QE2 Expiring, Greece Crisis Deeping –Perfect Storm for Dollar, Risk Liquidity Demand Swelling as Speculative Returns Falling Back S&P 500, Gold, Oil, Treasuries and the Dollar All Position For Reversals The FX market’s most liquid pair (EURUSD) and carry trade itself are on the verge of significant, bearish reversals. However, that is not the full extent of the tension. If we broaden our scope to include equities, commodities, Treasury and money markets; we see the same general patterns. After long-running rallies and a subsequent period of congestion, all of these prominent asset classes are threatening trend-defining reversals. What makes this particularly interesting though is that they are all lining up to the same fundamental conclusion: the shift of capital from the high-yielding and high-risk assets to the deeply liquid safe havens. And, it just so happens, that a series of fundamental fronts are coming together to threaten the perfect market event to prompt trigger just such a elemental change. Looking across the markets, we should account for the pressure on the various benchmarks and the fundamental correlation their respective strain reflects. At the forefront are the favored speculative assets. The S&P 500 has broken a bull trend that has guided the index to three-year highs since September. The critical step, though, will come when 1,250 gives way and the advance from the March 2009 ‘V’-shaped reversal following the worst financial crisis in modern history is finally broken. US Oil is facing a similar crossroad around $90-per-barrel. Things are a little more complicated when it comes to the bonds and rates market. The reflection of an active US-government bid, the 10-year Treasury is starting to waver after a multi-month run; while the three-month US Libor rate is slowing its descent to fresh record lows. Marking the absolute foundation of the global financial markets, we are starting to see disturbing rumblings in overnight cash markets. Short-term cash spread have shown significant jumps in US, European and Asian markets. Looking back, the freeze of funds at this level turned a market slump into a full blown crisis back in late 2008. Developments that have ushered the market to this ledge have been long incubating; but until recently, the collective speculative ranks have been able to downgrade the risks to focus on returns. The unquestionable support of the world’s governments has created an unmistakable brand of moral hazard and exceptionally low lending rates – factors that are so substantial that otherwise anemic rates of return have offset a fundamental risk like a building European financial crisis. The situation with Greece is perhaps the most easily identifiable; but it hardly stops there. We have already seen the funding and ratings troubles hit Portugal, Ireland, Spain and now Italy. Outside of Europe, we have a cash crunch developing in China following its effort to curb excessive lending, the fallout of UK austerity, a Japanese economy that is struggling to balance finances with growth and the US planning to let its stimulus build up expire. The end of QE2 is perhaps the most important change the global markets face. The US government’s and Fed’s effort to pump capital into its economy and market has indirectly propped up global speculation. Much of the capital that was destined for US businesses and consumers made its way to emerging markets and other countries’ endeavors. When this cheap funding is withdrawn, the leverage for sentiment and yield will be taken away. Moving forward, the Fed will likely hold its balance sheet stable for some months before embarking on a drawdown. That said, speculation of this change and a swell in the risk side of the ledger will put things into motion.

Source