Guest Post: The Big Picture by Alex Manzara

The big picture over the past few months is that markets are experiencing one large adjustment after another, perhaps analogous to the shifting of tectonic plates that create rolling earthquakes and various aftershocks.  The first large move was the fall in the yen (rise in dollar/yen), and the change in sentiment towards Apple (AAPL) which is down 42% from its high in mid-Sept.  USD/JPY moved 25% in six months from 80 in November to nearly 100 currently as Japan’s Abe vowed to create inflation through Quantitative Easing. Developed equity markets were boosted by this shift, with SPX rallying 18% over the same time frame.

USD/JPY in white and SPX in red


Gold was already moving lower in dollar terms, but precious metals were hit by vicious aftershocks in the past several days, and now copper and, to a lesser extent, crude oil have rolled over.  You can see below that while AAPL took out last summer’s lows in a decisive manner by December, gold had held its low from May 2012, only to be rocked by wholesale selling pressure in the past month, starting April at 1600 and testing 1350 within the space of two weeks.

Chart of AAPL in red and spot gold in white


Both of these investment themes (AAPL and GLD) had caught the speculative fancy of the “investing” public, and latecomers have been washed out.  The damage is shifting from the speculative to the industrial as copper has fallen 18% since February and unlike gold, didn’t have the benefit of even a minor bounce to close out last week.  Crude oil has spent the past three years between 80 and 105 and has fallen in sympathy with other commodities, sinking from $97/bbl in the beginning of April to $88 currently.  Steel rebar traded on the Shanghai exchange has fallen over 30% since 2011 (in yuan terms).

Chart of gold in white, copper in red, oil in yellow


Brazil (IBOV) and the emerging market index (EEM) have been putting in a series of lower highs and lower lows since the apex reached at the beginning of the year.  Now tremors are apparent in developed markets like the German DAX, at a new low for the calendar year, having this month broken an upward sloping trend line which had been in place since last summer.

Chart of IBOV Brazil in red and German DAX in white


It appears that the world is searching for a new equilibrium and markets are currently on unstable footing, spurred by policy makers who are generally oblivious to possible carnage wrought by their actions.  Indeed a loss in confidence of policies, or a market that becomes less certain of follow-through on specific initiatives can lead to rapidly shifting terrain.

Further, the response of one country to another’s change in policy direction must also be figured into the equation, which creates a broader spectrum of possible outcomes.  For example, the G20 has for now refrained from rebuking Japan for competitive devaluation.  But consider the chart below which shows the Japanese yen falling substantially vs the US dollar, and the Chinese renminbi simultaneously strengthening vs the US dollar; is it not fair to assume that China will in some way try to arrest the loss in export competitiveness?

JPY in white, CNY in red


The broad point is that tectonic plates of economic agents have begun to shift, causing disruptions across many asset classes which could easily become more violent in an interconnected world.

Alex Manzara began his career in 1984 at the Chicago Board of Trade and moved to the Chicago Mercantile Exchange in 1990.  He has worked at various Future Commission Merchants including Chase and ABN Amro.  He joined TJM in 2006, specializing in interest rate options and yield curve strategies.  Strong background in structuring trades based on macroeconomic themes.  He received a BA in Economics from Northwestern University and holds Series 3 and 7 licenses.

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