Thursday, 15 August 2013

Equity Bulls Regroup as USD Sinks

Ralph Shell, Excel Analyst

Equity Bulls Regroup As USD Sinks, Excel Markets Analysis It would seem that equity bulls are merely regrouping, at least judging by the behavior of the USD (EURUSD, UUP, UDN).  If this were really a bear deal, the speculative hot money would be running to the USD for cover.

Earlier today, Thursday 15 August, the US Net Long-Term TIC Flow report showed a net outflow of $66.98B.  Granted, these numbers are from June, antiquated for today's analysis; however, they are interesting.

The big outflow of foreign US investments in June was in Treasuries from the largest US investors, China and Japan.  Since this was when Chairman Bernanke started to openly muse about tapering off his buying program, this makes sense.  Collectively, these two countries own over $2T of Treasuries, and as the rates rise, anticipating the reduction in the Fed's bond purchasing, the value of their holdings is about to depreciate.  Why not be sellers?

Concern about this imminent tapering was renewed today when a voting member of the Fed Open Market Committee, Bullard, said the rise in US interest rate would probably not harm the US recovery.  Later, when it was reported the number of new claims for jobless benefits was the lowest since October 2007, the taper talk intensified.

There is another side of this US recovery story.  Yesterday (Tuesday), Cisco (CSCO), the world's largest manufacturer of networking equipment, announced they would cut 5% of their workforce.

“This recovery is more mixed and inconsistent than the others I have seen,” said Chief Executive John Chambers."

Then the negative outlook was confirmed by guidance from Wal-Mart (WMT) today:

"...the world’s largest retailer, cut its outlook for the rest of the year after reporting second-quarter earnings that fell below expectations ... "The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending," said Chief Financial Officer Charles Holley in a statement."

If these two assessments of market conditions were not enough to quell the bullish animal spirits, there was also this revelation.  In the 13F filing with the SEC, of the biggest position in the Soros Fund, it seems crafty old George's biggest position is for puts - specifically, 1,248,643 S&P 500 contracts (SPY).  Granted, we do not know the strike price of the options.  At the money puts could be a hedge against his portfolio while out of the money puts could be akin to a lottery ticket.  In either case, Soros is not bullish equities - this is a lot of puts.

Traders have a clear choice here.  Do you place your faith with an army of Washington bureaucrats who feed their information to the central bankers?  If so, you need be mindful, the government statistics may be tilted to please the administration and other Washington affiliates.  Or would you rather go with a wily old veteran who said:

"Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected."

How will this play out in the forex markets?

Judging by the initial reaction to the 226 point loss in the Dow, this weakness is USD bearish, and bullish on the euro and the pound.  Part of this might be USD position liquidation because of the increased volatility.

It will be interesting to see how equity markets react tonight going forward.  Should the equity sell-off continue in the Asian session, we wonder if the USD selling will continue.  The US recovery, though not robust, is still better than that in the developed world.  If the US economy slows, this will not help other economies.  Should the weakness become acute, the USD will again be a safe-haven destination. 

Markets are likely to remain excited.  Usually two bearish days, going into the weekend, brings a further Monday retreat.  This should prove interesting.
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