Oil and dollar driven by Chinese rate hike

“Magnificent promises are always to be suspected.”

Theodore Parker

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Yesterday was another very good example demonstrating how coupled the entire financial world really is. The macro data continue to dictate how all markets trade. It all started with a surprise move by the Chinese government raising short term interest rates by 0.25% to slow their surging economy a bit and start to mitigate inflation and real estate exposure. This move sent the U.S. dollar into a massive short covering rally which resulted in strong profit taking selling in global equities and most commodity markets as all of these markets are very much linked to each other. I also think China played a bit of politics by raising its short term interest rate by 0.25% for the first time since 2007. In addition U.S. Treasury Secretary Geithner said the United States will preserve confidence in its currency and will not engage in currency devaluation. Sounds great and it certainly impacted the market over the last 24 hours, but it sounds like words on the part of the United States and nothing more behind it to me. The combination of the one-two punch by China and Geithner (seems orchestrated to me) sent most of the global markets into a modest round of short covering which negatively impacted both equities and commodities. China indicated they were doing this to slow their surging economy and mitigate inflation. However, with a G20 meeting right around the corner China likely picked the current time more for political reasons which should result in their currency, the yuan, strengthening a bit and thus taking some pressure off of them at the upcoming G20 meeting. Right now most of the global financial and commodity markets are in a realignment after having experienced strong moves over the last several months. That said, I do not think any of the underlying trends have changed (yet) and I expect to see equities and commodities prices rising over the next several months while the U.S. dollar is likely to resume its descent...especially after the Fed announces the next round of quantitative easing.

Not only did the U.S. Dollar Index firm by almost 2% (it is down about 0.5% as of this writing) on Tuesday, but most global equity markets lost value over the last 24 hours as shown in the EMI Global Equity Index table below. Nine of the ten bourses in the Index have declined in value since yesterday with the Chinese bourse the only Index that added value after the Chinese interest rate increase. Germany is still on top in the winner’s list for the year with Hong Kong holding down second place. This is the first time this year a developing world country bourse is near the top spot of the Index. For all of 2010 the developed world bourses have been the leaders. We may be moving into a transition as money may possibly be starting to flow back toward the emerging markets in anticipation of better economic growth rates than what is expected for the developed world going forward. Even China’s bourse continues to cut its losses for the year (even after the interest rate increase) by more than 50% over the last several weeks and for the first time since April the Shanghai A market index continues to trade over the 3,000 level. Tomorrow the latest figures for third quarter GDP in China will hit the media airwaves and as the move in China did yesterday it will be a market mover in all regions of the world.

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