Morgan Stanley issues a ‘Petrodollar Tsunami Warning’
Bottom line: High oil prices will obviously increase the flow of petrodollars. But exactly how big are these flows? We calculate that the stock of the world’s proven oil reserves is now worth some US$121 trillion – higher than the combined market capitalisation of global equities and bonds, with annual flows (oil export receipts) of US$2.0 trillion. While up to 10% of these receipts may be spent on infrastructure and other investments, the rest will be invested in the global financial markets. A tsunami is coming.
- Morgan Stanley Economics, 21 Feb
Merrill Lynch assesses data that moves the markets
ML calculates the average close-to-close percentage change in USD/JPY and EUR/USD on days of important US data releases. Findings are presented in the table below. I don’t place much store in this but others may find it more useful.
Most of the most volatile days in USD-JPY and many in EUR-USD have been associated with financial concerns and risk sentiment rather than data in 2007.
This suggests that it is particularly important to gauge the market’s attitude to risk on a daily basis in order to be able to trade both the data and the additional information relating to the financial crisis.
With regard to the data, the release of US non-farm payroll data remains the most volatile trading day, while the real economic indicators have gained in importance. As long as the market remains uncertain about the global outlook, real data in both the US and the Euro area should remain very important.
- Merrill Lynch, 25 Feb
Just happened across this request from a lady asking how she can bag a millionaire husband. An investment banker kindly responds and puts her in her place.
These cool charts accompany the text in the SEB analysis quoted in the below post.
I haven’t read any bank research in a long while, but I thought it might be interesting to see what the street had to say about the recent break through 1.50. My quick thoughts are in italics:
UBS – With the EURUSD break of 1.50, we are not tempted to fade this latest US dollar move. The decoupling theory is proving true so far in Europe, with the German Ifo index surprising on the upside, helping Eurozone 2-year yields rise by 5bp. In contrast, the slump in consumer confidence in the US pushed US 2-year yields lower by 11bp. Consequently, the latest bout of weakness in the US dollar has been all about yield differentials and relative growth expectations, coupled with a clearing out of consensus positive dollar views. If the dollar longs have been cleared out, is it time to start building a short position?
ABN technical analysis - The strong and vicious break above the major barrier around 1.4863 has cleared the way to the major price projections on the daily and weekly charts. This projection range starts at roughly 1.5100 (weekly) and 1.5190 (daily). Short-term momentum is sky-high but not overextended. The RSI is overbought (86) but since the market is engaged in a breakout move, not too much value should be given to this indicator. Buy the dips when they occur. Dipping below 1.4860 will shake the bullish outlook. Sky high, but not overextended?
ABN fundamental analysis – The DXY index has fallen to 74.46, also a record low. In addition to the fresh widening in interest rate differentials, one of the key drivers of this move appears to be the surge of oil prices above the $101 level as petro-dollars are channelled into the EUR. Dovish comments by Fed’s Kohn also added impetus to the USD’s decline. Kohn noted that growth risks are a bigger threat than inflation which has led the market to look for another 50bp rate cut in March or possibly sooner. Or is it that are oil prices responding to the weaker dollar?
SEB macroeconomics – Although the US dollar is close to extreme undervalued levels against the euro this is not the case when looking at the trade weighted US dollar which has become only slightly cheap compared with our PPP estimate (lower chart). The upshot is that should the weak US dollar be seen as an independent problem by a central bank, for example the ECB, currency intervention is unlikely to work.
As long as the US dollar is not dirt cheap in trade-weighted terms, central bank intervention to dampen appreciation is unlikely to be fruitful. The one instrument that would work is lower policy rates. The EUR/USD thus carries upside risk as long as this is not deemed an option by the ECB. A higher euro protects the euro area economy against the escalating oil price, but exporters will be hurting and the argument can be made that the euro is unfairly shouldering the burden of dollar depreciation, as much of the world continues to retain artificially low currencies. The ECB has to weight the pros and the cons but I believe the risk of talk of concerted action has risen substantially.
This is one of my ‘arse gravy’ predictions.
Look at the long term chart below.
EUR/USD will break 1.50 in the near term. I’ve placed a small buy order at 1.4995 and take profit at 1.5020 (stop at 1.4960), on the premise that stops will get tested and run through as we approach the grand daddy of big figures (1.50).
In my all time favourite Jean Claude Van Damme film, Bloodsport, JCVD travels to Hong Kong to fight in the Kumite, a legendary, underground fighting tournament that takes place once every four years.
This piece of cheesy dialogue is highly relevant to trading:
Journalist: Why is it that no one will talk about the Kumite? What is this air of mystery? (pause) Why are you fighting in it?
JCVD: It’s personal.
Journalist: You want to prove your manhood to the world?
JCVD: The Kumite is for the fighters, not for the people who read the newspapers.
Lesson: Always remember your motive.
In this clip, JCVD is through to the the final, where he fights Kumite champion Chong Li. Note that Bolo Yeung (the actor who played Chong Li), was 49 years old when Bloodsport was filmed.
So many ways to get taken down, so few to succeed.
Behavioural problems can decimate a trader’s equity. The trick is to promote good traits and eliminate the bad. There is no need for expensive therapy, hiring a trading mentor, even buying books on the topic. No, as Ben Stiller demonstrates at the start of this clip, all you need is a battery, some wire, and a pair of crocodile clips.
I recently added some quotes to my collection that have a relevance to man’s endeavours, trading included:
The strongest oak tree of the forest is not the one that is protected from the storm and hidden from the sun. It’s the one that stands in the open where it is compelled to struggle for its existence against the winds and rains and the scorching sun. – Napoleon Hill
Never confuse a single defeat with a final defeat. – Winston Churchill
Never give up, never give in, and when the upper hand is ours, may we have the ability to handle the win with the dignity that we absorbed the loss. – Doug Williams
Never mistake activity for achievement. – John Wooden
There are some defeats more triumphant than victories. – Michel de Montaigne
There is no elevator to success. You have to take the stairs. – Author unknown
What you risk reveals what you value. – Jeanette Winterson
What we obtain too cheap we esteem too little – Thomas Paine
Some desire is necessary to keep life in motion. – Samuel Johnson
Some have been thought brave because they were afraid to run away. – Thomas Fuller
An interesting quote from the Financial Times that relates to the coin tossing post below and reminds us of the importance of knowing one’s investment horizon:
Stock investors may yet be lucky and muddle through, but the credit crisis is intensifying, banks are cutting off the lifeblood of credit to the markets, and equities have still barely responded. Surely anyone with a grasp of the seriousness of the crisis facing the financial sector would bail out of stocks now?
Again, this is not necessarily so. Just ask Nouriel Roubini of New York University, who has a reputation as the most pessimistic economist in academe. He deserves it. His most recent paper, published last week, is entitled: “Can the Fed and Policy Makers Avoid a Systemic Financial Meltdown? Most Likely Not.”
Nobody is more aware of the gravity of the financial situation, and nobody has done more to point out the risks of a systemic crisis.
So how are Roubini’s own funds invested? They are 100 per cent in equities. In the long run stocks do best and he is not yet close to retirement, so he keeps putting more money into index funds each month.