The Euro has broken $1.30
When the entire global investing zeitgeist is getting drunk off of a weaker USD and its that USD that has rallied sharply this year, one can't be surprised that markets are trying to recover from a hangover. The dollar started to rally late 2009, just about the time we were hearing the words sovereign debt issues. People still piled into European and US Equities because sovereign debt was just an issue, after all issues can quickly become socialized on the backs of taxpayers. It then became a problem, no problem here. Bailouts will do the trick. Now its a full blown crisis. OK. If bailouts don't work, we can just print money cant we? Sorry Charlie! It ain't working this time until the market corrects and China starts their printing press. Blast off for that is sometime in August 2010.
I would say that the 12 week rally we saw in Euro/US Equities was kinda like the last call at the bar. The markets were running on fumes. We are in a period of long due consolidation and the correction in Euro/US Equities is long due.
Essentially, what we were seeing was how risk asset markets were so dependent on a weaker USD. Weaker USD meant faster/cheaper exports for Asian economies. When the USD is weaker we have global liquidity. This global liquidity reached a top at the end of 2009. There was a tight correlation between liquidity and risk assets, this is not rocket science people. People have had a hard time making any loot because liquidity has shrunk because of the move in USD higher. Higher USD means people are becoming risk averse. Why do you think policy makers had a dollar destruction policy in the first place?
Remember this is a problem of debt. The 2008 global equity correction was a problem of debt. What we are seeing today is a problem of runaway debt. Subprime problems were clearly evident in 2006 and those problems actually peaked in 2007 before the peak in equities. This is no different. Same problems of debt with different incompetent characters. The progression is the same as it was in 2008. The optimism in investor attitudes towards the stock market topps out when the underlying fundamentals are getting weaker. Its exactly the same when markets bounce from severely oversold levels.
The correction will be quick and painful, because that is how corrections roll. It takes 12 weeks to go up 15%, but 2 weeks to lose it all. Ahhh! Such is life in the global casino we call financial markets.
We all should enjoy this. I know I certainly will.
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