There is massive unwinding in the Yen/Euro cross, which has moved from 169
earlier this month to 162. It is being unwound violently and this does not bode
well for risk appetite. Credit fears continue to spook the market and fears are
spreading about banks' growing exposure to LBO debts.
Not only was the stock market hit hard yesterday but also the commodity
markets as investors and traders liquidated. As the saying goes, Sometimes it
is not what you want to sell, but what you can sell.
The plunge of the last 24 hours dwarfs anything previously seen and is more
severe than the Emerging Markets' collapse from several summers ago and also
worse than 1987. The market has taken out Junes lows and now has a large
monthly reversal to the downside. It is interesting to note, however, that the
only market not in a free fall is China.
Last night I reviewed the signs that were tells of this demise:
The chart of the VIX, which had a series of higher lows and was trending
upward.
The early warning sign of the brokers selling off.
Daily lower highs on the S&P chart.
And the recent volatility with numerous gap openings.
The Market Profile charts also gave a huge heads up as the daily value
area lows continued to be rejected. The fundamental news of credit tightening
was the kiss of death and the global markets lost their legs.
This morning we see continued credit market volatility in London and
companies extending deadlines on deals. The credit fears have Cadbury (CSG)
extending its deadline on a 7 bln Euro deal.
Folks are rushing back from vacations and analysts are busy changing
forecasts. In the currency markets, Morgan Stanley has revised its end-2007
forecast for the Euro-Dollar exchange rate from $1.28 to $1.33. The company
still feels the Australian and New Zealand Dollars will be supported. We will
be hearing more revisions in all of the markets going forward.
The housing numbers were poor as new home sales fell 6.6%, which confirms
the inherent weakness in the economy. Durable Goods Orders fell 2.8% for May
with the transportation portion falling 6.9% and that was worse than expected.
Commodity prices are weak with gold falling hard and it has the feeling of
liquidation.
One issue hanging over the gold market is the legacy banks of Europe still
have approximately 180 tonnes of gold remaining in the the Washington Agreement
to sell before the end of September.
The base metals have given back much of their gains for the month and many
are concerned about the implications for the global economy. I have to say this
feels like more of a turn rather than a correction and it seems like the smart
folks did the right thing in liquidating holdings such as Sam Zell earlier in
the year and Blackstones (BX) management selling near the top of the market.
We will look back on this as excellent timing on their part.
Today we will get the GDP for the quarter, which is expected to be up 3.2%.
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