Saturday, April 25, 2009

The Debts of the Lenders: Yen and Emerging Markets Snapshot

The yen looks like it could potentially weaken some more and provide further fuel for the bulls on stochastics. But the MACD and RSI aren't providing any stronger confirming signals.

A weak yen has an inverse relationship w/equities. Remember that the Nikkei is the second largest stock market in the world after the US and is dominated by exporters. Funds and other large institutions tend to take bigger risks on a weaker yen b/c of the carry trade. While the relationship is not as strong compared to US equities as it is w/the Japanese stock exchange, there is still a definite spillover effect. We do remain very overbought in US equities though.

I have also included a one month snapshot of emerging market sovereign bond spreads for your viewing pleasure. These are the EM and EM diversified spreads from Markit's CDX indices. Unlike CMBX (which switched over to price recently), basis pt spreads are still provided.

Some definite improvement since March lows but spreads are still rather wide. No surprise there since we are coming on the heels of Russian govt rate cuts earlier this week and further calming in E. Europe. Please keep in mind that although while fears of a E. Europe credit meltdown are no longer pervasive (see the recent rally in Deutsche Bank and other Eurozone lenders' share prices w/big exposure) spreads are still wide. And it is debatable whether or not the recent rally in European bank shares is the result of Washington led bailouts or actual bullish sentiment among traders. I am more inclined to lean towards the former than the latter.


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