Monday, January 07, 2008

Market Mutterings

US Jobs Data
- Well, it looks like the final pillar standing has finally crumbled. That has caused players to factor in even a total of 1.25% in rate cuts by the Fed by March/April. The knee jerk reaction to sell down the Dow should be just that. The Dow should regain lost ground from here on because the jobs data would definitely force the hand of Fed to lower rates by at least 1.0% in total (in two strikes) by end March/April. That will give stocks a better footing going forward.

- That being the case, the USD will immediately be under pressure on the lower rates scenario, thus causing funds to flow to stronger currency markets for 1Q2008 at least. The sharper gains in yuan over the last few days (following a meeting between US and China officials) would indicate that an "agreement" has been reached to have a much stronger yuan and a weaker USD.

Inflation - That's the ugly spot affecting many developing countries but will be mitigated somewhat by stronger local currency. Almost every commodity and soft commodity have gained enormously over the last 3 years. We have to factor in some of the increase has been due to the persistently weak USD as the bulk of commodities are priced in USD.

- That also explains part of the higher oil prices as it is in USD. Plus the fact that OPEC has said over the weekend that they won't be raising production just yet would continue to support high oil prices. Problems in Pakistan and Nigeria continue to contribute to high oil prices. We should be wondering how oil prices at triple digit levels cannot be pushing inflation through the roof! That's because much of the increased demand for oil and other commodities are due to higher consumption and higher production efficiency. Naturally all goods and services will be priced higher but strengthening local currency helps to combat that somewhat - as the bulk of the consumption growth is in developing countries and not the US.

- The US can still stand because many of its companies now derive almost 50% of their revenue from the rest of the world. As long as growth from overseas is strong, it can cover their dependence on US domestic economy.

Stock Prices & Liquidity
- At present levels, markets pushing higher are more likely to be due to liquidity forces rather than company fundamentals. Hence one can say its bubblish area going higher. If there is a further contraction in liquidity, it could be messy. Thus investing now may bring more volatility.

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