Problem with an illiquid market
The single issue in any market is the ‘depth’ of liquidity.
The biggest issue, as has been demonstrated with the German Bunds, European Bonds in general and EU markets sell off is liquidity.
These markets, together with the currency markets gaining strength against the USD, will stabilize over coming weeks, German Bunds and the Dax in particular with the USD slowly regaining strength.
The issue of volatility is the problem, due to uncertainty and this problem will not go away.
Technically, yes a good word in economics when ‘all things are equal’ the mass printing of monies through Quantitive Easing should reduce currency value, similar to the Central Banks dropping interest rates, plus increase inflation, plus force equity markets to rise due to the devaluation of currencies.
The problem is though this is a war, a currency war against the USD. The losers are the retirees, pension funds and yes, Central Banks. The winners are the proprietary Banks, first and foremost. All that the QE programs do is recapitalize Banks capital, transfer of bad loan assets. They do not re-lend this money back to the market. In fact they deposit the mines in the US Fed Reserve and receive a nice earner.
The Banks therefore create a ‘credit crunch’ and there is no inflation on the horizon, as the available monies that should be lent are parked at the the Fed Reserve.
This action, reaction and timeline is exactly the situation that will bring about the Global Bond crash in late September 2015. We are seeing the effects of no liquidity being played out again in all markets.
Nothing can stop this. The train has no driver, is fully fueled and no one can stop it.
It will be a contagion so severe you will need plenty of toilet paper to mop up the crap.
Now to indicate the mere fact that there is really no satisfactory return in the European Markets, as they are in recession Central Banks are buying US equities. The buying is not being done by the retail investors. As an example the Swiss Central Bank is becoming a valued shareholder in Apple.
Then we have hedge funds, these poor bastards are betting against the inherent market volatility and doing what one would do when the markets are in ‘normal’ mode. They are trying to play ‘safe’ and make a profit by gearing up in known profit making areas.
But the markets are not normal fullstop.
The markets will not be for some time as weird gets weirder.
Please note that in any normal market, when a Central Bank reduces interest rates as the Reserve Bank of Australia did, then the AUD technically should drop … All things being equal.
Well they did not… AUD rose against the USD and there were a hell of a lot of casualties.
Here is one such news report… A lot of money lost.
“Odey Asset Management founder Crispin Odey’s flagship hedge fund slumped 19.3 per cent last month, after it was caught out when the Australian dollar strengthened against the US dollar.
The large one-month move, from one of London’s best-known hedge fund managers, wiped out Odey European’s small gain in the first three months of the year and took its 2015 performance to -18.2 per cent, according to investor documents.
The €2.33bn fund has built up a short position in the Australian dollar against a long position in the US dollar, which drove monthly gains of 4.6 per cent in March. However, since the end of March the Australian dollar has gained against the US dollar.
Odey’s currency position is leveraged, which magnified the losses.
This week, the Reserve Bank of Australia reduced its cash rate by 25 basis points to 2 per cent. But the Australian dollar rose even higher against the US dollar, following weaker economic data from the US.”
So this is one, remember that the EUR also gained good ground against the USD, as did other currencies. It is stabilizing for now but how many more billions was lost and not reported, as yet?