Saturday, December 19, 2009

Bubble is building


Future bubbles Dollar carry trade

Concept

The concept of carry trade is taken from the arbitrage world where people looks for the risk less opportunity to make money although involvement of risk is not nullified in the carry trade however modus operandi is almost similar to arbitrage.
Here's an example of a "U.S.dollar carry trade": a trader borrows 1,000 U.S.dollar from a U.S bank, converts the funds into Indian National Rupee and buys a financial assets for the equivalent amount in India it may be bond stocks debenture etc. Let's assume that the investment in India pays 6.5% and the U.S. interest rate is set at 0.25%. The trader stands to make a profit of 6.25% as long as the exchange rate between the countries does not change. Many professional traders use this trade because the gains can become very large when leverage is taken into consideration. If the trader in our example uses a common leverage factor of 10:1, then she can stand to make a profit more than 62%.

The big risk in a carry trade is the uncertainty of exchange rates. Using the example above, if the U.S. dollar will fall in value relative to the INR, then the trader would run the risk of losing money. Also, these transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.
Events
The easy money policy from the central bank’s around the Globe created ample liquidity in the markets, especially near zero rate interest rate policy by US Fed created huge outflow of dollar from the US and over supply of Dollar resulted as the deprecation of Dollar with respect to all major currency and emergence of carry trade, in this trade people takes money from the us due to the negligible interest rate regime over there and park those money in the high return securities around the globe due to this Global markets have rallied "too much, too soon, too fast" this year. but a correction is inevitable once fed will shed this policy the rising inflation is the one important indicator of which forced the regulator to think on easy money policy although it will not happen right away, as a cheap dollar will still encourage investors to seek higher-yielding assets for a few more months however time is short for the people betting on liquidity driven asset.

Recovery of U.S. dollar which is traded at the year’s low is depend upon the rise in interest rate which will led the repatriation of US dollar , but only in "six to 12 months from now, not any time soon."A correction might occur, but the risk of a correction is more in the medium term than in the short term, but the time when the correction will come it will sharp and painful for the equity markets around the globe.
The economist repeating their view that the U.S. economic recovery will be anemic, subpar and U-shaped, which should decipher into worse-than-expected corporate earnings and macroeconomic indicators, eventually forcing asset prices down.
Such a correction will be delayed, however, by a prolonged period of low interest rates and fiscal stimulus.
Many analysts are in the opinion that the real economy will surprise on the downside, especially when the stimulus fizzles out, but on the other side we will have the effects of policies, especially monetary and liquidity, that keep asset prices levitating.

Money wheel

Loose monetary policies around the world has resulted in continuous dollar inflows into developing economies and emerging markets like especially in Asia, which are likely to grow faster than developed world for several years.
The challenge for emerging market countries like Brazil, India will be to implement effective policies to curb excessive capital inflows that have led to appreciation in their currencies, to curb the inflow Brazil has imposed Tobin tax on inflow. The depreciating dollar is creating the risk for the exporter. The solution is probably along the lines of capital controls but capital control is the toughest step for the capital deficit emerging markets. Here money is chasing their growth with objective to get more return in shortest time and creating volatility in their markets. This is the reason behind the imposition of tax on inflow by Brazil.

Impacts

The beginning of carrying trade has infused the liquidity in the financial and commodity market around the globe. Chase of U.S.dollar pushed the Gold, Crude at their highest levels in 2009 and same effect has observe in equity around the globe Brazilian market has gone up by 145% on strong dollar flow. Dollar index came down sharply to their year high 89.62 on 4th march to the year low 74.17 on 26th November and take pullback from there. In the next six month when economy will come on growth path then inflation will be the primary agenda for the fed and they will increase the interest to suck the excess liquidity from the market. Rise in interest rate will trigger the unwinding of dollar carry trade. The unwinding of trade will create volatility in the stock market around the world it can led to another stock market carnage in the emerging market because significant amount of fund by FII and hedge fund has been pumped into the equity markets during their up move.


FIG:Dollar index 2009

Unwinding the trade will create negative impact on the local currency and unusual depreciation of the local currency will be disastrous for the exporters and their profit margin will be impacted

Wednesday, December 16, 2009

Time magazine Person of year 2009.....Bernanke

Time declared their man of the year 2009.
Federal Reserve Chairman Ben Bernanke, who worked to steer the U.S. economy through its darkest days since the Great Depression of 1929, was named Time magazine's Person of the Year 2009 on Wednesday.
"The recession was the story of the year. Without Ben Bernanke ... it would have been a lot worse," Time managing editor Richard Stengel said in a statement.
Bernanke, 56, a former Princeton University professor, is the student of the Great Depression of 1930,and their eye witnessed experience has helped him to frame the strategy to fight the recession and so the result is here the recession came as a shock and it is almost on the verge of an end as per US GDP data.This recession handled well by the fed chief and he deserve the credit.

Tuesday, December 15, 2009

Dubai event led the recovery of market...

Ripple effect of Dubai crisis was in the clouds of Asia and markets in this region were opened sharply down however the surprise support of Abu Dhabi to the troubled company changed the mood of the market in the region. Markets' initial reaction to the Abu Dhabi move was understandably positive, with the cost of insuring Dubai sovereign debt plummeting by more than 120 basis points.
But the fundamentals have not changed. Dubai remains leveraged and in the immediate term Abu Dhabi is the source of financial liquidity. Including Monday's move, Abu Dhabi has pumped $15 billion into Dubai, with a further $10 billion coming from the United Arab Emirates central bank.
The capital market responded positively on this development ,Asia recover their initial loses and turned positive ,Europe opened 1% higher followed by US market.
INDIAN MARKET
India open slightly negative in the morning and recovered from its low and get in the positive territory however the inflation number trigger the sell of in the market in the afternoon session and market again turned negative at the cost of BANKEX ,technically market is in the range bound and very soon it is going to give a good breakout and march towards 5300 which is the immediate target of nifty in near term .
Tuesday is going to critical day for market and their is more chance is here that market will march ahead from here onward.