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Market rallies flop into new year January 2009. Big sell soon on the Australian Dollar.

Posted by Adrian on February 3, 2009

I wrote a blog post in November 2008 titled Confused markets, deflation/stagflation threats and our old friend gold. The post detailed that I personally did not see extended or significant rallies in global stock markets into 2009. As it turns out that January 2009 was the worst month in history for the Dow. Although it was said that a rebound could occur from January 2009 to March 2009 this appears unlikely, as new lows may continue into March 2009. The volatility has fallen off somewhat, some commentators claim that the markets are unsure, hence the term that I use ‘confused markets’. But I think the market is now factoring in the absolute failure of the global economy in 2009, rather that potential upsides from Government intervention. In fact in my opinion the market now have factored in that government intervention does not work and won’t work to stimulate the markets, so a downside persists within the current market psychology. So it could be argued that the market is looking for that bottom, ignoring government intention as a possible market primer (as mentioned it has failed overall only effecting the bond markets factoring in a massive US deficit and the currency markets pricing in rapid value destruction of the US dollar).

The Australian economy (like the rest of the world) is in trouble, or more so, as it is a economy the relies heavily on commodity exports to Asia, notably China. As most governments have increased huge fiscal spending, Australia is leading the forefront (per capita) with a massive $42 billion (AUD) stimulus package, mimicking Obama $900 billion; the stimulus package will attempt to fuse infrastructure spending as the main driver of GDP growth. Of course this is a fallacy, especially for a country that relied heavily on capital flows from overseas investors and commodity exports. Even as the stimulus plan was introduced ( including the Australian Reserve Bank cutting interest rates at 1.00%) the market didn’t rally as expected. Again, the market is now settling into a downward trend as it is pricing in a deflationary and global slump into 2009

refer to graph (Australian all ords):

The main sell will be the AUD, already crunched dramatically last year 1st October 2008 bouncing off .60 cents from highs of .98 cents (July 1st 2008). The AUD is is trading in a very tight range between .65 and .62. Both CCI’s show a slight recovery from an over sold AUD, I would say that is temporary with the AUD going to come under huge pressure again breaking through support of .62 and falling lower under .60. All this depends on the government of Australia trying to raise capital from it’s debt and combined with private capital investment leaving Australia. Eventually Australia will have a bond down grade and will lose it’s credit worthiness.

Please refer to graph (click for larger image)

aud_usd

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One Response to “Market rallies flop into new year January 2009. Big sell soon on the Australian Dollar.”

  1. […] Europe, reporting that the UK goverment debt barometer is between 70%-100% of GDP. As discussed in Market rallies flop into new year January 2009. Big sell soon on the Australian Dollar, I didn’t see prolonged stock rallies into 2009. I was correct. In fact the main indices […]

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