Dollar strength could be the next story of 2010
Monitor
Dollar strength could be the next story of 2010
It’s turning out to be a quiet — and tiring — end to the year for
equities, a year that ironically saw one of the biggest rally seen in
recent times. Stocks in emerging market economies as well the
developed world including the US have seen a sharp rally from the
March lows when markets bottomed out in the wake of the financial
crisis.
According to Kirby Daley, Senior Strategist at the Newedge Group,
markets may now “drift down quietly” till the year end though there
may not be a sell-off. “We remain sceptical on the markets globally,
and also of the sustainability of the economic recovery if the
government stimulus is withdrawn,” he said.
Daley added that the recent strength seen in the US dollar against a
basket of other currencies may continue and could be “the story of
2010”. That may be come as bad news for emerging markets and
commodities as it is generally perceived a weaker dollar tends to be
better for these asset classes.
Here is a verbatim transcript of an exclusive interview with Kirby
Daley on CNBC-TV18. Also watch the accompanying video.
Q: Do you think the market weakness is linked to the snapback in the
dollar or is there something else driving it?
A: It’s just a general wind down to the end of the year. I do not
think there is any impetus after the strong performance of markets
overall this year to rally into the year-end. I think the rather the
more logical scenario was people to take some profits, take some money
off the table and I expected a very quiet drift into the new year and
it looks like that’s what we are getting. There is a lot of
conflicting news out there, some positive economic signs - they can be
interpreted both ways.
Until investors come back fresh in the new year getting new
perspective we are probably unlikely to see any major swings in
markets. I do not think that there is anything overwhelming negative
that’s going to spark a sell-off but I do think that the markets are a
bit tired after the excessive run that they have had.
Q: How high would you rate the outside chances of a sharp cut because
through last week a couple of Asian markets like ours actually lost
quite a bit?
A: The risk is to the downside. The investors need to be aware of that
even though we probably are unlikely to see any major move that
doesn’t mean that there couldn’t be shock to the system whether it’s
geopolitical or whatever the event maybe that could spark an event.
There is a far higher chance of something sparking a large sell off in
most markets then there is if any good news coming out would cause a
rally that it would get away from investors. So as a trader or
investor you need to keep that in mind. The risk is far more to a
downside sell off than to any type of a rally upwards from here.
Q: You have been slightly sceptical of this entire up move. What is
your sense going into 2010, economic reality will catch-up with the
market and that will cause a possible double dip or do you sense that
this entire liquidity picture is still too strong and now possibly a
shift from the dollar to yen financing again may keep markets propped
up?
A: I do remain sceptical and I do think that while we may see some
continued investment flows through either the dollar carry trade or
maybe some people trying to throw on more of the yen carry trade as
well. That is something that could keep markets from moving to the
downside as quickly as they should in my view to adjust the
fundamentals. I do believe and expect that looking at the market
dynamics and the follow of good news versus bad news that we have had
and what is likely to come as some stimulus programmes start to wind
down and some of the Fed’s buying programmes in the US if they go off
the books as scheduled in the next few months – there will be some
major shocks in the system.
Hence, I do remain highly sceptical of the ability of the markets in
the US and globally to continue this recovery path without the strong
hand of government help behind them. The big unknown is if we are
going to have stimulus in the US. After we get through the healthcare
situation, I believe that the focus will be in the US on very short-
term pumping the economy as much as they can. What happened to the USD
787 billion stimulus from last year – I am not sure they are going to
talk much about that. They are going to talk about new programmes,
efforts to get employment going to pump the economy for the elections
coming fall in the US. So fundamentally these economies are not ready
to take off on their own. We are likely to see a new round of health
from governments in the US and possibly around the world and then it’s
anyone’s guess as to how the markets are going to react to that.
Q: If there is a sharper rebound in the dollar index though what kind
of impact do you think it might have on emerging markets like ours?
A: The dollar story is interesting and it is natural in my view
whether you believe that this recovery is real and the Fed is going to
begin to tighten some how enter and exit strategy and that would be
dollar positive – that’s the tailwind behind the dollar whether you
believe that risk aversion is coming back like I do that economic
reality is going to come to the surface and show that this recovery is
not real. Even if that means the Fed won’t be able to tighten the risk
aversion trade coming back will be a tailwind behind the dollar.
We should see the dollar continue to strengthen for a while. I think
the danger for emerging markets is less the play in the dollar itself
and more in the fact that if we do see risk aversion come back we are
likely to see outflows from emerging markets because they have been
massive beneficiaries of the risk appetite trade that’s gone on and
this is something that we have discussed here many times. I hate to
repeat myself but there is not much new to the story. Emerging markets
have gained a lot of inflows that would likely come out if risk
aversion is take hold again in 2010 while it benefits the dollar.
If a currency story will emerge in 2010, it will be potential
competitive devaluations. A lot of areas protectionism and self
interested policies will come to light as we see that the global
economy is far more fragile than we think will probably be the story
for 2010 and emerging markets, Asian economies and how their
governments react to currency policies is going to be a big driver of
trade and a potential global recovery or second stock.
Q: Do you think some of this recalibration or risk aversion might come
back on the table as early as the first part of 2010 itself or will it
hit us somewhere a little bit later?
A: I was far ahead of myself thinking that risk aversion was going to
come back in summer and then again in the fall. It’s possible it will
eek back in the first quarter of 2010. It’s unavoidable by second
quarter of 2010 that we see risk aversion coming back.
I believe the key to this is healthcare. Once we get pass healthcare
in the US, policymakers there will begin to admit the realities
especially from the administration, admit the realities that this
economic recovery may not be as strong as they had let us to believe.
We are going to need some more help from the government and that will
cause inventors. We can get through some kind of healthcare solution
during that time. It’s very politically driven.
Q: For 2010 what is the asset class or the market to enter?
A: I believe that 2010 will be an adjustment for equities. The easy
trade in equities is done even if you are a believer in this recovery.
The recovery does continue either through government stimulus or
magic. I have missed all along either way equities have priced in a
pretty robust recovery that we are unlikely to get and even if we get
it there shouldn’t be a whole lot of relative upside in equities.
We are going to have to look as we move back into risk aversion again
at potential opportunities in the bond markets and then as inflation
makes its way into the system due to massive monetisation of DEPT
printing of money that we know of may not be a 2010 play maybe later.
However, investors need to position themselves into hard assets,
commodity linked assets and that doesn’t necessarily mean buying a
long-only commodity fund, exchange-traded funds (ETF) or fund index.
Looking at opportunities in the commodity space as a potential hedge
against inflation, but that is further off, not immediate. It can walk
you way in those investments again. Equities are likely underperform
in 2010.
BY CNBC TV18
.Source: http://bigcapital.wordpress.com/