New highs in equities not correlated by other markets.

Discussion in 'Trading' started by Ivanovich, Mar 23, 2010.

  1. This is not a top call by any means whatsoever. I've been posting how I've been long, with stops tight and smaller than average positions. I've also been on record as to saying that this market move up last march began with QE, and I believe it will end with QE when QE expires at the end of this month. There may be a slight lag, but that's what I believe.

    However, in looking at the currency markets, I'm not seeing the same moves I saw for the last 11.5 months in new highs of the market. Consider some pairs:

    AUD/USD - used to be tied heavily to equity appreciation. For the last two weeks it's having a hard time getting to 92 and keeping it, when in the recent past it had no problem going towards .94.

    AUD/JPY - one of the best correlated markets with equities (with the exception of EUR/JPY, which has it's own Euro related problems). Hasn't hit new highs either.

    Or what about the commodities? Gold? Nope. Silver? Un uh. Hmm...

    Makes me thing this is telegraphing the next move to come.
  2. spy adjusted by dollar index.

    you may be right about QE.

    maybe somebody could throw in some numbers to illustrate the amount of money involved to enlighten the clueless like myself.
  3. Quantitative easing
    From Wikipedia, the free encyclopedia

    The term quantitative easing describes an extreme form of monetary policy used to stimulate an economy when the interbank interest rate (in the US, this is called the Federal Funds Rate, in other countries the overnight lending rate) is either at, or close to, zero. In practical terms, the central bank purchases financial assets (mostly short-term), including government paper and corporate bonds, from financial institutions (such as banks) using money it has created ex nihilo (out of nothing).

    Normally, a central bank stimulates the economy indirectly by lowering the discount rate or reserve requirements, but when it cannot lower them any further it can attempt to seed the financial system with new money through quantitative easing.

    The process of purchasing financial assets with ex nihilo money is referred to as open market operations. The creation of this new money is supposed to seed the increase in the overall money supply through deposit multiplication by encouraging lending by these institutions and reducing the cost of borrowing, thereby stimulating the economy.[1] However, there is a risk that banks will still refuse to lend despite the increase in their deposits, or that the policy will be too effective, leading in a worst case scenario to hyperinflation.[1]

    Quantitative easing is sometimes described as 'printing money', although the central bank actually creates it electronically 'out of nothing' by increasing the credit in its own bank account.[2]

    Examples of economies where this policy has been used include Japan during the early 2000s, and the US and UK during the global financial crisis of 2008–2009.
  4. Well, the AUDUSD pair, for example, has outperform the DOW performance based on past correlations. It should be at around 0.82 based on last 5 years performance. What do you think?

    EURUSD slightly underperforms but that is due to special circumstances (PIIGS). It should be around 1.38 - 1.40
  5. Ivanovich, why do you think QE will end this month? this blog says otherwise:
    Quantitative Easing at the Fed and the Bank of Japan

    By John B. Taylor|Mar 20, 2010, 7:11 PM|Author's Website

    Next Thursday March 25 the House Financial Services Committee will hold a hearing on how the Fed should exit from its quantitative easing. This past week I was in Japan discussing the Japanese experience with QE with traders and experts in the financial sector and in the Bank of Japan. A simple graphical comparison between QE at the Fed and at the BOJ puts the exit strategy in a useful perspective.

    The two graphs show the monetary base—currency plus bank reserves—in the United States and Japan as reported by the Fed and the Bank of Japan. (The BOJ reports units of 100 million yen; thus the monetary base in Japan is now slightly below 1,000,000 units of 100 million yen or 100 trillion yen).

    Quantitative Easing at the Fed and the Bank of Japan

    The big bulges in the monetary base are measures of quantitative easing because the monetary base would have continued to grow at relatively steady pace without QE. Japan’s experience with QE was from 2001 to 2006; during those years the monetary base increased from about 65 trillion yen to 110 trillion yen, or by about 70 percent. While QE lasted for a long time it ended very quickly, and the quick exit seemed to go smoothly without volatility in the markets. Note that the post 2008 quantitative easing in Japan is very small compared to 2001-2006; thus Japan does not have an exit problem right now though it is still struggling with a deflation problem and will likely continue with its QE. Unlike the Fed, the BOJ did not think a big quantitative easing was appropriate in the recent crisis.

    Moreover, the Fed’s recent QE is quite different from the BOJ’s QE in 2001-2006:

    First, the monetary base in the United States increased by twice as much in percentage terms (140 percent) compared with Japan.

    Second, QE came on much quicker in the United States, with most of the increase in the base concentrated in the last few months of 2008, though increases have continued since then.

    Third, the Fed entered into QE when the interest rate target was 2 percent, while the BOJ started QE when the interest rate was already essentially zero at 0.1 percent.

    Fourth, the Fed’s quantitative easing has largely been caused by the need to finance its purchase of mortgage backed securities, bailouts of AIG and Bear Stearns and other loans and securities purchases.

    Fifth, and most important for the exit strategy issue: the BOJ exited from QE much more quickly than the Fed is now signaling its exit will be. Japan’s experience suggests that a quicker exit for the Fed might be considered.
  6. Goldstocks have been strong despite gold's lag.

    Normally it's a good sign as they usually lead the way.

  7. I'm talking about the MBS asset purchases, Shortie. Not very low rates. You're confusing the two.
  8. thanks for clarification.

    you are right, we should see some volatility in the market once this goes into effect. looks like Fed is ready to jump back in if the see troubles.

    " Fed Affirms Plan to End Mortgage Intervention
    March 17, 2010, 3:09 am

    The Federal Reserve on Tuesday affirmed its plan to stop buying mortgage-backed securities, expressing a degree of confidence that it could eliminate that pillar of support without undermining the nation’s economic recovery, Sewell Chan reports in The New York Times.

    The move came as the Fed voted to keep its benchmark interest rate unchanged, at nearly zero percent, citing evidence of economic weakness and little sign of inflation.

    The Fed’s purchases of mortgage-backed securities, which will total $1.25 trillion and end March 31, have helped hold mortgage rates to near-record lows, and the Fed left open the possibility that the purchases might have to be resumed, particularly if the housing recovery stalls.

    The Fed said it would “continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.”

    Marvin Goodfriend, a former research director at the Federal Reserve Bank of Richmond, said the Fed was essentially conducting an experiment by trying to end its purchases of mortgage securities. “It would like private money to come back into the mortgage market, but if the interest-rate spread on mortgages over government securities that is needed to bring private money back is too high, it could impede the recovery of the housing market,” he said.

    Ideally, the Fed would like to see only a slight rise in mortgage rates, he said."
  9. I would also add that emerging markets didn't join that party either. I January 2010 it was also the case
  10. S2007S


    They are going to test the grounds of ending the mortgage intervention, however its obvious they will end up keeping these tools in place. Just like they were suppose to stop the $8000 tax credit back in 2009, they extended it to April, just like they extended unemployment benefits for another 1000 weeks, the economy has become so used to these programs and handouts that taking them away will be a lot harder than most think, also keep in mind the longer they keep these tools in place the more the markets will rely on them. These programs being in place too long will create the next bubble and great inflation.

    #10     Mar 23, 2010