currency traders have been driving the major currencies of late, making a strong recovery relative to the emerging market currencies; but the major currencies are encumbered with a greater amount of sovereign debt, and will soon be falling faster and harder than the emerging currencies.
The chart of the emerging market currencies, CEW, shows that it is up strongly at 22.33.
The chart of the developed currencies, DBV, shows that it is trading up strongly at 22.82.
America with its small cap companies, IWM, IWN, and IWO, are highly dependent upon bank financing, and exposed to a flattening 30-10 yield curve, $TYX:$TNX, together with Europe, being exposed to European Sovereign Debt, are likely to be ground zeros for economic austerity, hardship and suffering.
It’s likely that those living in Peru, EPU, will experience a kinder, gentler way of life than those in the developed markets. The monthly chart of Peru, EPU, as of September 10, 2010, shows three white soldiers, a reversal pattern.
The ETF JYN appears to be topped out; closed at 70.31; accordingly, the USD/JPY may be making a reversal and going up. However Action Forex contradicts this opinion and believe the USD/JPY has more to fall from 84.138.
Bonds, BND, rose today, September 13, that is a day when stocks rose, for two reasons. First, the rush of carry trade investment; and second, the 30-10 US Sovereign Debt Curve steepened; allowing the longest out bonds to rise. TIPS, TIP, rose 0.68% to a new high; ZROZ rose 0.86%, TLT rose 0.49%, IEF rose 0.48%.
Chart of the 30-10 Yield Curve, $TYX:$TNX.
Chart of TIPS, TIP.
Notable gainers included: CU, 3.5%, RZV, 3.0%, XSD, 3.2%, KBE, 2.8%, EWZ, 2.7%, EWD, 2.6%, EWA, 2.3%, IWN, 2.4%, FEZ, 2.3%, JJT, 2.2%, INP, 2.2%, FDN, 2.1%, EPU, 2.0%, ACWI, 1.7%, EWH, 1.3%. EWS, 1.3%, WPS, 1.2%, DGS, 1.2%, FRN, 1.2%, SPY, 1.1%, BRF, 0.8%
Disclosure: I am invested in gold bullion