Wednesday August 23, 2006 - 10:20:16 GMT
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Black Swan Capital - www.blackswantrading.com
Stock market feedback to the buck?
â€˘ U.S. monetary policy makers may have to raise interest rates further in order to bring inflation back into a comfort zone, Michael Moskow, president of the Federal Reserve Bank of Chicago said Tuesday. (WSJ)
â€˘ Hong Kong's economic growth slowed to a near standstill in the second quarter, its weakest performance since emerging from recession in the latter half of 2003. (WSJ)
â€˘ Key Reports (WSJ):
7a.m. Aug 18 MBA Refinancing Index. Previous: +1.4%.
10a.m. July Chicago Fed Natl Activity Index. Previous: +0.34.
10a.m. July Existing Home Sales. Consensus: -1.1%. Previous: -1.3%.
â€śThere is something in the human condition that abhors uncertainty, unevenness, unpredictability. People like an average to hold onto, a target to aim atâ€”even if it is a moving target.â€ť
FX Trading â€“ Stock market feedback to the buck?
Does the market see it:
Weak US housing = Weak US Growth = Weak US Dollar
What if instead:
Weak US housing = Weak US Consumer Demand = Weak US Growth & Weaker Global Growth = Stronger US Dollar
The â€śwhat ifâ€ť view hinges on the feedback loop for weaker global growth being risk assets and their link to the stock marketâ€¦
The chart below, originating from Merrill Lynch economist David Rosenberg (sent to us by a friend in Chicago), shows a surprisingly high correlation (lagged that is) between the US stock market and housing (NAHB Housing Index vs. S&P 500 lagged 12 months; a 79% correlation):
In addition, we noticed a surprisingly tendency for the US $ index to track on the S&P 500 index (inversely that is). In the chart below we have inverted the value for the US $ index so you can better see the â€ścorrelationâ€ť:
If these so-called â€ścorrelationsâ€ť hold, it suggests falling housing leads to lower stock prices and a higher US $ index.
A bit of a stretch, we agree. But what is a plausible US dollar link to the stock market? Where is the cause and effect stuff for this to have any credence beyond purely coincidental (weâ€™ve seen many supposed correlations that stop correlating as soon as we used them to trade on, so though we watch these things, we are still always skeptical)?
If anything, we think it comes back to risk-reduction trade i.e. there is a boatload of â€śoffshoreâ€ť money managed by US funds of all types and sizes. And we suspect much is levered to differing degrees. We think many managers are betting despite a slowing US economy, the rest of the world can continue down the growth path even if Mr. US Consumer wonders off the trail. If the global growth bet proves wrong, a lot of offshore money will likely be a) vaporized and, b) returned to the US for safekeeping as global stock markets are hit. If money rushes back to the US in that manner, itâ€™s likely to be good for the dollar.
Yesterday we witnessed a surprisingly poor German investor confidence report; and a sharp dollar rally. Could it be a primer for things to come?
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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