The current fundamentals and how to trade them

The markets have calmed down a lot in recent weeks. There is a feeling that the worst in the money markets is now behind us. This may well turn out to be a correction in a bear market in equities rather than the beginning of good times.  Indeed it is hard to see how the bear run could end so abruptly. The authorities have been pumping a stunning amount of capital into the markets and that seems to have the desired effect of making people stop deleveraging. The specter of inflation is bound to be a problem as all that money from quantitative easing works into the economy in the near future. Barring any unpleasant surprises, it makes sense for bond yields to start going up as more and more money goes in the direction of equities and other assets.

It is difficult to see which currency would benefit from all these developments. The yen is no longer a carry vehicle since the rates from the other major economies are close to zero. Euribor indicates real interest rates in the euro zone are lower than the official rate suggests. The US is providing very large sums of money through quantitative easing but the BOE is not far behind. The ECB is buying covered bonds and the BOJ are old hands at the money printing business. Despite this, inflation is low in all of the four major trading areas.

Industrial production figures in the euro zone have been terrible in the most recent release and the credit rating of countries like Greece and Ireland are abysmal. Spain is quietly suffering the worst slump in the housing market and very high unemployment figures. There is a good chance unemployment can hit 10% in the US, although no one knows how high it will go before it hits a peak.

The UK economy is highly dependent on the banking industry and its fortunes are bound to rise and fall with financial sector.  There is no reason to expect any major improvement in the short term and confidence in the banking sector is too fragile for cable bulls to rely on any signs of revival. However, there are likely to be some fast moves whenever there is a glimmer of hope that things maybe improving

For all the famous clarity of Trichet and the ECB, the difficulties in Europe seem the most opaque among the major trading areas: some major countries are entwined with the credit market of Eastern European countries and these nations have some serious problems that can force the ECB to do even more to help them out despite the consternation of some members of the ECB, notably Weber.

The Japanese Yen’s fortunes continue to reflect risk appetite for reasons that are no longer very obvious. Japan doesn’t seem to produce as many bad news as the rest of the major countries and it is one area where it is hard to do any obvious analysis.

Taking all of the above into account, it is not easy to see any major directional move on any particular pair and range trading with low leverage seems to be the safest way to proceed. To be sure, the ranges are bound to be wider than the good old days that preceded the credit crunch. Short term trading with tight stops is likely to present headaches and it pays to adapt until there is a sign of orderly moves in the market. That may be a long way off but there are ways to make some decent money under these circumstances. Indeed this may well be a blessing in disguise.