Market Wrap: March 11, 2011

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Welcome to our first edition of the GBR Market Wrap! This weekly feature is meant to inform and to educate. It includes a brief summary of interesting market events and major economic news.  It also features a “Chart of the Week,” highlighting noteworthy and unusual market developments.

GBR Market Wrap invites all students, faculty and alumni to exchange views and engage in an open and non-judgmental discussion about the financial markets. Stay tuned to GBR.pepperdine.edu/blog every week-end for new content.

GBR Market Wrap, March 11, 2011

In this Week’s Issue
Weekly Snapshot

Weekly Barometers

Chart Of The Week

This Just In … Japan’s Earthquake

Weekly Snapshot
• Moody’s lowered Greece’s rating to B1 and said the risk of default is rising (Bloomberg)
• Brent crude oil futures climbed to $118 per barrel on Monday (FT)
• Gold touched a new record of $1,444.95, silver reached a 31-year high of $36.75 (Economist)
• As of Feb-11, 985 Exchange Traded Funds (ETFs) had assets totaling $1.0TN (Statestreet)
• China unexpectedly posted a trade deficit of $7.3 billion in February (AP)
• Moody’s Investors Service downgraded Spain’s debt rating by one notch to Aa2 (WSJ)
• The Reserve Bank of New Zealand cut interest rates by 0.5 percent to 2.50 percent (WSJ)
• The Bank of England kept interest rates at a record low of 0.5 percent (Reuters)
• The U.S. international trade deficit in January rose 15.1 percent to $46.3 billion (ESA)
• Forbes 2011 list includes 1,210 billionaires at a combined wealth of $4.5 trillion (Forbes)
• Japanese Yen gained against the US Dollar and the Euro after earthquake hit Japan (Reuters)
• U.S. index of consumer sentiment fell to 68.2 in March from 77.5 in February (Bloomberg)

Market Barometers

Barometer chart 1
Click on chart to view larger image

Chart(s) Of The Week
This week marked the second anniversary of the darkest point in recent financial history. On March 6, 2009, the S&P 500 fell to an intra-day low of 666.79.  It was an eerie number at the time, but in hindsight, it marked a turning point and the beginning of an unprecedented bull run, returning over 90 percent to investors if they had bought on March 9, 2009 and held their position until today.  The question is, of course, who had the guts to buy stocks on that day?  It always seems so easy watching the markets from the rear-view mirror…

March 11, 2011 SPX chart
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Despite this phenomenal rally, some prominent traders, analysts, and fund managers have been raising questions as to how genuine the stock market recovery really was, considering it has not translated into the real economy by any comparable measure. To get a sense of how stocks could have made such a marvelous recovery, please consider this illuminating chart courtesy of dshort.com.  After so much ammunition (TALF, TARP, QE1, QE2) has been used to prop up asset prices, it also begs the question: What happens when all this ammunition is no longer applied?

Chart: SPXand Fed Intervention
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This Just In … Japan’s Earthquake
The 8.9 magnitude earthquake hitting Japan on Friday, March 11, sent shockwaves of disbelief around the world.  As Reuters reports:

The biggest earthquake on record to hit Japan rocked its northeast coast on Friday, triggering a 10-meter tsunami that killed hundreds of people and swept away everything in its path.

Rare events like this one can send massive financial shockwaves too. While the impact on Japanese and global stock markets may not be as imminent, the currency markets witnessed a reaction that may seem counter-intuitive at first—the Japanese Yen gained against all major currencies when the news of this devastating earthquake hit the wires.

Why was the Yen rallying on the news?

Markets assume that vast sums of money may need to be repatriated from foreign assets to pay for damage repairs and re-development costs as a result of this catastrophe. The two charts below show how both the US Dollar and the Euro dropped on Friday during Asian and European market hours.

US Dollar versus Japanese Yen

China-earthquake1
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Euro versus Japanese Yen

China-earthquake2
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It is still too early to assess the longer term impact on the Japanese economy and its capital markets. In terms of the currency markets, a re-alignment towards the previous trend is often seen once the initial shock is digested.

Good luck and good investing!


Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also publishes the popular investment blog www.fxinvestmentstrategies.com along with a weekly news-letter.

Author of the article
Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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