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beHappy - Fundamentals

Discussion in 'BeHappy by Tautvydas Marciulaitis' started by TMarciulaitis, Nov 23, 2012.

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  1. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    In this section you will be able to find my fundamental market analysis. Most of the time it will cover range of markets and how events may impact them. I will offer some insights about intermarket relationships and etc. Some things here may be similiar to FX analysis, as I trade mostly on FA, but in general you will find some broader views here.
     
  2. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    2012.11.23 Fundamentals

    Last month we have witnessed run to safety or risk-on. US bonds went up, so as BUNDS. Euro broke from a channel for a while after US elections and it seemed like it should go down at least for a while. In addition, stock indx went down in whole world and EURO periphery bonds didnt seem to strengthen more. But well, as it sometimes happens, markets decided to change its views. So lets see some pictures, it will be easier for everyone to understand.
    First of all, US bonds:
    USBD25yNov12.

    As you can see, yields went down for some time and then it started to bounce back. So even though it seemed like risk-on, now this contradicts it a bit.

    Germany:
    GERBD25yNov12.

    Same story.

    Euro periphery (ITA and SPA namely)
    SPITBD25yNov12.

    Yields stopped going down, but there is no obvious upside movement. So it either means that money is not leaving these bonds, or that ECB is standing there and trying to hold the yields. Both scenarios are plausible, but I doubt that money should be going out of there. Just stopped flowing in.

    And now EUR/USD:
    EUNov12.

    Was going down with bonds (money outta periphery to SH at US), but now it just started to move up !
    In general: US bonds down, GER down, EUR up. Looks like risk-on, yeah ? But wait, periph bonds standing in one place ! And same goes for exotics in FX (more or less). Then where the hell is money flowing into ?
    Simple answer guys: stox ! Just take a look at indices all over the world, they are going up. Its a risk-on in a stock buying form. There may be couple of reasons for this. First is pretty trivial: indices were going down for quite a long and now investors decided to buy at lower levels. That may be true, but this is not the whole story. Remember, today is the Black Friday. Everyones buying everything, spending the money they dont have and things they dont want and will prolly never use. New iPhones and xboxes for 5y olds, jewelery for lovers and pots and pans for spouses, useless Margarita machines for oneselves. So this should boost profits for Q4 and maybe some of those will turn into dividends. Aha, got it ? But this is still not it. As mentioned, its Q4 time. End of the year. Stockholders are willing to see profits. Markets want to see profits. CEO's want to get their bonuses. THERE HAS TO BE PROFITS ALL AROUND ! So everyone is trying to do their bests just to make books and balance sheets work. Does not matter if its tail-gating, front-runing or window dressing. Just get the books cooked with less dirt.
    This happens every year. It may be not that stocks shall go up for further long. And it is not that euro gained the confidence back. Its just old Uncle Sam is making his anual thing, while poor USD has to suffer. I dont think its euro gaining, just look at other EURO and USD pairs it will be clear that its not euro gaining, its USD going down. So unless problems at Europe are getting solved over Christmas period, I do not see why after holidays break we should see more up action. Of course, do not forget that as long as ECB and Draghi are here, short term periphery bonds are a safe bet. But lets wait for next year and see. For now we have EUR/USD going up after stox. And thats great, we can ride with it. Its start of the season and end of the year. So have that in mind friends.
    I think GBP is better investment atm than euro. Even if euro falls apart, GBP will stay where it stands. And its not 100% correlated with euro. So if you want to short USD, i would suggest GBP for you. Or NOK. Both pretty good choices. Just mind the swap.
    Also stocks still look attractive. Might be dips along the way, but cmon- its the season ! Shouldnt just crash in next few days. At least do not hope so :)
    Well I guess thats that. Just some general thoughts about markets, where we stand now and where we are going. For the end, I will leave you with sentiment index. Of EUR and USD. This is data from CFTC called commitments of traders. And it shows what combined options and futures positions do large traders have on these currencies.
    Have a great weekend !

    COTEURUSDNov12.
     
    #2 TMarciulaitis, Nov 23, 2012
    Last edited: Nov 23, 2012
  3. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    For those too lazy to check, two more pictures. EUR and USD against some other curr:
    EUROinterNov12.
    USDinterNov12.
     
  4. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    Fiscal Cliff

    For the last couple of years, financial world acted quite simple. Headlines were all about either European Debt Crisis or something in US. Bad news about EU periphery were followed by something from US (Greek default->US debt ceiling). So reviving talks about fiscal cliff should not be seen as anything new.
    The fiscal cliff was here for couple of years. It is not a new phenomenon. It may be new only for journalists, who have nothing to write about and so remembered this thing. And what they write looks pretty scary. So I will try to explain in a simple manner what the fuzz is all about.
    Basically everything started when Bush was still in the office. He approved some tax exemptions and spending reforms. That was not that bad call, given that economy was booming. However, when GFC came on 2007-8, these tax exemptions made the budget deficit and debt go through the roof. With bailouts, quantitative easings and such tax exemptions do not look as such a good idea anymore.
    This year most of Bush reforms will expire. Increasing the tax burden and maybe cutting some of federal spending. And this is the fiscal cliff. It is called so, as some argue that with increased taxes, people will have less disposable income and so will have to consume less. Decreasing consumption will make the GDP shrink, what in turn can create more unemployment and poverty. Argument sounds reasonable, but carry on with me.
    Most of the exemptions were put on richest people. Yes of course they create jobs and so on. In some mysterious wonderland. In reality, these people have great accountants who are able to manipulate taxes as they wish. Thus, most of the exemptions actually just make life easier for accountants. Nothing more. Just think about it: what a businessman would close his firms or move his business out of the country after 1 or 2% increase in taxes. This is plain rubbish.
    In my opinion, what would actually happen if US goes over the fiscal cliff (lets all the exemptions expire) in the worst case scenario is that Glenn Beck and Bill O’Rilley with all the FOX team would cry themselves to death. And well if that’s a sacrifice US has to make to get their deficits and debts back on track- I would say go for it.
    Because if Congress and President decide that it is not a good time now to increase taxes, deficit will continue to grow. So as the debt. One way or another, that will have to be taken care of one day or another. The longer one puts it off, the more consequences will hurt. Therefore situation can be summarized simply: either US takes the medicine now and gets over it, or it puts the unpleasant moment off so that in the future medicine and illness get even worse. You cannot run from reality forever.
    On the other side, I see this fiscal cliff something as debt ceiling discussions. Debt ceiling was about the money US has already spent. Fiscal cliff is about taxes that should have been collected. And it does not matter what decision will be made. Skies will not fall. Trust me on this one.
    Financial markets may react in a few ways. My predictions, even though I hate to predict things, go along these lines.
    Investors will look for something safe. The problem is that the safest thing around is USD. And fiscal cliff is happening in the US. Simple maths, USD is not a good candidate. Another market that is usually chosen when looking for safety is commods. So I would expect increase in commodities and commodity-based-currencies prices. Maybe some of the capital will go to JPY and BUNDS. Keeping it more simple, I would expect USD and USD based assets to depreciate. Same goes for stock markets. Equity markets rarely perform good during times of turbulence.
    But never bet a farm on these things. It might be the case that investors learnt their lesson after the debt ceiling bubble. And no one will care too much about this fiscal cliff thing. But hey, it is always best to act rational. And rationality says that USD should not be the most preferable good in the market. So lets not go against the market.
     
  5. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    Gold Crash

    Maybe the title is a bit exaggerated, but well, more of you will open and read this. So today we saw pretty fast crash in gold price. I was not able to watch this, but heard that some people even got their orders closed not at the desired levels. Also heard number of explanations about this price action. Some of those are somewhat plausible, but some look pretty silly. So I will try to give mine.

    Ok, first lets look at what we have. Chart of gold futures price action today:

    GoldCrashTickNov12.

    This is tick charts. 133ticks are aggregated to form a candle. In less than a minute, gold price went down by about 26USD or 1.5%. Say whatever you want, but I consider that to be significant. Take a look at daily chart:

    GoldDailyRangePRCNov12.

    Today’s range is something around average daily range over past few months. But it happened in less than a minute !

    Try to remember, if you have seen something similar happening. Well we all know about the flash crash, but lets concentrate on the gold market. On what instance did price crash quite heavily in a matter of seconds?

    You should remember at least one. Gold crash in April, 2012. Back then price of gold went down by ~100USD. That movement was not as quick as today’s, but well, it was 3 times larger.

    If you were in the markets back then, you should know that huge recalls of physical gold were made, which lead to that price crash. You may ask how couple of recalls can make the price crash. It is, nevertheless, increase in gold demand. Pretty simple. Notional value of derivatives on gold exceeds the real value and reserves of gold by a number of times. So pieces of paper, which you call future contracts, are not fully covered. Or to say, they are next to worthless. However, clearing houses and exchanges have to have gold in their warehouses. In case someone wants to convert their paper into real asset. So when someone wants to exchange a paper into gold, which prices are pegged at 1:1 ratio while the ratio of real assets to paper is N:1, paper prices fly down obviously.

    So I hear you saying: but wait, future prices go after the real assets prices. And you are right. That was only the first part of “why”. Second is a bit more interesting. Even you may have heard that this whole universe is going to crash soon and you need to buy gold and only gold to survive, reality looks a bit different. Gold World Council release statistics on gold from time to time. The similarity between most of them is that demand for gold keeps going down, while supply keeps increasing. They also show which industries use gold the most. Percentage of gold used in financial industry climbs up every year. So this adds up to what I told you up to now. Notional value increases, some entities need real assets due to regulations, quantities of gold used in financial industry goes up. It is costly to store gold for these entities. It is more painful, as they cannot use it in any other way, but storage. And they do not have any kind of time horizons, when and how much of their stock they will need.

    Okay, back to price crashing now. When someone recalls gold, as already explained, value of worthless pieces of paper go down. In addition, warehouses, for whom to store gold is costly but to sell is profitable, are racing to sell it off. Thus creating over-supply of an asset. And so double down effect on gold price is created. No one wants to buy futures at the end of the month and warehouses want to get rid at least of some of their holdings. Prices crash.

    As you see, logic is simple. Now why do I believe that we had same kind of situation today ?

    Well first of all, no news was announced. Nothing serious happened in the fundamental front. Overall, this was more or less a calm day in the markets. In addition, timing is interesting. It’s a calm day at the end of the month. Middle of the session between London fixings.. So one should not expect lots of movements. But from somewhere such a massive order comes that prices go down 1.5% in less than a minute.
    It is definitely not futures traders. Those guys have no impact on price. It may have been someone at bullion market. But well, to conduct such large orders not by dark-pools or face-to-face agreements, its not rational. So I do not think that a guy came in somewhere and started to shout SELL 100metric tons @ MKT, GTC. And it was not a dark-pool for that instance. Look at tick data. There were gaps, but price stopped moving at certain points and tried to hold. This was going into market live.

    Well of course, one can say that someone was adjusting their portfolio and sold some physical gold in just to get cash. But with current interest in US fixed income, I do not see anyone buying even more USD by selling metals. Only insane hedger would do that.

    Therefore my best educated guess is that someone recalled large quantities. By doing so, warehouses and physical sellers had some time to react and offer different prices. And order was partially executed at those. But with gaps, as some were afraid that they will not get any kind of action at all, so pushed their prices down. This is the most reasonable explanation I can come up with.

    So what can we make out of this action. Well, to be honest, more or less nothing. It was one entity doing its own business. But its better not to make anything out of nothing, rather than create some fantasies and trade according to them. This may affect gold price for some time. But overall, EUR/USD will affect gold more. For sure. And yes, one can try to buy and wait for gold to come back to its previous levels, as this price action has no fundamental backup, but be careful. Someone else may also want to recall.
     
    #5 TMarciulaitis, Nov 28, 2012
    Last edited: Nov 28, 2012
  6. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    It’s winter. Last month of 2012. So we are moving towards yearly close. And as always, everyone wants to close higher than they opened. Markets show that pretty well. Especially- stock markets. And well, what else rather than capital markets would want to close higher than they opened.
    The money is flowing out of U.S USD. Same as out of JPY, but we should attribute that to Bank of Japan more than market. Anyway, we are moving out of so called safe-heavens. Gold is also going down, despite USD depreciation. So where all this stream of cash goes to ?
    Well, Europe’s bond yields are red. And not only semi-core or core. But also periphery. Ireland looks great, think no one remembers the times, when it was something like Greece is today. Well of course, that’s a different story. Ireland managed to cope with problems better than Greece. Or most of the other European countries.
    Interesting thing is that US bonds do not show much of depreciation in price. Especially short end of the curve. This is indeed interesting, while USD is actually depreciating. And this usually means outflows out of bonds. Most agree that US treasies are overpriced. But for some reason their prices are least to say stable.
    Looking to the stock markets, we have seen a great bounce up from the middle of last month over the world. Investors are getting back in stocks. And not only investors. Companies want to end the year in profit. They want to earn their shareholders some dividends. Well, market participants know that and also want dividends. So they jump on the bandwagon. This creates a double-down effect on stock prices, which was the main cause of such a rapid growth on indices.
    And well it seems that movement up stalled in the markets. Looking to the bonds and stocks together- it seems that some of the money might go back to bonds. But on the other hands, year is not over yet. We shall see some more movement up in stocks.
    More or less everything is going up. So why would USD depreciate. And why would gold go down. Investors swap their money between fixed income and capital markets. All over the world markets react in the same way. This means there is not much international capital movement. But there is something you might have missed.
    First, earlier mentioned Japan. Bank of Japan forces investors out of JPY. And this feels at the longer end of the curve. Bond prices jumped a bit. But not much is happening on the short end. This might be due to that short term investors still think they might get out until yen depreciates too much. While longer term investors may have some better inside information. But that is only speculation with a limited information. Nevertheless, if BoJ keeps on pressing JPY down, expect movement on the short end of the JPY bonds curve. It will happen. If you want to play safe, just go into flattener.
    Japan was not the interesting part. China’s bonds are depreciating all along the curve. Someone is selling them out while buying either US or EU bonds. My bet would be on EU. China dumped quite much of US debt into the market during this year so I do not see why would they get it back at worse prices. It has to be Europe. China is buying Europe since last year. I think you remember how EUR/USD was acting for couple of months, when orders from China were coming in. There were very strong bullish momentum and movements.
    The strange thing is that money is not moving out of India, Russia or other BRIC nations so fast. I would expect investors to dump all the emerging markets at the same time. This might be due to that China’s economy has been called overheated a number of times. And as Europe and it’s consumption is crashing, China might go down sooner than other emerging markets.
    It is overheated, it relies mainly on exports (most of which go to Europe) and they enjoyed cheap labor force. All of that combined might be a signal for larger investors to get out and go to underestimated capital markets. Or maybe synthetize products out of stocks and bonds.
    In addition to the named facts, China keeps CNY at really low levels. Given decreasing purchasing power of Europe and increasing labor costs, People’s Bank of China may well decide to even more decrease the value of CNY. These hopes may be even more exaggerated by the fact that CNY is appreciating. Given China’s bonds performance- it is strange.
    Given the fact that there is so much capital in China, enough money should land all over the world. Primary target is Europe. It is getting better and better. Even though no real changes, but policies are taking their toll on deficits and spending. We are moving towards German model. In addition, for a long time now (I remember hearing it first in the summer), EU stocks are very undervalued if compared to US counterparts. Same goes to EU bonds. Some smaller countries with worse ratings are actually as cable of paying investors back as US. So why to choose lower yields.
    And we are still left with gold. Well, I do not believe many are selling gold. But China may be doing that. They need more and more money to fund their public projects. After selling US bonds and now selling their own, they still need other sources. They cannot lose all debt they hold as that would mean letting their debtors free. So they well might be selling gold. I think this is true for such countries as India or Russia also. Especially Russia as they rely on commodities very much, there is a need of diversification. As a need of fixed income products.
    Another thing is that gold became very volatile. Market is quite shallow, physical gold is not that easy to find. And only financial world actually needs it. While trading paper gold became a game for gamblers. Volatile market, unpredictable moves, possibilities to corner and outplay small investors, dependence on price of USD- it is all true for paper gold. So it is not strange that some investors are getting out. They might have some of physical left in their portfolios. But rather a small share. Meant to hedge against depreciation of USD and crisis.
    This is the current situation we are in. End of the year. And it is an interesting end of the year. One should search for opportunities in fixed income and currencies related to their findings. Same goes for stock markets. If some countries around Greece have undervalued markets just because they happen to be somewhere around Greece, it is a good deal. Sooner or later someone will take it. EUR should also look strong for the rest of the year at least. Fiscal cliff is coming, USD assets are a bit overvalued, Japan kicks everyone out, so Europe is the place to put your money. If you are afraid of EUR, go to the Britain. It is safe there. Or Scandies- always a good choice. And there are many possibilities to perform trades on bond markets: flatteners, steepeners and everything you may think of. Just use your fantasy. As Mr. Jessie Livermore wrote “Well it is a bull market, you know”.
     
  7. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    Lord Ben

    Uneasy morning. Ben woke up still thinking about what he should tell his friends this evening. He is the king of the FED castle. And there are millions of peasants waiting for his decision. High Lords of the FED are also waiting for his thoughts and wishes.
    Ben knows that peasants trading food and other goods among each other think that he will give everyone even more coins to cure the struggling kingdom. But he struggles himself. He has to stop twisty operations to do that. Up till now, he was twisting quite much, to lengthen the time, when his kingdom will have to pay the debt. And kept borrowing costs for short term low. While on the other side, his generous giveaway of coins decreases cost of borrowing for the longer term.
    However, time came when he has to decide whether to keep doing twists or not. If he should increase the supply of coins or not.
    If twisty operations stop, Ben’s land will see dark days. Costs at which others will lend to him for shorter term will definitely increase. He does not want that. It will be bad for everyone. His poorest creeps, who do not even work now for the goodness of the kingdom, will live even worse, as Ben will have to pay more to his creditors. Being a graceful lord, he does not want that.
    On the other hand, as said before, he knows that peasants expect an increase in supply of coins. But that is not a big problem. The larger problem is that his generals at his best Goldman legion also want more coins. And Ben cannot mess with those guys. They are the backbone of his kingdom. And well, to be honest, large supply of gold decreases coins value so partners at other kingdoms will buy more goods from Ben’s manufacturers. That is good, that is what everyone wants. So one thing is sure- he cannot decrease supply of coins. No matter what happens.
    There are two things he cannot do: decrease supply of coins and stop twisting. But he cannot accommodate everyone’s wishes also! There is not enough gold in his treasury.
    Ben thinks hard. He wants to do the best thing. Wrong decisions are not welcome. He knows that rich peasants and lords from other kingdoms like his debt. They are buying it. So twisty operations may be decreased by a bit. He will be able to save some coins this way. And what is the best, he might give them away to his generals! But not too much. Twisting is still very important.
    Ben feels happier now. He found a way. Of course, no one will be too happy. He knows it. But at least, kingdom will be well. Small decrease in the number of twists he does, accompanied with small increase in generosity is definitely the best option! Expectations of peasants will be fulfilled, manufacturers may be able to sell more goods and employ more creeps, borrowing costs will not increase and, what is the most important, Goldman legion will stay loyal.
    Decision is made. Now it is time to present his ideas to the High Lords of FED and hope that everyone agrees with him. Now it is time to think how and what to say. But this is easy part. Ben studied things about money, expectations and decision making. So he knows how to lie and do what is needed to be done for kingdom’s well-being.
     
  8. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    You Go BoJ

    Over the last few months, yen lost a lot of value. It used to gain it for what can most of the traders remember. And yen was always considered to be among safe-heavens. Places, where investors put their money, when things go wrong somewhere in the world. So either there is nothing wrong with the world, or yen is acting strange now.
    It depends how one defines “nothing wrong”. Europe is still struggling with mass of insolvent banks. Mario, even though implemented a lot of policies, did not manage to achieve any real changes. Whole Euro zone is still crawling out of the debt cave. Really slowly.
    Over the ocean, we have U, S and A. With its own debt, bunch of wars, uncontrolled shootings and fiscal cliff. You name it- they have it in USA. They look better than EZ, but still, Bernanke needed to change TWIST into something like new QE just not to let economy go back into recession once again.
    Asia is also struggling. China selling US and it’s own bonds, trying to boost their economies through different projects, such as fast speed railways and similar. Their exports dropped vastly due to problems in Europe. That affects manufacturing, consumption, unemployment and wages.
    Russia, Australia, India, Brazil- everyone is not doing that well do to systematic problems and systematic risks. Financial sectors and even real economies are too interconnected overall not to feel implications if some of the partners struggle. Not to say, if two largest and strongest partners struggle. Namely, Europe and US.
    But the fun part is that everyone is still in fixed income. Mostly bonds. And bonds of both EU core/semi and US are increasing in value. Even though there is so many concerns over these continents, investors still choose them as the safest places on earth. Not even fixed income. Capital markets are also going north. Just look at some stock indices. But there is too much to say about how and why they are increasing. Just know two things: end of the year (Q4) and liquidity from the banks from the central banks’ QE.
    So lets now go back to yen. There are obviously many things going bad in the world. Fixed income is still popular (signaling lack of confidence in the markets). Developing markets are not doing that fine. So what the hell is going on about yen ?
    Wrote about this some time ago. New government not once said that they will ease monetary policy and money even more to decrease the value of yen. So Bank of Japan (BoJ) will have to do number of different things: from quantitative easings to interventions. What is the most important they have done some interventions this fall. Just to show that they are not defending some particular level, but rather are dedicated to decrease the price of yen.
    Investors noticed that. They know that new government and BoJ will try to devalue yen. The price action is expression of these expectations and actions. Market becomes drier and drier as investors pull out their capital. When BoJ tests the market with intervention, even less money is needed to achieve large effects. So X/JPY pairs start to fly.
    Expectations are well shown in the bond market. Yield curve becomes steepening. New policies and actions did not affect short end of the yield curve yet. It is pretty stable. But long end (10yr) climbs up. Thus, yield curve is steepening, showing that investors are uncertain about the long term. This is not a good sign.
    For countries like Spain or Ireland, short end is usually barometer of investors’ expectations. Countries are not stable, they offer high yields and so investors buy assets with shorter maturity. For countries like Japan or UK, this is true for the longer end. They are considered to be safe, thus investors put their money in longer term assets. Therefore, flight of capital out of longer term Japan bonds is something similar to flight out of 2yr ITA.
    All of this means two things for us: do not fight the central bank and use the situation properly. I think that one could do steepener on the Japan’s yield curve. Or simply short yen against some strong currency as GBP. And the advice of the day: do not open JPY longs now. Not shorting it is a safe bet. Longing it not on intraday or scalp purpose is a suicide mission.
     
  9. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    Something From Nothing

    You may ask why I am quoting Lawrence Krauss. Well, simple reason- Fiscal Cliff. So much fuzz was created around this topic, while nothing really happened here. Let get couple of things clear: they had to have an agreement and it was supposed to be a compromise. These were well known facts. And to everyone’s surprise: that is what they did !
    Unbelievable.
    Agreement itself is really not that interesting. Keep taxes for rich but do not touch anyone bellow ~half mil per year. That is the essence of this agreement. Many analytics thought something along these lines will be decided. Congress and parties are fed up with being called puppets of large corporations and Wall Street, so they did not want to leave tax exemptions for rich. Especially when Soros with Buffet came forward and asked to raise taxes for them. On the other hand, by not increasing taxes for poor kids, they look like good people. “We know it is hard for you, so we will let you enjoy exemptions for a bit longer”.
    Leaving everything aside, this is the most rational decision. Even naively believing that rich actually pay their taxes, they would feel new taxes less than poor. So investment and consumption on luxury stuff would not decrease by much. By taxing jobless poor more, one would definitely harm consumption and maybe investment. Also, shady side of economy would increase definitely.
    But when we look at reality and agree that most of the rich do not pay all of their taxes so they could not care less about somewhat increase in what they have to pay, situation becomes even more transparent and absurd. In reality, nothing changed. It is a nominal decision. Increasing tax to rich and leaving poor majority with the exemptions is essentially the same as saying “let’s leave all the exemptions for everyone”. Okay, not the same. But the effect of these changes is so small that no one should notice.
    But we might see the effect. Because economics is not about numbers. Psychology plays important role here. Now people will think that government care more about them than large corporations. When they see a new Bentley they will think “haha pay taxes for that you rich”. This will create two effects (maybe more, but these are the main): poor will feel less miserable and psychological segregation will increase.
    Second is a long term issue, while first is a short term. But as the Congress and Presidency last for around half of decade, who cares about the long term issues. Hip hip hooray, we fixes the problems for a while.
    So we arrive at the beginning. So much was created out of nothing. Fiscal Cliff existed for number of years. Simply no one wanted to talk about it. When time came, they chose the easiest solution which looks as the best in the short run and is only nominal. One problem solved, another created, nothing really changes. Therefore, I do not understand why everyone is so excited about this Fiscal Cliff thing. Nothing happened, nothing really changed. Anyone without any superior mental abilities could have guessed that something like this will happen.
    But here I am writing about it and You reading about it. Strange world.
    Just remember that nothing fundamentally changed in reality. Markets will react only on emotions, not real changes. Treat these reactions as such. Do not have false hopes and delude oneself that macro factors changed. They did not.
    Better go and sell some JPY. We have a central bank and government aggressively pushing it down and investors running out of bonds. Why to waste time and guess about what is happening here. Or go and sell some AAPL. Also pretty clear situation.
     
  10. TMarciulaitis

    TMarciulaitis Macro Analyst at EFEForex

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    Back to Reality

    Let’s get over fests and holidays. It’s time to come back to work. Back to reality. I hope most of you already started to work last week, however I am just starting now. So lets start this year with overview and commentary about world markets.

    Fixed income for starters.

    US bond markets look a bit strange. Since the beginning of the year, demand for short end of the yield curve was obviously higher than for longer end. So yield curve is becoming steeper. Since Jan 1st, yields on 1yr US govies remained more or less constant, while for 10 and 30 years it increased quite much and quite rapidly. Maybe some businesses and investors were in bond markets just for the tax shield. There are no good reasons for investors to flee these markets at the moment. There were no real changes in the outlook of US in the long run, unless some funds feared some more downgrading to come. But that does not seem logical. So there is a run out of longer term US bonds, but I cannot find any good reason for that.

    To Europe. In Germany, situation is exactly the same as in US. Short end remains stable, while there is a large increase in longer term yields. Once again, I would bet on tax shield stuff. There is no reason at the moment to run out of safe-havens just after the New Year. Looking at more interesting places, Italy remains more or less stable at historical lows. Same cannot be said for Spain. Money outflow is visible over the whole yield curve. Maybe a little less on the short end. But that is reasonable, as everyone knows that Draghi will not let short end go up by too much. And well, there is less and less talks about European Debt Crisis. Everyone was focusing on Fiscal Cliff, so markets look pretty calm in Europe. One should not expect too many changes here, unless something interesting happens. But periphery is dealing with its problems and Germany remains stable as always. So nothing new here.

    Japan now. With actions from BoJ and new government, yield curve is steepening even more. Longer end climbs up gradually but consistently, while shorter end revolves around one point more or less. Like I wrote some time ago, this is not strange. Japan is safe country and so investors put money into longer end. When price of its currency starts to drop by double digits, its time to get out. That is what they do. They get out of the longer end. This should not last for much longer. Even though exporters should be happy, many companies trade in derivatives and did not plan for such a high drop in prices. Imperfect hedges, risky positions and etc should be eating up companies’ profits. Also, importers should not be happy. So we might expect increase in price of yen. Unless BoJ does not give a single… and will go on to push yen down.

    Australia is getting cheaper over the whole yield curve. This started in the mid-autumn, after in August several large mining companies declared they are going out of the island. That gave a start for severe decrease in AUD which later on lead to money outflow out of the bonds. Even though in currency markets, aussie seems to be more or less stable, bond markets, especially longer end, are getting cheaper. This might indicate that aussie did not hit its lows yet and more may come.

    Ok so that was fixed income. Time for capital.

    There is no need to divide these by country. All around the world stock indices are in the stable-increasing position. Prices are going up or just remaining stable at quite high levels. As I wrote before, everyone wanted to close higher than they started. Thus pushing stock prices up for the end of the year. Now it will be interesting to watch. We should see some fireworks, as sharks will start slaying retailers. Some profit fixing and asset reallocation needs to be done at high levels, so we should see some sell-off. Question is whether there are enough retailers to hold stock prices at these levels, or will we see a correction. Time will show.

    For the currency markets, there is nothing new here. Except for yen, which was spoken about numerous times, there is more or less nothing happening. These are good days for day-traders and scalpers and rather sad ones for position traders. Volatility is quite high, but we are getting nowhere. This reflects the situation in other markets. There is no obvious demand for assets of some particular country and so there is no obvious demand for a particular currency. I hope we will get out of this stalemate in a few months. For now, just day-trade the market. That is my best suggestion.

    Last but not least, commodities. I will dismiss gold and silver from this analysis, as I believe those are not real commodities. Silver- maybe, but definitely not gold. Gold is useless shiny junk. That’s all to it. Otherwise, prices of commodities, except for natural gas, went up. Once again, it is seasonal. There is more demand for oil and less supply of grains during the winter. Therefore, such price action patterns should be expected. As for natural gas, it’s prices are falling. There can be number of reasons for that, but as I am not sure why and how this happens, I will not try to guess. Anyway overall we what we would expect, taking seasonality into consideration. In addition, commodities are usually connected with USD prices. As USD is going nowhere, it is now up to demand and supply of commodities. I will not start to name what fundamental issues affect what commodities, as that is finance 101, but just keep an eye on these markets. They might be a good indicator sometimes.

    Well that’s that. A brief overview of financial markets around the globe. Hope there will be some more interesting things in the next few weeks or at least months. For now, just trade safe and have green days !
     
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