spring tuesday, page-5

Funnymetals.

Earnings season is over. The exuberance that has buoyed the markets with companies beating low expectations (lower than I originally thought) on cost cutting ventures as opposed to revenue increases is waning.

Back to the economic watch, for market clues, as well as the return of the missing summer volume in the northern hemisphere. Perhaps that will bring back some punters with a bit of fat in their portfolios, to spark an extended selling wave.

Meanwhile, as Japan ekes out a number that signifies the end of its recession, the yen has looked bid up against the USD, which is hampering the performances of the exporters.

The USD/JPY correlation is a weird one. For years, we've used that pair as the benchmark for derisking, i.e. as USD/JPY goes lower, stocks sell off, and as it goes higher, stocks rise.

Funnily enough, this last selloff has been largely ignored by the USD/JPY on first glance. But the spike a week ago, from 95.00 to 97.70 was noted. Subsequently, although markets made new attempts at breakouts in a higher range, the pair sold off over the week, back down to 94.50 where it has traded the last few days, despite the overwhelming derisking that has been going on.

This may be a precursor of things to come. I believe the current carry trade (short USD/long everything else) is about to be reassessed. Especially if the States are looking to raise rates by early next year.

So, if the USD/JPY selloff was a precursor to the markets falling, then one should look at the pair really closely, as if I am right, a reversion to the original carry trade would lag markets a little bit.

As for economic data, we've got a data heavy week, to lead the Dow, starting tonight.

USD PPI
USD Housing Starts
USD Building Permits

If I remember correctly, back when the USD/JPY was at 94 ish, the world was about to end. So, all eyes on that one for me. And Shanghai obviously. I think a fair few funds are limit long in China and are derisking that market. Falling 12% the past 5 days, another few more days like last night and China's going to go back into bear territory. (Did we leave it in the first place?)