Archive - May 11, 2014

Dispassionate discussion of the near-term forces at work in the foreign exchange market.  

As if the question actually needs to be asked, we thought the following 3 charts would provide at least some defense against the constant barrage of "healthy rotation" bullshit currently being used to maintain assets-under-management as professionals unwind their levered longs into a newly-willing retail public. As Gavekal notes, the following chart show that the median stock is trading at valuation levels only seen at the previous stock market highs of 2007 and 2000.

In this difficult market, and confusing - for traders, and everyone else - environment, what are the three main questions posed by Goldman's clients had? According to David Kostin, "Three questions dominated our investor dialogue this week given the lack of meaningful data releases.

1. Interest rates: The recent decline in ten-year US Treasury yields to 2.6%, the forward path of interest rates, and implications for equity valuation;
2. Capex: the outlook for corporate capital spending in 2014; and
3. Rotation: The potential for the momentum drawdown of the past two months to reverse and vault high expected sales  growth companies back into a market leadership position.

The most significant geopolitical event of the day is the east Ukraine independence referendum taking place in various cities across the region, less than two months after the Crimean case study which saw the region split away from Ukraine and join Russia, despite the fervent warnings by Kiev and the west that the result of the "rigged election" would not be accepted by anyone. As it turned out then, it only needed to be accepted by Russia which promptly took over the Black Sea territory. Today's vote is a carbon copy of what happened in Crimea, with the locals almost certain to vote in Independence from Kiev (even over Putin's "objections" who has managed to distance himself from the vote if quite willingly will accept its outcome), followed by another vote that annexes east Ukraine (and subsequently Transnistria) to Russia, promptly followed by the adoption of the Ruble as the regional currency.

And what's in it for you...