Turning Points: Fed Tapering Bond Purchases, Central Banks Shoring up Currencies

All the talk of the Fed tapering bond purchases has put the markets in a tizzy. The 10-year US Treasury bond yield is now ratcheting upwards. Money is fleeing emerging markets, and central banks in these countries are now trying to support their currencies, rather than devalue them. What a difference a month makes.

China is in a tussle with its banking system. And the US real estate market appears to be the engine driving the US economy right now, with expectations that the US is in a mid-cycle slowdown to resume growth later in the year. The reflation is finally working, but at what cost? No one yet knows, but bubbles appear to be forming everywhere.

Here's a wrap-up of key issues affecting global markets for fundamental investors.

Currencies

• Talk of Fed tapering has upset the status quo: Emerging markets are now shoring up their currencies. (CNBC)
• "Tapering from Currency Wars to Interest Rate Wars" (Zero Hedge)
• Ford's CEO calls Japan a currency manipulator. Isn't that kind of like calling a dog a "four-legged animal"? Not picking on Japan, but all central banks are actively engaged in "actively adjusting" the value of their currencies. (Bloomberg)

Commodities

• Don't Listen to Pundits that overhype the lumber price correction. See two nice charts that show lumber prices in short run prices are off 30%, or so — but still well elevated over five years. (Seeking Alpha)
• "Rise in Shale Oil Boosts Global Crude Supply Estimate" (Reuters)
• "Gold Slumps on Fears Fed Will Signal Taper" (MarketWatch)

China’s Direction

• "China Loses Control of Its Frankenstein Economy" (Bloomberg)
• "China's Central Bank Has Its Own Worries" (New York Times)
• When China sneezes, commodities catch a cold. (SmartPlanet)

Derivatives

• CDS prices are rising in Japan and Australia. (Bloomberg)
• "Cash Hard to Raise as Fed Jars Credit Markets" (Reuters)

Energy

• Oil demand in the developing world surpasses demand in the developed world in April — and this trend will never reverse. (Reuters)
• Recent innovations in solar technology will make it cost competitive for the first time. (Renewable Energy World)
• America's shale oil boom could end sooner than you think. (Forbes)

Euro Crisis

• "Chronic Job Crisis Worsens in France" (EuroNews)
• "Euro Crisis is Coming to a Theater Near You" (Zero Hedge)
• Italy's borrowing costs are rising. (Reuters)

Hedge Fund Money

• Hugh Hendry says that Japan's return to the global economy is bad. (Hugh Hendry Blog)
• One of Dalio's funds at Bridgewater is trailing the market badly. (Reuters)

Interest Rates and Central Banks

• "Yellen Overwhelming Favorite to Replace Bernanke at Fed" (Reuters)
• "The Chairman Just Killed the Bernanke Put: Fed Ready to Taper QE This Year" (Forbes)

Japanese Debt and Inflation

• The Japanese government is not panicking over the recent spike in the Yen. (Reuters)
• "Japan's Export Value Rises at Fastest Pace in Three Years" (Financial Times)
• "Japan's $1 Trillion Pension Fund Mulls Real Estate Spree" (Reuters)

Stock Market

• Recent performance of the S&P 500 by sector. (Standard & Poor's)
• "Dow, S&P 500 Dive on Rising Interest Rates" (USA Today)

US Real Estate Bubble 2.0?

• "US Housing Prices Increased More Than Forecast in April" (Bloomberg)
• US housing inventories stand at 12.5mm. (Zero Hedge)

Time Capsule

• The following link is a timeline of events in the Asian financial crisis of 1997 put together by Frontline. What is absent from this link is any discussion of how the crisis happened. In brief, as the Reverse Plaza Accord between Japan, Germany, and the United States unfolded, the dollar appreciated strongly, and the Yen depreciated strongly (falling by about 50% vs the US dollar). Asian economies had their currencies pegged to the US dollar and had substantial dollar-denominated debt. Consequently, they were forced into a choice — either keep the peg to the US dollar, thereby letting their exporters battle against Japanese exporters with now-much-cheaper goods, and pay off their dollar-denominated debts at the same level. Or, they could devalue their own currencies to better compete with Japan (and Germany) in the export markets and pay off debts at much higher (devaluation-adjusted) levels. They chose the latter.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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