Bryan rich - Asian markets could face a black Monday

A recent report on Emerging Market funds suggests that nearly $ 30 bn left the Asian markets in May 2010. One fall-out of this outflow has been a fall off the Asian currencies vis a vis the USD alongside a fall in FX reserves. So is it possible, that the direction in which currency moves defines the way Equity markets follow? Yes, and investors better watch the strength of the US over the coming months.

Currencies represent the truest reflection of economic fundamentals and market sentiment. Therefore, they continue to be an important segment of the financial markets to watch.

Since the "flash crash" in the U.S. stock market on May 6, most market pundits and financial media have had their eyes glued to the euro for explanations on stock market activity.

Take a look at these headlines to see what I mean ...

• Reuters: "Stocks Slide, Euro Falls After Spain Downgrade"
• Associated Press: "Stocks Slide After Euro Falls to New 4-year Low"
• Press TV: "Euro Concerns Pull Down Global Stocks"
So perhaps there's never been a more important time to keep abreast of the ...

Currency Markets and Market Correlations

While the euro is proving a critical catalyst for all global markets, today I'd like to show you other examples of intermarket relationships that can offer important clues for the future direction of currencies.

First, take a look at this chart of the Canadian dollar and the S&P 500.





The Canadian dollar had been hovering around parity versus the U.S. dollar for much of April, prompting forecasts of much more strength ahead and an uptick in interest in Canadian investments.

But despite the improving economic data in Canada and the associated prospects for the Bank of Canada to start reversing record low interest rates, the Canadian dollar's fate has been more intimately connected to the performance of the U.S. stock market.

So if you have an interest in the future direction of the Canadian dollar or Canadian dollar denominated investments, you should pay close attention to where U.S. stocks are headed.

Next ...

It's widely believed that emerging market economies are the place to be. "That's where the growth will come from" experts say. And Brazil is typically on the top of the list. Also keep in mind, when the Brazilian real moves up or down, so do your investments in Brazil.

But is the performance of Brazilian markets truly a representation of the country's economic fundamentals or is it more of a reflection of prospects for the global economy?

So while Brazil may have the fundamental tools in place to attract global capital, the returns on that capital, in this highly fragile global economic climate, are likely to be more explained by the U.S. stock market.

The bottom line: The S&P 500 is acting as the key proxy of global economic health. And as global risk appetite oscillates, so does the U.S. stock market and, as a result, so do global markets.

Given the stock market declines of the past month and the elevated risk environment, these intermarket relationships suggest the performance in global markets will continue to follow the path carved by U.S. stocks.

My advice: Be aware of the external influences on your investments. A growing sovereign debt crisis and threats of a slowdown in Chinese growth represent big risks to global growth and global markets. And for cues on how global investors are digesting these risks, just watch the U.S. stock market.



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Nothing in this article is, or should be construed as, investment advice.

More Cash Will Shift Into Gold

Adrian Ash

All those who watch cross currency moves, especially Euro/Dollar, Euro/Yen, Yen/Dollar and even Rupee/Dollar cannot help but notice how strong has been the appreciation of the US Dollar against all principal currencies. In certain cases, the appreciation has exceeded 10-15 per cent in as little as one month. The latest currency to slide against the Dollar has been the Rupee, losing closing to 7 per cent in a matter of days. Suddenly, the Re/Dollar is Rs 47.60 when a fortnight ago it was Rs 44. All those voices that spoke of Re/Dollar at Rs 39 by December 2010 have died down.

But what has Gold done-it has moved from roughly Rs 1680 a gm in April 2010 to roughly Rs 1920 a gm in May 2010, a gain in rupee terms of more than 10 per cent. This is what Gold has done against the Dollar, Euro and Rupee if we broaden the trading range to over 6 months. And this trend will accentuate as the Euro and the Yen fall against the dollar, and investors find refuge in an appreciating currency-Gold.

For the first time, the de-coupling of Gold from paper currencies is now self evident. So much so, that this is the only precious metal which seems to show positive returns for the 13th year running,

So what is happening?

Inflation-Proof Deflation Hedge

Knowing how governments will respond to deflation, the case for inflation-proof gold looks increasingly clear to cautious wealth...

USELESS for pretty much everything except storing wealth (its economic value is social, not industrial), gold acts as inflation-proof money when investors need it most - right in the middle of an asset-price deflation.

At least, that's how people choosing to buy gold amid today's global deflation in risk assets see it. Why else do you think German coin and small-bar dealers are being emptied, even at 5% (and worse) premiums to "melt" value? Why else did gold-hoarding deliver secure, rising purchasing power amid the Great Depression of the 1930s...?

Given central banks' default response to any level of financial stress, it's a unique and appealing attribute. Because rather than leaving cash hoarders alone, sub-zero real rates of interest - plus the ever-present threat of massive devaluation - force sleepless nights on cautious savers. (The risk of banking collapse is an extra, but non-government-inspired threat.)

So when there's a dash for cash, it's little wonder that "worried wealth" finds gold better even than Dollars. Because gold cannot be inflated, nor destroyed. And it has 5,000 years of human use as a secure store of value behind it.

Yes, this month's flight from everything into cash (which still means US Dollars worldwide) has knocked the gold price 6% off its recent record high vs. the greenback. But compared with all other assets bar Treasuries, however, gold shows phenomenal strength so far. Oil is down 20%. Platinum is 15% off. Aussie Dollars have dropped 10%, despite paying 450 basis points above cash deposits at the US Fed.

And should the slump continue, investment demand for physical gold is likely to put a floor under gold prices much sooner than other "risk assets" find their floor, just as it did during the Lehmans Crash.

Amid financial stress, physical gold hoarding creates a source of deep and widening demand that no other asset class enjoys. Not even silver comes close, because institutional and high-net worth buyers would rather get gold's significantly deeper wholesale liquidity and much lower storage costs.

Indeed, it's hard to class all "precious metals" together - in terms of price behavior - when the inevitable hits the fan.

Gold, unlike platinum and silver, commands a "safe haven" premium that industrial commodities can't - a critical point when credit dries up and risk assets are converted back into cash.

Compare gold's price-action with any other raw material, in whatever currency. When confidence and economic demand sink, gold attracts capital. Whereas crude oil, copper, soybeans, even silver and platinum...they're all vulnerable to risk aversion, because their bull markets tend to rely on economic growth, whether or not it's fed by money-supply inflation.

Gold, in short, is not merely the "inflation play" that most analysts and journalists think (if, indeed, they're thinking at all). Hoarding physical metal may not seem a "sophisticated" reaction to current events. Hedging your move into cash may not even outperform an all-Dollar position, short or long term. But it is perfectly normal, historically evidenced, and sane response.