Forex Investment and Currency Trading

Yesterday, equities sold off again despite the housing rescue bill (maybe because it really doesn’t address foreclosures that occur due to negative net equity and so is really quite a modest response – in any event, the Dow closed at a new six-year low; the S&P 500 is off 14% year-to-date); gold sold off despite the slide in equities; Treasuries sold off sharply despite the sharp widening in CDS spreads and the S&P financials sank 5.2% to the lowest level since January/95 (the credit card companies really took it on the chin). Inflation concerns were sparked by the PPI data although the pipeline measures of inflation are still in negative terrain. The Turkish central bank made a very bold policy move with a surprising 150bp cut in the policy rate to 11.50%, while the market was expecting only a 50bp cut. In this very challenging environment for risk appetite, this is likely to cause short-term weakness of the TRY.

Why the bond selloff yesterday?

First off, there were plenty of Fed speakers in the past 48 hours, including Chairman Bernanke, and hardly any discussion over the prospect of the Fed coming in and buying Treasuries as part of its quantitative easing program. Before this was seen as a possibility in early December, the yield on the 10-year note was around 2.8%, where it is today. Second, the bond market is cheapening up ahead of what looks to be a blockbuster supply calendar next week as Uncle Sam intends to auction off $155 billion of short-dated and long-term paper. Third, there has also been a heavy slate of corporate bond supply in recent weeks that the market has had to digest (then again, the corporate sector does have, according to Moody’s, $200 bln of debt maturing in the next three years so it’s always best to make hay while the sun shines). Do we still like Treasuries at these levels? Answer is yes.

Market direction

As for equities, it is quite simple. Whether you look at CDS spreads or how preferreds are acting, investors seem to be under the impression that quasinationalization may end up being the end-game. We do know that just as the financials led the downturn in the overall market by a good six months in 2007, the group will have to bottom before we can declare a light at the end of the tunnel for the overall market. Looking at the lags, the fact that the financials are still trying to put in a bottom suggests that an overall recovery in the stock market is no less than a half-year away. Besides, the financials themselves are a proxy for credit creation, and without that, the economy can be expected to either remain in reverse at worst, stall-speed at best. As it stands, the Dow is already down 47% from the cycle high, and for those who are still involved in the academic debate as to whether or not this is a recession or a depression, keep in mind that the stock market has not endured such a decline since the early 1930s. Economists believe we are in a global deflationary environment, where investors should be focusing on cash flows, not capital gains. In the equity market, it is vital to own companies that are defensive and that have a history of organic dividend payout growth. In any event, it also appears that the closer to being a consumer cyclical the greater the risk.