Key News
• The contraction in the credit markets is spreading to global investment-grade debt, with issuance of highly-rated bonds falling to the lowest levels in years. The tightening of credit has been most pronounced for lower-rated debt in the US, but figures from Thomson Financial show a significant decline in activity in the global investment-grade market as well…“Some of the key drivers of liquidity, the subprime and new debt issuance markets, have effectively shut down,” said Richard Gilhooly, senior fixed-income strategist at BNP Paribas. (FT)
• The slide in stocks makes it more likely the Bank of England will keep its key rate on hold at its meeting this week. (WSJ)
• U.S. Treasury Secretary Henry Paulson, rejecting claims in Congress that he's too soft on China, said negotiations rather than sanctions have led to a faster appreciation of the yuan. (Bloomberg)
Key Reports
10:30a.m. July Dallas Fed Mfg Production Index. Previous: 14.0.
Quotable
“Good tests kill flawed theories; we remain alive to guess again.”
Karl Popper
FX Trading – A test of dip theory!
They say Pavlov’s dog could salivate on cue to the sound of a bell. Well, guess what, portfolio managers and investors can too. The problem is, since there are no bells ringing at the top, many of us are salivating to exactly the wrong stimulus—a dip. On Friday we warned about friends who urge you to jump back into the stock market to scoop up those seeming “bargains.” And right on schedule we saw this lead headline on Bloomberg.com Sunday afternoon:
Cheapest Stocks in 16 Years Entice Investors Amid Market Rout
July 30 (Bloomberg) -- Investors are preparing to snap up shares of telephone, health-care and computer companies after last week's $2.1 trillion global stock market rout left U.S. equities the cheapest in 16 years.
[Of course the headline resonating in our heads appropriate for stock investors is this: Danger Will Robinson!]
Buying the dips in a bull market works! It’s the stimuli that conditions investors. Just as Pavlov’s dog who learned food was near and salivated when he heard a bell, investors have learned that profits are near when the market dips (though the dip is a unit of measure difficult to quantify).
It’s really no different in the currency arena where Pavlov’s conditioning process is embodied in the Japanese yen. Buying the dips in USDJPY has worked for a very long time because the carry trade has worked for a very long time. And the break in the carry trade will have little to do with Japanese fundamentals and everything to do with global risk; thus why we’ve coined the yen our global temperature gauge.
Credit risk is still spreading. Funds (big yen borrowers among them) are under pressure. No doubt this is the best test yet in this cycle of the theory “things are different this time” because credit can be manufactured 24/7 in any sausage shop in town.
Bottom line: We still like short $-yen (long futures). We still like short NZDUSD. We still like short SPU. We still like long Treasuries. But then again, a lot of people probably like those trades by now, so maybe it shows we’re only salivating in own right. Hmmm!
Jack Crooks
