How long will this rally last?

(Posted on Monday 1am)

The US equity market or in any stock market, as usual, is ahead of the (US) economy. When US stock/indices start to rise in October 2011, the US data started to improve, right? Most of the US data had been pretty good so far, with the latest being, the Non Farm Payroll and Unemployment data.

With the exception for the Euro Zone; the US, BRIC, emerging markets, Asia reported

·         Better data namely PMI,

·         Monetary stimulus,

·         Corporate earnings beating expectations,

·         Lowering interest rates (in support for growth vs. Inflation).

And some of you probably know that the volatility index is at current at 20 thereabouts from readings as high as 45!

And what does the last two points encourage? That is, in an environment where interest rates are low and volatility is not high. It encourages carry trades.

If you’re not too familiar with the carry trade concept (please Google it, this point is VERY important). And the king of safe haven currencies is the Japanese Yen.

Did you notice what happen to the Japanese Yen and the US dollar lately? While most economists, fund houses are bewildered with the fact that the Japanese Yen is weakening against most major currencies (apart from the recent monetary stimulus), the obvious reason is; in a low volatility environment coupled with very low interest rates (for an extended period of time like the US until end of 2014) this encourages carry trade. That is borrowing from low yield assets and investing in higher yield assets like the Aussie, Kiwi, Loonie, commodities.  Similarly, high yield assets like stocks rise. Does this explain why the high yield assets (like commodity currencies) have strengthen? The Euro is NOT!

Hence, let’s get back to the subject matter of this post.

If you follow most, if not all of the above, you should follow closely to the volatility index, VIX! For e.g. One of the possible events that may cause the volatility index to rise/spike could be the events that are brewing in Europe; Greece and/or Portugal, etc. And when that happens, it is known as unwinding of carry trades. What happens thereafter is your imagination!

Finance ministers from all 17 euro-area countries meet in Brussels (Monday) as governments close in on a deal to unlock a 130 billion-euro aid package for Greece. Hence, my speculation is that volatility will be highly in suspense before the news!

News over the weekend - China cuts RRR by 50 basis point, effective Feb 24th, 2012 afterwhich a newsflash from Bloomberg on China. Japan to assist Europe solve the debt crisis thorugh the IMF. (Specifics are not out yet.)

And if some of you still don’t follow, please feel free to comment or ask questions. While the rest may understand the above, why not drop me a comment on the above analysis! And if you like the post,

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For the record, my posting since Jan 2012 had been very receptive with my last post, Investment planning, huh hitting ALL time record high page views. Thank you for visiting my blog for quality and timely posting.