Big Picture - Capital Flows
Tough At The Top
When equity markets are at all time highs, its tough for everyone. You don't want to miss it but you are wary of the short term correction. This current global bull run has captured almost every equity market into its grasp. If we were to look at it - this bull run looks quite tame, not much excessive exuberence. Which is good because it means there is less froth. Of course, I am refering to most of the European markets plus US and even Malaysia and Japan. Markets that look more frothy are the ones in HK, China and Singapore. FVrothy as in the sense of more speculative plays and margin plays. So, in a nut shell, on participation level markets still look "safe-ish".
On factors affecting capital flows - interest rates and interest rates expectations. ECB - flat or down. Federal Reserve - Flat with possible downside bias. Bank of Japan - Flat with upside bias. China Central Bank - Flat. Interest rate expectations is probably the most important indicator for assessing capital flows. The US equity markets was rising and rising, and many were expecting an imminent drop in Fed funds rate in the coming months. This would serve two purposes, the main one being to have a soft landing amidst a slowly weaker economy; and the other being to engineer a weaker USD. The US markets fell last night on the drop in inventory of unsold homes and a weak 5 year T-note auction. The weak auction indicates weak foreign participation, thus pushing up yields further = foreign investors want higher yields or would want to enter only at a much weaker USD. Both predictions have a strong probability of becoming a reality in the coming months.
But you cannot really have both at the same time as higher rates tend to push the currency stronger, and at the same time weaken the economy. The Fed's strategy is likely to be flat rates, weaker USD.
Capital flows in Asia would be an important factor as well. Will capital rush out? Growth in GDP and earnings are there for most Asian countries. Despite the overall strengthening of Asian currencies against USD, its not so bad because almost every Asian currency is rising at the same time, meaning the export competitiveness is not eroded vis-a-vis other Asian exporters. Growth is good, and the stronger currencies give them a better way to manage imported inflation.
As long as the Euro and especially the USD are on a weakening path, investors will gladly park their funds in Asia. So, the biggest derailment factor is capital flows rushing out of Asia = a strengthening USD. It looks like the USD will spend a lot of time during 2007 on the weak side. Just how weak is weak enough? Till there is a dent in China's trade surplus? That will take years.
Whatever it is, there is little risk now of capital rushing out of Asia, but we need to monitor developments. On the economic front, this look fine for all. One thing which could cause a flight to USD is political risk or risk of war/conflict, so keep your eyes open.
Tough At The Top
When equity markets are at all time highs, its tough for everyone. You don't want to miss it but you are wary of the short term correction. This current global bull run has captured almost every equity market into its grasp. If we were to look at it - this bull run looks quite tame, not much excessive exuberence. Which is good because it means there is less froth. Of course, I am refering to most of the European markets plus US and even Malaysia and Japan. Markets that look more frothy are the ones in HK, China and Singapore. FVrothy as in the sense of more speculative plays and margin plays. So, in a nut shell, on participation level markets still look "safe-ish".
On factors affecting capital flows - interest rates and interest rates expectations. ECB - flat or down. Federal Reserve - Flat with possible downside bias. Bank of Japan - Flat with upside bias. China Central Bank - Flat. Interest rate expectations is probably the most important indicator for assessing capital flows. The US equity markets was rising and rising, and many were expecting an imminent drop in Fed funds rate in the coming months. This would serve two purposes, the main one being to have a soft landing amidst a slowly weaker economy; and the other being to engineer a weaker USD. The US markets fell last night on the drop in inventory of unsold homes and a weak 5 year T-note auction. The weak auction indicates weak foreign participation, thus pushing up yields further = foreign investors want higher yields or would want to enter only at a much weaker USD. Both predictions have a strong probability of becoming a reality in the coming months.
But you cannot really have both at the same time as higher rates tend to push the currency stronger, and at the same time weaken the economy. The Fed's strategy is likely to be flat rates, weaker USD.
Capital flows in Asia would be an important factor as well. Will capital rush out? Growth in GDP and earnings are there for most Asian countries. Despite the overall strengthening of Asian currencies against USD, its not so bad because almost every Asian currency is rising at the same time, meaning the export competitiveness is not eroded vis-a-vis other Asian exporters. Growth is good, and the stronger currencies give them a better way to manage imported inflation.
As long as the Euro and especially the USD are on a weakening path, investors will gladly park their funds in Asia. So, the biggest derailment factor is capital flows rushing out of Asia = a strengthening USD. It looks like the USD will spend a lot of time during 2007 on the weak side. Just how weak is weak enough? Till there is a dent in China's trade surplus? That will take years.
Whatever it is, there is little risk now of capital rushing out of Asia, but we need to monitor developments. On the economic front, this look fine for all. One thing which could cause a flight to USD is political risk or risk of war/conflict, so keep your eyes open.
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