Master Rider Blog

Market View 130907

September 13th, 2007 NW Teong

A quick glance at the macro indicators that I monitor on a daily basis show me that some of the indicators are worth a closer look. They are 1) the US 10-year Treasury yield which closed at 4.41% yesterday. As mentioned before in my earlier blog, at 4.41%, this is the lowest level since Dec 2005. Of course, it has just ease off a little from yesterday’s 4.37%. This is basically a market indication that signals Fed to cut its Fed funds rate. 2) The crude oil is at a historical high of US$80 dollar per barrel! I feel a bit odd but not really surprise that there is no panic in the markets. As I said before investors are kind of immune with this high crude oil price. My view is that, we cannot afford to ignore this important commodity, not until we have found a good alternative, which may be 10, 20 (or longer) years down the road. Please be aware that a long and sustainable high crude oil will surely impede the growth of most economies (except those economies that depend on it). The worst case scenario due to this is like the oil crisis experienced in the late 70s. I am not saying the crisis will happen again, common sense tells me that surely someone is going to pay for this and it is most likely that common people like you and me that would have to foot this enormous bill. If you still cannot understand what I am saying, look at your electricity bills, your petrol bills, your public transport fares, and other consumer products which prices have increased due to higher freight rates, higher input (energy) prices….so on and so forth. If US economy is on a slow-down mode, the last thing it needs is a prolonged high crude price. Bear in mind that winter is round the corner which might mean much higher demand for the last quarter of the year. In addition, some oil producing countries are always facing the threat of supply disruptions due to potential internal military conflicts. 3) The next indicator that prompts my closer monitoring is the currency exchange rate. Euro is at historical high vis-à-vis US$ (please see chart below)

While Japanese Yen is not at historical high currently, it has also strengthened a fair deal since end of June this year (please see chart below).

All the above are basically what I called conditions for volatile markets. On one hand, you have credit market crisis, housing market slump, consumer spending (might) slow down in US. These are now joined with a shocked ugly labour data (only one month bad data, need to monitor more on this. If subsequent data are very negative, this is a very bad symptom for US economy) and a high crude price. All these are forces/indicators that US economy will not be in good shape in times to come. On the other hand, we are all hopeful that US government and Fed would come out with prudent measures to address all these issues. However, we understand that all policies need to be considered carefully. For instance, there are market analysts, prominent economists, investors argued for a higher and speedier interest rates cut. While this may give the markets a powerful shot in the arm and a booster for the economy, a too aggressive a cut in interest rate may cause asset bubble in a later period. In addition to this, a lower interest rate would also put huge pressure on US currency.

To sum it all, my view is that Fed is likely to just cut the interest rates by 25 basis point (as oppose to some aggressive call of 50 basis points cut) on 18 Sept. While I have said that Fed would rather err on the safe side, thus it will cut the interest rates, however in my opinion, the US Fed Chairman, Ben S. Bernanke, a conservative and careful person would choose to do it on a gradual basis. In any case, should the markets need another rate cut, Fed has the authority to cut the rates at any time (i.e. before the next FOMC meeting) that it sees fit.

At current level, markets have priced in a 25 basis point cut in Fed funds rate, if markets are also trying to factor in a bigger cut, I am afraid investors would be disappointed when Fed announces its interest rate policy on 18^th of Sept 2007.  Happy investrade in this volatile quarter, cheers!

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Entry Filed under: Macro, Stocks