Week in review 11 to 16 Oct 2010

Another week has gone, and now it is time to review what has happened and to preview what will happen in the coming week.

United States

The Big Speech by Ben Bernanke has overshadowed everything else, now as if every one is talking about Bernanke’s Big Speech but nothing else. Forget about job numbers, consumer confidence, retail sales, foreclosuregate, Intel (INTC.O) and Google (GOOG.O).

Ben Bernanke’s speech was largely uninspiring. He has talked about nothing that we have not already known: inflation is too low, unemployment is too high, job creation is too slow, so more monetary policy is warranted. The next question is how large the next round of QE will be. He provided no specific answers. The unexcited speech, in my view, was an attempt to manage market expectation. The market has discounted a high expectation of QE despite the fact that the Fed has said nothing specific for weeks, and even the Fed Minutes did not say anything in particular. It is probably better to have a more reasonable expectation to avoid disappointment. So Bernanke is trying to say something as if he has said nothing. Again, I think QE will not work as some policy-makers would hope.

Foreclosuregate continues to be under my radar screen even though no one in the Hong Kong market has really talked about. Banks stocks have been under tremendous selling pressure over the last two sessions of the week, especially names like Bank of America (BAC.N) and JPMorgan (JPM.N). The danger here is that mortgage investors may ask for a buy-back, and the looming Mid-term election and all sorts of potential political pressure may the catalyst for systemic breakdown.

The market has rallied for weeks by now, and volatility is almost at its 2-3 years low as shown by VIX. I continue to be cautious now as I believe the markets have discounted an expectation of QE2 which was too high, which has already weakened the US dollar. I have noted that US dollar strength as indicated by Dollar Index (DXY) has a reverse relationship with stock markets. In fact, DXY regained strengthen after Bernanke spoke. Should the US dollar strengthen if the eventual QE2 is less than expected, it may trigger a reversal in US dollar trend and stock market trend. On top of that, if the foreclosuregate turns out to be a serious problem, it will trigger a flight to safety into US dollar, and potentially a huge decline of stock markets.

Europe

There are not too many worthy news in Europe last week. The QE story and Bernanke’s Big Speech occupied the market consciousness. Only note-worthy mention would be some poor data from the UK. Consumer confidence has dropped, and jobless claim increased. It might be the case that even before the spending cuts coming through, the UK has already lost confidence in its economy.

Hong Kong/China

Hong Kong and China markets continued to be eventful. Land auction in Hong Kong on 12 Oct broke some record again, with Chinachem Group beating Kerry Properties (683.HK). The next day we had the Chief Executive Donald Tsang read the Policy Address 2010-2011, announcing more measures to curb home prices and subsidise home ownership. I think the policy will not have any major effect in terms of curbing home prices or helping people to buy homes, but the market initially took it quite seriously for a few hours.

China market was extremely interesting last week. The Shanghai Market entered the bull market after rising more than 20% from its recent low. We have heard more rhetoric on curbing home prices, and the PBOC expectedly raised reserve requirement by 50 basis point at 5 commercial banks. All these did not have much impact on China market, nor the looming currency war. Trade surplus number was down from last month, but it was still a very large number. At the same time, the US trade figure showed that its trade deficit with China has widened, and China’s foreign exchange reserve hit record high. These all give Western politicians more ammunition to exert pressure on China to allow Chinese Yuan to float. It will be an interesting drama to watch.

Economic Calendar (Abridged)

Source: FX Street

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.