November 26, 2008 --- The Textbook of Japan

Overnight, US markets managed a 3-day gain -- the most in a decade. The driving force behind was the surprise QE2 (QE1 was the doubling of Fed B/S via all liquidity funding programs), that will buy up to 800bn ABS and consumer loans and GSE debt. The amounts are massive as the MBS/GSE purchases equal to the total net issuance for an entire year. LT Mtg market took the news well with 30yr rate fell from 6.38% to 5.50%.

For the first glance, the Fed is following the Japanese textbook of the lost decade. But for every fix now, there is a fault -- the USD weakness and the fear of future inflation. So far I believe that risk seems far away as markets just last week were pricing in a global recession and got a -0.1% core CPI as evidence. Last night, oil closes down 6.3% - mostly because of lower demand expectations. The crush of data on the economy – a weaker GDP (-0.5%) , continued weak house prices (-17.4%) and Leading indicator (-0.8%) – all point to the shifting psychology of the consumer.

As we approach YE and ME, asset allocators should expect to shift of money to bonds over stocks in a world where CBs buy debt outright begets a rush for duration…My view is HK slowly and surely will retest previous low of 10600. If we don't get there next month, then we wait 1Q09. So in the meantime, just trade around the narrow range 12K-15K and watch volume dry up further as we approach Xmas and year end.

Oversea Markets Review

Last night, global equity prices rose 1.4% as DM markets broadly moved higher, WITNESSED BY +5.2% in Japan, and ~1% in EU and US. Meanwhile, EM equities were about flat on balance. In November, DM and EM equities have both fallen about 10%. Elsewhere, 1MWTIoil gave up $4 to $50.77/bbl. 2yr UST yield slipped 3bp to 1.18% and 10yr dropped 22bp to 3.11%. USD fell 3.8% this week vs. EUR to a one-month low at $1.306 and slipped 0.8% against YEN to 95.2.