June 10, 2008

Global Market Comments for June 10, 2008

1) There was coordinated verbal intervention by the Fed, the Treasury, and the president, to support the dollar, emphasizing the risk of inflation, which would lead to higher interest rates. The dollar gapped from the $1.58 handle to $1.54, and the thirty year bond futures dropped a full point to 113.50. In two days, two year Treasury note yields leapt from 2.30% to 2.90%, one of the most rapid moves in history. Crude fell $7 and gold was off $28.

2) I spoke to the head of research at Nomura Securities in Tokyo last night. He believes that the Nikkei is poised for a 20% move up in the next few months. Japanese companies have amassed a huge war chest for buying back their own stock. Individuals are sick of earning zero interest rates. The yen has already backed off from its ??96 high to ??107, and further weakness will enhance the competitiveness of Japanese companies. Foreign equity weightings in Japan are historically low and the return of gaijin will add fuel to the fire. Japanese companies currently own the global hybrid car market. The only thing missing is a trigger to unleash all of this buying, such as a turn in oil prices. There is a very nice long side trade setting up here. The Nikkei closed at ??14,021 last night.

3) There was an unprecedented reduction in the open interest in crude contracts last Friday, falling by a record 10,932 contracts, indicating that traders are pulling out of the market. Many traders were wiped out by Friday’s moves and the volatility has scared away many professionals. Better to fight another day. The reduction in capital will make crude prices even more volatile.

5) Lehman hit a new five year low of $27.

6) Corn hit a new all time high of $6.75/bushel.

7) Vietnam has hit a new two year low of 373, off 66% from its high only eight months ago. The inflation rate there has soared from 8% to 25% driven by higher crude and food prices.


If crude keeps going up here is how it will end. The Fed will organize a massive and coordinated central bank intervention to gap the dollar up, Saudi Arabia will announce a major OPEC effort to increase production, and the president will announce an emergency release of oil from the Strategic Petroleum Reserve. This will send crude back below $100 in short order where it will stabilize until alternatives come on stream. Today’s verbal action was a preview of such a scenario, sending a warning shot across the bows of speculators.