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Saturday, June 05, 2010

**[investwise]** Bryan Rich: Asian Markets Could Face A Black Monday

 

A recent report on Emerging Market funds suggests that nearly $ 30 bn left the Asian markets in May 2010. One fall-out of this outflow has been a fall off the Asian currencies vis a vis the USD alongside a fall in FX reserves. So is it possible, that the direction in which currency moves defines the way Equity markets follow? Yes, and investors better watch the strength of the US over the coming months.
 
Currencies represent the truest reflection of economic fundamentals and market sentiment. Therefore, they continue to be an important segment of the financial markets to watch.
 
Since the "flash crash" in the U.S. stock market on May 6, most market pundits and financial media have had their eyes glued to the euro for explanations on stock market activity.
 
Take a look at these headlines to see what I mean ...
• Reuters: "Stocks Slide, Euro Falls After Spain Downgrade"
• Associated Press: "Stocks Slide After Euro Falls to New 4-year Low"
• Press TV: "Euro Concerns Pull Down Global Stocks"
So perhaps there's never been a more important time to keep abreast of the ...
 
Currency Markets and Market Correlations
 
While the euro is proving a critical catalyst for all global markets, today I'd like to show you other examples of intermarket relationships that can offer important clues for the future direction of currencies.
 
First, take a look at this chart of the Canadian dollar and the S&P 500.
 
 

Chart

 
 
The Canadian dollar had been hovering around parity versus the U.S. dollar for much of April, prompting forecasts of much more strength ahead and an uptick in interest in Canadian investments.
 
But despite the improving economic data in Canada and the associated prospects for the Bank of Canada to start reversing record low interest rates, the Canadian dollar's fate has been more intimately connected to the performance of the U.S. stock market.
 
So if you have an interest in the future direction of the Canadian dollar or Canadian dollar denominated investments, you should pay close attention to where U.S. stocks are headed.
 
Next ...
 
It's widely believed that emerging market economies are the place to be. "That's where the growth will come from" experts say. And Brazil is typically on the top of the list. Also keep in mind, when the Brazilian real moves up or down, so do your investments in Brazil.
 
But is the performance of Brazilian markets truly a representation of the country's economic fundamentals or is it more of a reflection of prospects for the global economy?
 
 
Take a look at this chart.
 

Chart

 
Like with the Canadian dollar, it's clear in the chart above that the real closely tracks the movements of the U.S. stock market. When stocks go up, money flows into Brazil and its currency. When stocks go down, money flows out.
 
So while Brazil may have the fundamental tools in place to attract global capital, the returns on that capital, in this highly fragile global economic climate, are likely to be more explained by the U.S. stock market.
 
The bottom line: The S&P 500 is acting as the key proxy of global economic health. And as global risk appetite oscillates, so does the U.S. stock market and, as a result, so do global markets.
 
Given the stock market declines of the past month and the elevated risk environment, these intermarket relationships suggest the performance in global markets will continue to follow the path carved by U.S. stocks.
 
My advice: Be aware of the external influences on your investments. A growing sovereign debt crisis and threats of a slowdown in Chinese growth represent big risks to global growth and global markets. And for cues on how global investors are digesting these risks, just watch the U.S. stock market.
 

 
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
 
Nothing in this article is, or should be construed as, investment advice.
 
 
 

 
 

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