Case For Renewed Yen Carry Trade To Resume

After japanese central bank refused to increase the interest rates and with yen strenghtening against the dollar and risk perception of japanese investor/saver on an increase due to lack of investment oppurtunities in their own country, yen carry trade will begin to find favour among large investment banks and hedge funds. This will further give a boost to already over heated stock markets like India and other fast growing asian economies.

Markets Cheer Rate Cut!

Stock markets are cheering 0.5% rate cut by US federal reserve but i believe Fed must have punished defaulters of subprime mortgage borrowers and lending institutions by raising interest rates rather than cutting them. Instead Fed has revisiting same starting point which started this whole cheap credit phenomenon across all asset classes. By printing more and more dollars, Fed is again pumping more cheap money into the financial system and re-assuring the market participants that in any adverse event like default mess the fed will bail them out by printing more money, thus inviting more defaulters to do default at will and get away! That's the way systemic problems linger on and system makers continue to drag them for their pity interests like to help very large lending and investment banking institutions.

Yen Carry Trade Unwinding

For two days running, stocks across the world are bearing the brunt of a credit crack that first started in U.S. sub-prime market and now has spread to other credit instruments. This collateral damage has prompted hedge funds, PE funds, large financial institutions to pay back the capital that they have borrowed from Japan very cheaply. With the losses mounting on their mortgage books, they will now have to withdraw from risky assets like stocks and return the borrowed money and this is causing Yen to strenghten against the Dollar, now trading at 114.32 after touching a high of 113.55 against the Dollar. Serious downward stock price adjustments had happened in the last few days, dow jones has re-traced all the gains it had made during this fiscal year and all other emerging markets are also follwoing the suit. For the first time in the last four years, serious credit squeeze is happening and this is not good for assets like stocks. Only selective buying can be made in stocks which are having the strongest of fundamentals and business momentum. Commodities are also correcting and this is good news for commodity user industry and hence to some extent for Inflation.

Central Banks Pour The Money

Seeing liquidity crunch because of sub-prime mess in the U.S., central banks of major economies are pouring huge money in the financial system.
Several leading funds of major investment banks and institutions have been closed due to losses that they have incured in sub-prime investments in the U.S.
Yen has been strengthning for the past few days and this is also a cause of concern, critical level to watch out for yen against dollar is 115. This is very important from the yen carry trade point of view as it has in the past and in present providing huge liquidity to the financial markets.
It will also be very interesting to see if Japanese central bank raises the interest rates this time or not, again very important for yen carry trade to keep going.

Dow Jones is Down Again Sharply

On August 03,2007 Dow jones fell sharply again by 280 points, thus retracing all the past few days gain in one trading session indicating that worst is not yet over for global equity markets.
To tread cautiously is the name of the game.
Watching carefully the Credit Market in the U.S. will be extremely useful in knowing future course of action by big players like Investment banks, Pension funds, Mutual funds, PE firms, Insurance companies, Hedge funds etc, in the financial markets.

Credit Cycle

We should ask ourselves one extremely important fundamental question i.e., whether Credit cycle that has fuelled spectacular price inflation across the asset class has cracking or not before we raise doubts about continuation of bull run in stocks, commodities, properties.
I say in some segments of U.S. subprime mortgage market, it is showing signs of troule with many borrowers defaulting on their credit liability, and hedge funds along with large investment banks who love to buy these certificates are facing problems. Thats adding volatility in currency and stock markets because they pull back money from other assets like stocks if they face turbulance in holdings of their other invesments like subprime mortgage certificates. Volatility is the name of the game for some time now.

Yen And Oil

The massive surplus dollars that oil rich countries have is also fuelling prices in stocks and commodities and other assets.

And with japanese economy doing practically nothing for the past one decade, they have no other option but to invest massive japanese savings in other countries assets. This coupled with extremely low interest rates in Japan is fuelling borrowers greed to borrow cheaply from japanese banks at the interest rate of 0.5% annually!

Large investment bankers from developed countries like U.S. and Europe have borrowed significantly from Japanese Banks and invested that money into riskier assets like stocks in India, China, Brazil, Phillippines, Russia etc. This has resulted in massive run in these markets and raised concern about bubbles in certain pockets of these markets. Like we have heard that chinese are now selling their homes in order to buy stocks!

Global Liquidity And Financial Markets

Every asset class one can imagine is going through a massive bull phase un-seen in the history of financial markets. Whether it be Stocks, Bonds, Commodities, Real Estate, Art, Mortgage market. Never before we had a secular bull run in all these asset classes at the same time.

Huge liquidity (money) unleashed by central banks across the world has been fuelling this asset price inflation for the past 4 years and its in the interest of wealth managers, portfolio managers, investment advisors, financial planners to continue advising wealthy individuals/corporates to keep pouring money in these assets in order to out-perform or out-do each other. These individual/corporates also desire to out-do each other and hence raising their risk appetite in order to achieve more returns and hence take more risks in the form of leveraged by-outs/take overs as shown by some large PE funds.
Also they leverage in financial markets across the world in order to gain large profits and hence open the window for disaster if someting goes wrong in terms of rise in interest rates, big fluctuation in cheap to borrow currencies like Yen, an epidemic spread likes of bird-flu across a continent like europe, major terriorism attack on developed countries, sharp increase in crude oil prices.
Any adverse event can thus poses great risk to investors/traders financial health.