February 24, 2009 --- From Hope to Fears

Overnight, US market close was horrible – down 3.5% to 1997 lows with VIX closes AT 52.6. The drivers of equity market sold-off appear to be fears of banks still and the most important factor, in my own views, Policy Fears. These fears or uncertainties include the little understood bank stress tests from US Treasury, the JPM cutting its div (lower 87%), the CNBC story about AIG ($60bn losses) and the lack of details about Citibank. EN plus, the verbal intervention from the CE4, the rate cutting restraint shown and the talk of more money for bailouts from EU and IMF – all hurt rather than help the market. 

Obviously, the talk of President Obama to regain the battle of the budget does little to UST market as well. Projecting a 10yr plan sounds more like a fiction than fact and many remain skeptical. Currency wise, JPY now behaved like different animal than it was 3 months ago and EUR and USD are on the race of devaluation anchor. So it begs my thinking of the question as to what is next…Hopefully, I can get some clarity over US policy from Bernanke’s speaking tonight.  

Local markets seem to be disconnected with US lately with SP500 broke below last year's Oct low and closed at a 12yr low. While HK is now still trading 23% higher than Oct low of 10676, and 2X of its 12yr low of 6544 (Apr1998). I still hold my view that HK or Asia has not been able to fully decouple from US unless China becomes the world's biggest and also a free market. But certainly, HK’s dependency will be less and it tends to look at China for light and direction. I think HK should at least test Oct low going forward as the period of peak to bottom in major sell-offs can last as long as 31 months (S&P in 2000-03, Nikkei in 1989) which is quite scary as HK is only 15 months away from the peak and wont see bottom till 1H2010…HKCN ADR showed +400ppts down….Good Luck…

Overseas Market Reviews

Global equity prices dropped 9.2% over eight consecutive days, hitting their lowest price since 2003. Regionally, stocks slid 0.5% overnight in Japan, 0.8% in EU and 3.5% in US since 1997. For historical perspective, Euro area stocks sit at a 6-year low and Japan’s Nikkei is just above October’s multi-decade low.

However, despite the slump in equities, USTs did not rally much with 2yr yield ticked down to 0.93% and 10yr yield ebbed 3bp to 2.75%. Commodities were little changed. 1MWTI oil slipped to $38.44/bbl, and gold edged down from Friday’s 11-month high to 988. USD climbed +1% vs both EUR and YEN today to 1.269 and 94.6.