Asian flu continues to drain U.S. markets
By Marilyn McDonald, Director of Marketing for Interbank FX
It’sIt has been said, in the past that ““When the United States sneezes, the world catches cold..” AAnd while this is still widely quoted, it’s pretty fair to say in today’s market that when China sneezes, the world gets a cold; -- or at least a bad case of the sniffles. This has been highlighted quite dramatically as the U.S. market continues to struggle since the Chinese stock market dropped a 9 percent% three weeks ago.
For the past year,
TheChinese markets had been skyrocketing over the previous year, buildinggrowing like a what some saw as a bubble primed ready to burst, and the needle w. There’ve been many that point to the offending needle, but the truth as the is a combination of a lack of real liquidity combined with the fears of additional Chinese legislation and taxes. The frenzy started in the Asian markets and continued west around the globe as markets opened. When London and New York came onlineonline, the markets were in utter confusion.
The U.S. markets were further jolted by a drop in the Q4 fourth quarter gross domestic product (GDP), former Federal Reserve Chairman Alan Greenspan’s utterance of the the dreaded “R word” uttered by Mr. Greenspan and problems in the U.S. sub-prime mortgage market, not to mention a couple of computer glitches. All of those at combined to send those markets into a tail spintailspin. In one dayday, the Dow Jones Industrial Aaverage dropped 3.3 percent% and the S&P 500 dropped nearly 3.5 percent%.
For FX foreign exchange traders, the risk was seen in the overextended carry trade whichtrade, which spurred considerable bids for the Japanese yen and Swiss franc. The yen posted huge gains against most of its currency counterparts, particularly against the New Zealand Dollar. It also confirmed a downward trend against the U.S. dollar:
There’sThere is no debate that all this combined to fuel major changes in the FX markets and furthered the U.S. dollars decline against the yen. Japan’s Nikkei index then fell 3.3% percent to solidify the worldwide retreat in the equities markets.
These dramatic moves echoed across the other currency pairs in equally dramatic fashion. On the 29th of February. 29, the EUR/USD also took a turn and headed south:
What does it all this all mean? Well, hindsight is 20/20. The DollarUSD/Yen JPY sank to a new three- month low. But as the equity markets start to regain back some of their earlier strength,; traders will see the corrections being mirrored in the FX charts.
So much of the news reported throughout this time was overly hyped and poorly analyzed. In fact, my local news channel, which never has market analysis, led with big news items speculating about market crashes and the general populace losing retirement accounts. It was an insanely over-dramatized snapshot of what was going on. In reality, the Chinese market has seen growth of 100 percent% annually over for the last two years. So a 9 percent% retracement on stocks that were up 13 percent% over the previous month should not have been a portfolio-threatening event.
It is clear that ripples in equity markets can quickly translate to earthquakes in the forex markets. Whether February Feb. 28, 2007 will be seen as a great buying opportunity or the emergence of a new trading range remains to be seen. However, it was not the catastrophe many foretold in the early hours of the moves. And considering U.S. Treasury Secretary Hank Paulson’s comments that global economic conditions are very healthy, I think that the signs of recovery are clear.
This reminds me of a quote by Coleridge, “In politics, what begins in fear usually ends in folly.” I think that same advice lends itself to the markets. My advice to everyone facing this situation in the future is not to lose your head. Do some thoughtful research into the situation and make your own, fact-based decisions.
Marilyn McDonald
Director of Marketing
InterbankFX
HYPERLINK "mailto:marilyn@interbankfx.com" marilyn@interbankfx.com.
