On Football and markets – the sidelines the safest place.

July 13, 2011

FOREX, Global Macro

I love footy but at 42 I know I’m too old to strap on the boots again and run onto the ground without a serious risk of getting smashed by one of the fit young blokes running around (we’ll leave aside my skill level – this is a story I’m telling). So I know that for me the joy comes from supporting my team (Collingwood/Waratahs/Bulldogs) and staying on the sidelines.

I get to enjoy all the action without putting myself in danger.

So it is with markets at the moment, as the tooing and froing about what is, or isn’t, happening in Europe continues and the deadline for the US Debt ceiling on August 2nd approaches. Yesterday afternoon in our timezone the new IMF boss Christine Lagarde laid a bump on anyone and everyone who thought that the Greek deal was a done deal when she said that the “IMF hasn’t yet discussed New Greek aid details with EU, nothing should be taken for granted on Greece”. So markets went into a funk, although you would only have a hint of it if your only snapshot was 9am yesterday and 9am today.

Let me recap – at 9am yesterday the AUD was around 1.0640 but it hit a low of around 1.0530 at about 6pm last night and now sits at 1.06. Likewise the ASX 200 opened the day yesterday 4570, closed at 4495, futures got down to 4422 but closed at 4467. European bourses were all off much more at some points early in trade and while the Dow wasn’t quite as volatile it’s turned from a solid up to close down 0.47% on its lows in the last hour or less of trade. The EUR/USD moved through a 200 point range – huge for probably the worlds deepest and most liquid instrument.

European bourses took an extra nose dive on the bank of news that 6 Spanish banks would fail the stress tests but won’t they all if Europe actually concedes there is a chance of a Sovereign default. This was the big flaw in the logic of last years tests but we’ll get the results of the latest stress tests this Friday night at Midnight (Australian EST).

Equally the fact that Italian 10 year bond rates rose above 6% for the first time since 1997 also highlighted that the Euro is slowly unravelling. If they had of enforced the Maastricht Treaty vigorously it would have already partly dissolved.

Anyway, it is the ongoing credit issues that were also the catalyst for the late New York selloff was news, unsurprisingly, that Moodys had cut Ireland’s debt rating to junk with a continuing negative outlook. Now we aren’t surprised that Ireland was downgraded but we have some sympathy with the European politicians disquiet at the way in which the Ratings Agencies are treating this situation. Why is it that there is a rolling run of downgrades rather than the fact that all of these recent moves could have been done at once. Why is it that Italy was downgraded a few weeks ago and then its banks the following week. The attack on the ratings agencies for what they are doing by French politicians seems misplaced but the constant downgrades seems interesting to say the least.  

This in itself is fueling the crisis. It’s not the ratings agencies fault but their handling is problematic.

For investors it is safer to either be out or have a very, very, long-term view of things otherwise this market volatility is like getting caught at the bottom of a Ruck. It is just no fun for investors and it can do serious, I would say is doing serious, damage to overall confidence in the economic outlook and efficacy of investing in non-cash instruments. We saw a little glimmer of hope in the US from Fed minutes that suggested QE3 is not ruled out but that is not a sustainable solution to worlds troubles.

Markets are assailed by significant structural economic growth issues, are assailed by significant sovereign debt concerns and are losing faith that policy makers anywhere can do anything about it. This feels like the ERM or Asian Crisis to me. There is little policy makers can do – the obvious circuit breaker just isn’t obvious.

Just like the footy unless you are a super aggressive and intellectually flexible trader sidelines are the safest bet.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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