Rosy Ending to Q3 Part 2 : Not A Single Doji

rose in bloomNot a single doji in sight for the monthly candles. The quarter will end in a nice way given the Hindenburg omen expires tomorrow !

Examining the quarterly performance, we find Nikkei and Nasdaq the champion for 3Q. Emerging markets did not fare too badly except for Indonesia. And the VIX Index is starting to look redundant !

CBOE SPX VOLATILITY INDEX        14.06         16.28 -13.64%

There is an interesting new indicator I just read about constructed by adding the inflation rate, the unemployment rate and the S&P 500’s price/earnings ratio based on trailing 24-month earnings. Source :

This indicator currently points at US stocks in a high risk zone. Korea and Norway are looking good by the same standards.



Commodities are so dead, with the exception of crude and Syria, and we have Citibank calling for the sunset of the commodity supercycle which does not look so good going ahead for most of the EM exporters, particularly Latam and mighty Australia. The only support commodities will have is the potential of the non Taper and more LTRO in Europe which are uncertain events with finite time frames on which their fate hangs upon.

In the foreign exchange market, we can truly observe the suffering of emerging markets. For someone who had invested in Indonesian equities for the quarter, you would be sitting on forex losses of 13% and the index loss of another 10%. Whereas for the case of India, your equity gains of 2% could have buffered that forex loss of 9%. But that is still no fun.

Korea is showing remarkable resilient for both her currency and stocks, possibly for the market valuation reason I mentioned above.

fx q3

The bond market correction cannot be described as violent in most of the markets because it is just a mere correction from the relentless rally we have enjoyed for 5 years. There is still an inordinate amount of money in bonds.

The FED owns >40% of all US treasuries above 5 years and the rest is taken up by  investors such as mutual funds, central banks, insurance and pension funds (about 81% of the total market). Foreign cross ownership is on the rise for government bonds with 30-50% of IDR government bonds owned by foreigners (compared to 20% in 2008) and countries like Malaysia and the Philippines have about 40% of their bonds going offshore.

Fortunately this recent yield rout does not affect entities like central banks who are not profit accountable.

 10Y Bond Yields 27-Sep-13 3-Jun-13 CHG
UNITED STATES           2.66         2.12 0.55%
CANADA           2.59         2.05 0.54%
BRAZIL         10.88       10.48 0.40%
MEXICO           6.06         5.47 0.59%
POLAND           4.42         3.51 0.91%
UNITED KINGDOM           2.75         1.99 0.76%
GERMANY           1.83         1.52 0.31%
ITALY           3.75         3.57 0.17%
SPAIN           4.34         4.47 -0.13%
IRELAND           3.87         3.88 -0.01%
BELGIUM           2.62         2.26 0.37%
SWEDEN           2.48         1.95 0.53%
SWITZERLAND           1.07         0.75 0.32%
NORWAY           2.97         2.29 0.68%
AUSTRALIA           3.88         3.42 0.46%
MALAYSIA           3.75         3.46 0.29%
INDONESIA           8.21         6.01 2.19%
THAILAND           3.83         3.57 0.26%
TAIWAN           1.71         1.35 0.36%
INDIA           8.73         7.24 1.49%
SOUTH AFRICA           7.59         7.09 0.50%

Where are we going from here ?

Make no mistake, it will be data dependent and we all better learn to trade every asset class on every economic number or speech that comes along. Central banks are on a leash now and they will do anything to prevent a crisis or recession.

I really cannot bring myself to project longer than a month or two at this rate, knowing that trades are piled high in the equity asset class and still heavily weighted bonds.

Having said that, there is still a strong start coming into Q4 next week with not a single doji or Hindenburg omen to haunt us.