Are you Ready for an Emerging Markets Rally?

It was announced this morning that Dubai’s government received $10 billion in financing from Abu Dhabi… Hmmm… You know, I read somewhere a couple of weeks ago, when this debt/loan repayment problem was announced, that in the end, the Abu Dhabi government would step in to bail out Dubai, since the people running the two governments are blood related; and even though there had been shots fired between the two, blood would run thick here… And voila that’s exactly what happened!

In fact, at the time, I tried to explain that California – the world’s eighth largest economy – had bigger debt problems then Dubai, but the media decided to focus on Dubai, and not California!

So… All that selling of risk assets since the Dubai announcement on Thanksgiving, was unwarranted… The selling of the dollar on the California, New York, Illinois, and other states’ problems did not happen.

So, the risk assets and gold are edging higher this morning, sticking their respective toes back into the “risk waters” to see if it’s OK to get back in. I don’t know about that… There could still be a few risk aversion sharks circling just beyond the shallow waters… This risk aversion has held on longer than usual, so be careful out there… However, if this is the thing that sends these sharks back out to sea, then we could be seeing some very inviting levels of the currencies and gold to get back in, or dollar cost average by buying more at these cheaper levels.

The cheaper levels were being generated all week, but culminated in a rout on the non-dollar currencies and gold on Friday, after some US data led traders to believe that the Fed would be raising interest rates sooner than they’ve led us to believe.

US retail sales rose 1.3% in November, nearly double the 0.7% increase Wall Street had predicted… And of course the media did not report that October sales were revised down to a 1.1% increase from a previously estimated 1.4% increase. But don’t let that downward revision get in the way of a party to celebrate a 1.3% increase in retail sales!

I saw a quote this weekend while reading and researching with which I couldn’t agree more…

“The dollar may weaken after an initial rally following any sell-off of risk assets, according to HSBC Holdings Plc.

“While the initial reaction to a sell-off in risk assets would be a higher dollar, this, in our view, would only prove to be short-lived, a team including David Bloom in London wrote in a report received today. The longer-term and bigger move would be an acceleration of the dollar’s recent decline.”

And further reading led me to one of my all-time fave economists, Stephen Roach… I had not seen anything from Stephen Roach in a long time, but this quote really caught my eye…

“The Federal Reserve may cause another crisis by botching the withdrawal of liquidity from the US economy…

“The Fed is the ‘weak link’ among central banks and may fail to tighten monetary policy in time to stop asset bubbles from forming… The Fed helped trigger the boom and then bust of the subprime mortgage market by being ‘quick to slash, slow to normalize interest rates.’

“They need to be very early in executing their exit strategies… I take Mr. Bernanke at his word that he’s looking for an extended period of monetary accommodation, which, quite frankly, I find very worrisome in assessing the prospects of a next bubble and the next crisis.

“The traditional view of central bankers that asset bubbles are hard to spot and deflate with rates is ‘ludicrous.’”

See why I’ve always held Stephen Roach high on my hit parade of economists? He tells it straight, and doesn’t pull any punches. These are all the things I’ve tried to explain to you about the Fed and their claim that they will be able to remove the stimulus without harming the economy… That, like their claim that asset bubbles are hard to spot and deflate with rates is very ludicrous!

OK… So that’s what’s happening here… And we touched on the Dubai thing, so let’s see what’s going on in the rest of the world, shall we?

First off we have central bank meetings in Norway and Sweden this week (Wednesday)… The markets expect that the Norges Bank (Norway) and the Riksbank (Sweden) will keep rates unchanged as we head into the end of the year. However, I’m still keeping a light on for the Norges Bank to raise rates 25 BPS (1/4%).

In Japan, the Japanese Tankan report, which is a measure of the economy’s pulse, came in stronger than forecast. This report has done a lot for the return of the risk takers overnight, along with the Dubai story.

And in Australia… The Reserve Bank of Australia (RBA) will release their last meeting minutes this week, which the markets will read through quickly to see if there was any mention of halting rate hikes. I don’t think they’ll find that, and the Aussie dollar (AUD) will be allowed to get back on the rally tracks…

In Brazil, there are reports there that this season’s Christmas shopping will far exceed last year’s numbers by 9.5%! WOW! Recall that last week I wrote about Brazil and talked about how I believed that their central bank would fail in their attempt to keep the real (BRL) weaker than it currently trades? Well… There’s a guy named Jerome Booth who writes for the Ashmore Group PLC, and he agrees with me, and even goes further to say that he believes the Brazilian real will reach a level of 1.50 versus the dollar in 2010!

Mr. Booth said, “Emerging-market countries including Brazil, China and India will attract more investment because their banking systems are healthier than those of the US and the European Union…

“The perception of risk needs changing radically. The investor that is thinking of maybe putting 5 percent in emerging markets needs to rethink and realize that being 95 percent in developed markets is very risky.

“Currencies in Asia and Latin America will face a lot of upward appreciation pressure.”

Booth also sees, like I do, Brazilian rates going up by 200 BPS (2%) in 2010, which he believes will help fuel this rise to 1.50 from current levels of around 1.75… (Remember, real is a European-style currency, so the lower it’s conversion price to the dollar, the more value the holder receives… A move from 1.75 to 1.50 versus the dollar would be a gain of 14%)

It will be interesting to see what the US traders think of the Dubai debt/loan repayment problem going away… They were the big pushers of the risk aversion, and every time for the past two weeks that the overnight markets moved the non-dollar currencies and gold higher, the US traders would sell them off.

Then there was this… Beijing Automotive reached a tentative deal to acquire certain assets of General Motor’s Saab unit, including intellectual property for two sedans and equipment to produce those cars, according to a person with direct knowledge of the agreement.

The deal, sealed over the weekend in Sweden, will enable Beijing Auto, one of China’s main state-owned automakers, to integrate the Saab technology into its own vehicles.

And… Once again extend China’s tentacles a little further into everyone’s world…

To recap… The Dubai debt/loan repayment problem has been satisfied, just like I said it would be, by the Abu Dhabi government. The Japanese Tankan was stronger than forecast, and these two items have the risk takers checking the waters once again. Stephen Roach makes an appearance in the Pfennig for the first time in a month of Sundays… And are you ready for an emerging markets rally?

OH… I almost forgot to mention this… Nothing like calling a bottom for gold on Friday, and then see it drop $10! UGH! Oh well, I thought gold looked like it had consolidated and was forming a new base from which to rise from… But, NOOOO! So, see! My beautiful bride always claims that I don’t claim to be wrong… But, here you go… I was wrong about gold forming a bottom on Friday! But maybe I was just a day early… Since gold, is up $5 this morning!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

Visit: EverBank

Be the first to comment

Leave a Reply

Your email address will not be published.