Jan 24. The end of ‘adult supervision’
Obama’s State of the Union and FOMC both this week, (tue/wed). Obama’s new pro-business stance, along with focus on budget cutting and education are designed to play well to stocks. Continued loose Fed policy is also supportive. However, restraint in financial mkts is coming from outside, with rate increases in China and Brazil, and high food and energy prices. Higher rates at the long end of US curve also negative for housing. (If stocks have a bad week I think it will portend much more to come. GOOG and AAPL represent about $500 billion of market cap and although their losses are offset by gains in stocks like GE and Exxon, a drop in high fliers is negative. We’ve also seen breaks below upward sloping trendlines from 2008 in India’s SENSEX and (to a lesser extent) Brazil’s Bovespa. The strongest markets seem to be turning).
–Interesting that last week we saw two examples of rejection of “adult supervision”, Google’s Schmidt, and Volcker for Obama. GOOG stock didn’t seem to like the change, big outside day and a close below trendline from August. I don’t know how Obama’s shift to business cheerleader is going to play out, but it feels like another step of crumbled resistance to TBTF financial institutions.
–Since the beginning of the year the Fed effective rate has been around 18, had a few lower readings right at the beginning of the year. Fed Fund contracts are trading 99.83 or above out to July…seems like worth a short.
–There’s is a bit more talk of Japan reaching a breaking point in terms of public finances, with an aging population and huge deficits. I think this ought to negatively impact yen, even if another bout of risk aversion occurs. Actually, the US dollar is probably now the “funding currency” which will see gains in the event of risk aversion, and higher global rates should siphon off support for yen and JGBs.
