According to the Treasury Department, the global demand for US financial assets strengthened in March to a record level, as investors from China to the UK purchased, amongst others, the largest amount of US Treasury bonds since November 2009. Overall, foreign investors were buying equities, notes and bonds in amount of $140.5 billion in March, after a net buying of $47.1 billion in February. It is a clear signal that foreign institutions and investors are returning to the US as the ultimate safe haven. Not surprisingly, China remained the biggest foreign holder of US Treasuries after its holdings rose by $17.7 billion to $895 billion in March. Japan, the second-largest holder, increased its holdings by $16.4 billion to $785 billion in March. Holdings in the UK gained $45.5 billion to $279 billion. Continue reading ‘The Return To Risk Aversion’
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During the second half of 2009, the apparently endless and prolonged slide of the once mighty greenback against most of the other major currencies was primarily attributed to the Federal Reserve’s near-zero interest rate policy. The relatively cheap dollar funding has led to an escalation of the carry trade, where investors were borrowing USD and investing in commodities or higher yielding currencies. We all remember that China, the world’s largest holder of FX reserves, and Russia have both called for a new global currency to replace the US dollar as the global currency reserve. On top of that, Bill Gross – PIMCO manager, claimed that the dollar would continue to weaken as long as the US was pumping massive amounts of money into the economy. According to an Italian money manager, “the diversification out of the dollar will accelerate, and people are buying the EUR not because they want that currency, but because they want to get rid of the dollar.” At the beginning of this year, the median estimate of more than 40 economists and strategists was for the dollar to end the year at $1.47 per EUR. Continue reading ‘EUR:USD – The Sultan Of Swing’
On January 11 2010, though CBOE Volatility Index [VIX] dipped shortly under 17.00 mark it did close at 17.55 – the lowest level since May 2008. Right after Lehman Brothers bankruptcy and the demise of AIG, the VIX hit its historic high of 89.53 on October 24, 2008 on concerns about the banking system stability. Prior to this crisis, the VIX had peaked at 38 on August 8, 2002. By definition, the volatility index measures expectations of volatility, or fluctuations in price, of the S&P500 index. Higher values for the volatility index indicate that investors expect the value of the S&P500 to fluctuate wildly – up, down, or both – in the next 30 days. The index is also known as the “fear index” because a high VIX represents uncertainty about future prices. Warren Buffett once said “Sir Isaac Newton gave us three laws of motion, but his talents did not extend to investing. He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men”. If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.” Continue reading ‘Fear Factor’
The stock market has rallied tremendously from the twelve-year lows that were seen in March 9 2009. The Dow Jones index traded as low as 6,547 and it has rallied more than 3,200 points in just six months. Similarly, S&P 500 index traded under 670 points in early March and recently topped the 1,060 mark. An incredible rally to be sure – one of the biggest six-month rallies that we are likely ever to see. The million-dollar question now becomes: is this a powerful “bear market rally”, or the beginning of a secular bull market? Many investors agree that the worst news is now behind us, and that this is the beginning of a bull market. However, many hedge fund managers are betting against the rally, expecting that the US economy will have some trouble moving forward. Continue reading ‘The Bear Market Rally’
As we recall, the US dollar reached relative highs in March after its 24% rise from the 2008 lows. While the recent sell-off has been across the board, losses against commodity currencies have been pilling-up. The Australian and New Zealand dollars are each up more than 20%, and the Canadian dollar has gained 16%. There have been two distinct waves to the dollar’s recent weakness. Initially, the dollar sell-off was driven by investors looking for signs of global economic recovery. As confidence increased, investors rushed into buying risky assets, and abandoned safe-haven U.S. government bonds and the dollar. Then, toward the end of May, investors became worried about the potential for a downgrade of the U.S. sovereign-debt rating and sold-off the dollar again. Let’s address few fundamental aspects within the FX space. Continue reading ‘Fundamental FX Triad’
Speculation is certainly not for everyone, but trading is definitely not a snobbish occupation of an exclusive club of Ivy League graduates. There are many things to be said about trading. However, two points are paramount in becoming a successful trader: a rock-solid discipline and a timely acceptance of the losses.
In a nutshell, investors could have either a bullish or a bearish sentiment. That practically translates in the expectations that the markets will rise or fall within a pre-defined time-horizon. Under a quick classification, any financial instrument could be either a spot product or a derivative product. For instance, when you buy 100 shares of Apple [AAPL] you create a long position in that stock. For every dollar that AAPL share goes up in value you make a $100 in profit. Your profit & loss (P&L) account goes up or down linearly with the underlying product. However, when you trade futures or options products, the relationship does not work anymore. An option is a derivative, as it derives its value from an underlying asset. As the price of the underlying asset, such as a stock or commodity, moves in the marketplace, the price of the option changes in harmony. Continue reading ‘Options Trading 101′
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