My Diary 597 --- The Correlations Breakdown

Trading Diary (July 27, 2009) --- The Correlations Breakdown

X-asset markets and Macro headlines

Last week witnessed new yearly highs in equities and many commodities and a heavy week of US earnings, with >50% of US companies have now reported with and impressive beat / miss ratio of 4x vs. a historical average that is closer to 2x. Most interestingly, X-asset correlations continue to breakdown – both USD and US fixed income are barely changed on the week despite the moves in equities and commodities. The USD sometimes tracked rates, sometimes stocks, sometimes commodities– simple explanations for those too tired get down to the tough business of finding a new paradigm.

Until volumes return to something like normal, positioning and flow will matter much more than what’s going on in other assets. With so much for the market to bang on about – inflation vs. deflation, the pending start of a global tightening cycle, fading stimulus effects, ever-present geopolitical risks, commercial real estate, the beta chase and the rush of money being forced to work – maybe the doldrums offer opportunity. It’s always prudent to consider the tails when everyone else is all too happy to enjoy a trend or a range

Hong Kong China News

CICC A share strategist suggested to buy banks, because 1)PB/PE are all at the low end of the market; 2)has been lagging since SHCOMP went beyond 3000 level; 3)more Index Funds are to be launched soon;  In addition, he also suggested to buy securities due to high T/O recently and accepting IPO applications by Enterprise-Boards (Total 108 companies applied). 

Corporate wise, Everbright Securities last Friday won final approval for an IPO offering in SH --- sell as much as 520mn shares on August.  China Merchant Property (000024) announced to have a no more than 200mn shs of private placement to 10 strategic investors to acquire assets in Shekou and other 5 property assets from the parentco. Chalco (601600) announced to expect a net loss for 1H09 as falling demand drove down production and prices. 

Overseas Markets Review

Global equity markets finished +4.3% higher than last Friday and +10.6% over the past 2 weeks. Stocks have surged +12% in US over the 2wk period, +11% in EU area, ~10% in EMS, and +7% in Japan . USTs were little changed with 2yr down 2bp to 0.99% and 10yr unchanged at 3.66%. Elsewhere, 1MWTI oil increased for the 8th day to $68.05/bbl, The highest since July 1 and only about $4.50 below the mid-June high. Base metals have also moved up sharply, with the JPM aggregate index rising 14% over the 2wk period.  USD weakened 0.7% to EUR1.420, but +0.6% to JPY94.8. On a TW basis, the dollar declined 0.9%.