Caporegime says: These things gotta happen every five years or so, ten years.

The Caporegime (from Wikipedia)

The Godfather had many friends with loyalty.

Peter Clemenza:

These things gotta happen every five years or so,... ten years. Helps to get rid of the bad blood. Been ten years since the last one.

In contrast with the consecutive downfalls of global stock prices in last week, it has been on a bumpy ride this week in US market particularly, partially because of Fed rate cut which was unexpected and little explained and Super Tuesday's outcome.

Meanwhile, it is a time to back in reality, isn't it?  After Fed rate cut and Mr.Biden's revival on Super Tuesday, there is no pragmatic solution combating Coronavirus. What is a kind of solution is a vaccine development whose production is expected after months to more than a year. So far, it looks good news are lasting and shadow of bad news ahead.

Flybe, one of the largest regional airlines in Europe, is dragged into administration. Even before the Coronavirus outbreak, Flybe has 40 years of its history and had expected to have a rescue deal to manage the difficult situation. Its employees' jobs are at risk.

China is pushing their business back to normal as much as possible, but the recovery is not enough for global economy. Outbreaks in other parts of the world are spreading faster and faster.
After all, consumers' demands are fading day after day as Coronavirus spread, except for panic buying at some supermarkets. The new James Bond film, which was planned to be released on April, was postponed until November.

The atmosphere surrounding the world is becoming reminiscent of the financial crisis in 2007-2008. The financial crisis 2007-2008 stemmed from credit crunch. The recent financial uncertainty is caused by the fear of epidemic and its economic effects. But the epidemic could not only lead travel industries including Airline companies like Flybe into the dark, but also cause domino effects in other industries, including financial industries.
Airline operators are financed through Structured finance, so called Aviation finance or Aircraft finance. They rise funds in both equity and debt for multi-billion dollars to purchase their Aircrafts to operate. The expected revenue is a source of the repayment and is supposed stable without such pandemics or wars. Reduction of the scheduled flights leads to their revenue cuts. Apart from the basic measures, business insurance or collaterals to avoid delinquency, they may have to cut labor costs. It has started already. (See below)

Sky News: Virus turbulence could give airlines cover to make cuts
Lufthansa, Germany's largest airline and the third-largest in Europe by stock market value, unveiled a cost-saving programme in which it will suspend new hires and offer employees unpaid leave in an attempt to mitigate the financial impact of coronavirus.
...
And it was revealed that KLM, which is the Dutch arm of Air France-KLM, Europe's fifth-largest carrier by market value, is to delay all IT and property projects that have not yet got underway and will be suspending hiring in certain departments.

Even such big names like Lufthansa and KLM struggle due to the Coronavirus outbreak, needless to say that the smaller operators suffer badly. In case that cost cutting is not sufficient, the subordinated debt repayments are first affected and the operator maybe forced into insolvent when senior debt repayments are failed. The insurance companies have to recover the loss, but the pandemic bring such unfortunes for virtually all the airline operators and travel related industries as chain effects. It can be a global credit crunch that we don't know the exact figure yet.

The financial markets have experienced some sharp up and downs for the last 10 years, but they are nothing more than the financial crisis 2007-2008, aren't they?  The Caporegime knows what happens now, perhaps.

Energy Transition long way to be real

Energy Transition whose concept includes the matters of energy technology or fuel sources, is naturally posed with "Climate Change". Fossil fuels are typically targeted in such discussion because of Carbon dioxide (CO2) being produced and pollution, too.
While the Energy transition is an idealistic concept, the reality seems be that people on this planet continue reliant on fossil fuel including oil as much as now. According to the report OIL 2018, it indicates that world oil demand increases by more than 5.5% until 2023. World Oil Outlook of Opec in 2017 has also indicated that Eurasia primary energy demand of oil, coal and gas increase 0.6%, 0.5% and 0.7% per year respectively by 2040. Nuclear energy demand is expected to outpace those energy sources, but it is behind higher risk at accidents, which was reminded from Fukushima disaster in 2011.

Big players in the market, are ironically investing into the oil production infrastructures these days, according to the below sources. Perhaps, it is too early to restructure your portfolio, adapting to Energy transition, unless your investment horizon is beyond next 50 years?

[Bloomberg] KKR, BlackRock Are Set to Invest $4 Billion in Adnoc Pipeline
KKR & Co. and BlackRock Inc. are set to invest in Abu Dhabi National Oil Co.’s pipeline network in a deal valued at $4 billion to $4.5 billion, according to people familiar with knowledge of the matter.

[The Economist] ExxonMobil gambles on growth
A fossil-fuel titan’s strategy is at odds with efforts to hold back climate change
.....
On February 1st the company announced annual results, declaring itself on track for ambitious growth. By 2025, oil and gas production will be 25% higher than in 2017.

European elections 2017

There are more political uncertainties in Europe this year, as you would be already aware of. Here are probably not all of them, but some remarkable events listed below:

15-March: Dutch general election
Netherlands picks up members of House of Representatives. Main focus would be how many seats are being held by Geert Wilders' Party for Freedom (PVV). Recent reports still say PVV is leading the poll, which currently have 12 seats out of 150 and is expected to obtain around 30 seats.
>> General election: Latest poll of polls shows slight drop in PVV support
>> Dutch polls

23-April and 7-May: French presidential election
Two rounds are held to for the election. Currently, the poll by Elabe for Les Echo predict that Emmanuel Macron wins by beating Marine Le Pen on the second round. Francois Fillon is facing Fake job scandal. Although the investigation is underway, it inevitably damage his supports for a while.
Global interests would be whether Ms.Le Pen beats another on the second round, who is leading National Front party known as a far right wing and EU sceptic party.
But now, the president is still Francois Hollande.
>> François Fillon faces 'elimination' from French presidential race as 'fake jobs' scandal intensifies

11-Sep: Norwegian parliamentary election
Since no radical party rise up in Norway which is not a member of EU, majority of global media have not followed the election. As seen in the poll, it indicates Labour Party (AP) which currently holds the largest number of seats would get advanced further. But the poll outcomes with no particular surprise.
>> NORWAY, January 2017. Sentio poll
>> New political alliances forming

24-Sep: German federal election
Some know Alternative für Deutschland (AfD) have got spot lights in 2016, as a consequence of the refugee crisis. However, the recent poll shows Ms.Merkel's CDU/CSU (Christian Democratic Union/Christian Social Union) coalition is still leading, followed by Social Democratic Party (SPD).
Although there are 7 months to go, German political order is unlikely to change too drastically.
>> Merkel’s Challenger Leads Social Democrats to German Poll Boost
>> POLLYTIX GERMAN ELECTION POLLING TREND

Some day in 2017?: Italian parliamentary election
The next parliamentary election is planed in 2018. But, after the referendum on December, Matteo Renzi resigned PM position, and both Democratic party and 5-Star movement are calling for the earlier election. 5-Star movement possibly takes majority of seats for the next election, which is known as anti-establishment and Eurosceptic.
>> Italy court verdict could pave way for early elections


There were many political events which probably shake the financial markets in 2017. But I would more concern that European economy will visibly stagnate this year. Maybe, it is better to publish on another post.

Brexit just made another market turbulence but see it in longer term

Brexit brought another turbulence into the financial market, GBP diving around 10% against JPY,  USD and massively down against other currencies.

This is absolutely massive scale, but is it so fresh? It is not. Nowadays, many people tend to forget something past so quickly as perhaps flood of information from the internet and media. Remembering just 1 year and a half ago, Swiss Franc (CHF) shot up around 15% against GBP, obviously whose scale is more than Brexit impact.

Lehman crisis had a clear message of credit market overestimated, and in fact that one biggest bank collapsed in public. So it is normal that people do not want Lehman's shares any more. 

Unlike insolvent, nothing will change from next Monday for British people's life drastically. To establish Brexit deal. it will take more than 2 years.

It is clear that British economy entered the unexplored zone meaning uncertainty. Detailed pros and cons are not on the main topic of referendum, but more or less driven by populism. Further research and publication make clear that economic effect at Brexit. Even a single sentence in EU constitute may clash GBP value.

It is understandable to sell GBP as its expected uncertainty, but why they buy JPY?  Looking at sovereign ratings or banking industry's ratings, there is no sign of strong-buy JPY. It had been traditionally always happened, but without economic reason, it is another sign of bended market.

As another trend, Gold price has started rising after years of downward trend.

By the way, keep eyes on Spanish election on Sunday

>> Brexit could influence Spanish election amid surge in support for hard-left party

Correlation AUD vs Commodities 29-May-2016

The oil price is bounce back in 2016, where we see US$48 for WTI crude oil price, and it was around $37 at the end of 2015.
More remarkably, the gold price have been upward trend since early this year, where XAU/USD is 1220, and it was around 1062 at the end of 2015.

Australian dollar (AUD) is historically correlated with commodity price as commodity trade is one of their major export. The below figure shows 3 month correlation AUD vs Crude oil and AUD vs XAU respectively.

As seen there, those correlations have positive values, particularly with XAU. Although RBA cut the interest rate and AUD got weaken, AUD is fundamentally strong from the point of commodity price.
XAU is usually bought against USD when uncertainty is anticipated. US is having the presidential election which could be an uncertain factor (geo)politically.
Recovery of the oil price also support increasing commodity price.
Australia has kept the highest ratings, AAA (S&P), Aaa (MDY) and AAA (Fitch), which are evaluated in stable.
AUD has been sold for last 3-4 years due to their monetary policy, but it has fundamentally very positive perspectives.

Back to the correlation matter, currently 3 month correlation shows -10.0% in AUD vs XAU and -19.0% in AUD vs Crude oil. As seen in historical data, those correlations are likely to bounce back to highly positive territory soon or later. As far as the upward trend of commodity price keep ahead, AUD is expected to be upward trend, too.

By the way, our business Apps are available on Google play. Of course, they are free.
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British Pound remarkably low against major currencies 25-Feb-2016

Since the beginning of this month, GBP has sharply gone against major currencies such as USD, JPY, AUD or NZD though GBP peaked out in last Autumn of 2015.

Compared with the level at the end of 2015, GBPJPY got the sharpest decline more than 12.0% down, GBPUSD is following down at 6.0%, and even against AUD and NZD, GBP has gone down 5.0% and 3.6% respectively.

Due to the rate cut of AUD and NZD for a last few years, GBP and other currencies have been relatively stringer against AUD and NZD whose interest rates are more stable now than before.
However, even though their rates had been cut, the policy rate in

Australia is still 2.0% and it is 2.5% in New Zealand while the rate in England is only 0.50%. Also looking at the credit rating of sovereign debts of them, S&P rated AAA (stable) for Australia, AA (stable) for New Zealand and AAA (negative) for United Kingdom. Simply thinking, Australia has better credit rating and more interest rate, which of Australian or English debt do you want to invest?

We cannot miss out that global stock markets have been downward and volatile since the beginning of the year. The market shows

some symptoms of financial crisis, particularly strength of JPY and weakness of GBP. Remember Lehman crisis 2008, JPY had been the strongest currency in the market.
What happened in crisis probably happens now again, it is still a question from the view of investment because Japan has S&P rating only A+ (stable) and negative interest rate at -0.1%. Do you want to invest?

2015 was geopolitically unstable year, and 2016 will be economically and (geo)politically unstable due to the volatile market, US president election, Brexit, Spanish goverment, ...


Keep yourself to follow the global economy more efficiently, why not use Newsensus. Available on Google Play.

Credit Default Swap market signals another trend? 26-Sep-2015

Since the beginning of this year, global financial market have been volatile and chaotic in uncertainty of geopolitics and economics. You easily remember Chinese stock market crashed recently, but we have experienced several events from beginning of 2015, which have driven the market.

(Remarkable events in 2015)
 Jan 2015: Swiss Franc Jumped 30% - 40% against Euro, and massively gone up against other currencies.
 Jan 2015: Greek election. SYRIZA lead by Alexis Tsipras became a leading party in Greek government.
 May 2015: UK general election. Although the leading party is Conservative party lead by David Cameron, opposition parties are restructured in larger scale. Labour and Lib-Dem lost certain number of seats, but Scottish National Party (SNP) got more seats.
 Jun - Sep 2015: Chinese stock market have continued going down, and other market including in UK, US and Japan have declined.
 Aug 2015: Chinese yuan (CNY) has been devalued.
 Sep 2015: Refugee crisis got attention. Number of refugees in this year became record high in Germany.
 Sep 2015: Volkswagen's emissions scandal. German car industry could face slowdown.
 Long term trend 2015: Natural resources including crude oil and iron ore, the price continues going down.
 Long term trend 2015: Currency has been weak in emerging market, including BRL, ZAR, MXN, MYR or PHP.
 Long term trend 2015: Currencies of natural resources provider, such as AUD, NZD and CAD has been weak as the interest rate has been lowered.


By the way, today's subject is about Credit Default Swap (=CDS) market. While such events have been occurred since the beginning of 2015, CDS market indicates some sense of another trend.
CDS market might be unfamiliar with some of you, but it is basically measured in credit spread for each entity. When the spread is widen, the market expect the referenced entity is losing its credit. When the spread is tighten, the market expect the entity is getting credit.

Around 2010 - 2012, it was sovereign  bond crisis, particularly Greek bond yield has shot up record high. 10 year Greek bond yield has gone up 25% - 30% at the peak. Since then, the market has been calm down. Compared with that time, the credit market is still stable.

However, CDS spread have been widening in some economic zones since early 2015. For example, Spanish banking industry have been getting wider spread sharply. Spain is facing political uncertainty about discussion of Catalonian independence. A political party, Podemos, could add another shot into the market.
On the other side of the planet, Australian banking industry have been getting wider CDS spread, too. Australian economy highly depends on Chinese demand, and the demand has been slowing down since beginning of this year. Chinese stock market crisis may drive the Australian CDS market further.
American, British, German and Japanese banking industries are relatively tighten.

It may be too soon to say crisis about Chinese stock market crush. It could be just the beginning of chaos.

If you have confidence to change this uncertainty to profit, Forex Signal by QROSS X will help your forex trading.

GBPAUD Trend & momentum, RBA announcement 4-Aug-2015

GBPAUD has massively gone down while AUD became bullish against other currencies, as RBA announced holding the interest rate at 2.0% as well as removal of the sentence demanding cheaper AUD.

The Australian >> Reserve Bank holds official cash rate steady at 2 per cent

It implies AUD will be stronger in longer term as the policy changed.
By the way, the trend & momentum in GBPAUD indicates further downward trend in coming days.

AUDJPY Long term anomaly? 30-Jul-2015

Since early last month, some of stock indices have been downward trend with Chinese stock market plummeted. List of major stock indices are listed on a post in the past.

By the way, although anomaly is just anomaly without any fundamentals evidence, it implies the time for risky asset to be adjusted. We have introduced anomaly in stock market on this blog, Forex Flyer.

AUDJPY 1993 - Present

For a last 2-3 years, AUD has been declined against major currencies due to the interest rate lowered. Some market analysts mention Australian economy highly depends on Chinese economy nowadays, and it implies current Chinese market slow down badly affect to Australian market. If Australian market is being slow down further, the interest rate could be cut to ease financial policy. It means AUD will be at downside risk in that situation.
This is just a mathematical trick, anomaly oddly describe AUDJPY stays near the peak, applying trend & momentum analysis. JPY is typically strong while global market is shrink and vulnerable while AUD is considered more risky asset relatively.

The fact is the market has become very volatile for months, facing geopolitical issues, such as Greek bailout or Chinese stock market.

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Mansion house speech by Chancellor and BOE governor 10-Jun-2015

Today, the chancellor George Osborne and Bank of England governor Mark Carney will have the annual speech at Bankers and Merchants dinner in London.

Back to the last speech, the governor mentioned the interest rate could go up in next months. But the rate has actually stayed at the record low 0.5% for the year.

Considering the deflation last month, though it may be temporary phenomenon, the interest rate is unlikely expected upside. If any clear direction is indicated in today's speech, forex market can be driven sharply whichever upside or downside.

Osborne’s Mansion House hot topics: rigging, ringfences and RBS

By the way, the trend & momentum of GBPUSD indicates it still has upside but it is limited as expected trend reversal toward later this week.

Anomaly in Stock market? 9-Jun-2015

Since the end of last month, stock markets have declined in major economies, UK, US or Japan where Nikkei down more than 1.70% of the last closing.

It is some sense of anomaly to bring technical analysis into the stock market. Some of the stock indexes are likely near the peak of long term cycle. Back to Nov-2014, the potential cycle has been observed in FTSE 100 and Dow Jones Industrial Average indexes, and it was introduced in this blog.

Although the stock markets have not crashed critically yet since that time, the recent market is relatively volatile particularly this month. The cycle analysis still indicates the stock index is still near the peak of potential cycle in FTSE 100. Despite the cycle of DJIA not clearly detected, correlation between DJIA and FTSE 100 is more than 80% in last 20 years. Once one of them has crashed due to critical event, another could suffer as if it is like dominoes.

The market cycle is sometimes anomaly, and it means nothing more than mathematics or statistics. But the fact is both of stock market and bond market are relatively volatile in those days.

Bond market is still far away from last crisis level 7-Jun-2015

Since beginning of this month, Jun 2015, the bond price has gone down sharply, rising government bond yield. Media reacted to the market as if another crisis is coming.

[10 year government yield]

Considering the economic situation, such as potential collapse in financial aid for Greece where the leading party of government is rejecting proposals from other European countries, the debt market could be crashed once such crucial event is triggered.

[10 year government yield except Greece]

With in last two years, the government bond market has been hot in some major economic zones, including UK, US, Japan or Germany. Since the market trend was almost single direction, the yield going down, the trend reversal could be occurred in natural manner.

However, even the government yield has hiked recently, it is too early to see the market crisis. The  chart describes the yield of 10-year government bond. The most of them still stays around record low level of the last decade. Particularly in Greek, Spanish and Italian bonds, the yield is still far lower than those under the European debt crisis in 2011 - 2012.

(CNBC) Pay attention to the chaos in the bond market
(The Telegraph) Global bond market suffers from erratic swings amid liquidity drought

To get more business news you need to know, download Newsensus at Google Play.

NZD expected under jumping risk toward RBNZ financial stability report

NZD has been relatively weaken against major currencies, particularly GBP or USD since beginning of 2015.
 RBNZ has been expected to cut interest rate since early this year. See a related post.
 NZD is weak towards RBNZ releasing financial stability report in today's evening GMT. It implies the market consensus still expect downside at interest rate. Even US and UK are still hesitating to rise interest rate, and RBNZ is unlikely to change their stance to the policy.

 Ref (picked up on Newsensus ) NZ dollar falls ahead of RBNZ report, retail sales

 GBPNZD trend & momentum chart

Check international business news on Newsensus. Available on GooglePlay

Mortgage bubble in Australian capital cities? 27-Apr-2015

According to the article picked up in Newsensus, Risks of mortgage defaults in Sydney and Melbourne are growing as soaring house prices are matched with bigger loans and deteriorating affordability, ratings agency Moody’s warns.

Since 2012, RBA has cut the interest rate into record low level, which currently stays at 2.25% and was above 4.0% in early 2012. In line with the interest rate falling, AUD has declined against major currencies including USD, GBP, NZD but not JPY that has fallen.The timing when mortgage price started going up steeply was near that interest rate started being cut.
Typically, it could say that lower interest rate helps buyers to buy houses and it has lead to housing price up. In UK, lower interest, as well as help to buy scheme, has helped people to buy houses and the housing market has gone up steeply for a last few years.

A below figure describes Australian cash rate target vs Residential Property Price Index. Since 2012, Residential Property Price Index started going up steeply until 2014 while the cash rate has been cut over the period.

Although it is not evidence that the lower interest helped people to buy houses, the timing matches between the rate cut and residential price going up from 2012 to 2014.

Ref. Australian Bureau of Statistics

(Newsensus available at Google Play)

EURNZD trend & momentum 23-Jan-2015

EURNZD has been volatile up and down, ranging between 1.48 - 1.54, and it stays around 1.505 at the moment.

Quantitative Easing has been announced by ECB yesterday, and rest of political risk factor is Greek election in short term.
While EUR has been weaken against most of currencies remarkably after the QE announcement, NZD has not been relatively stronger than other currencies. Market consensus in New Zealand implies that NZ reserve bank is expected to cut interest rate in this year and the rate will be reviewed in next week. NZD has been weaken against other currencies, including EUR early this week.

Slower than expected inflation data earlier this week stoked speculation New Zealand's Reserve Bank may lower interest rates this year, and traders are pricing in 9 basis points of cuts over the coming 12 months, according to the Overnight Index Swap curve. Governor Graeme Wheeler will review the 3.5 percent official cash rate next week, and is expected to keep it on hold.

Ref. NZ dollar heads for 3.5% weekly drop as US economy shines

Technical side, trend and momentum in EURNZD indicates it is expected downward trend toward middle of next week. Although market consensus probably have taken into account Greek election on Sunday, Syriza leading, unexpected result or policy would bring volatility into the ma
rket. NZ reserve bank is expected not to cut interest rate in next week, despite their probably cutting in this year. If the rate is unexpectedly cut, NZD will be weaken and EURNZD will go up.

For more currency pairs, Forex trend & momentum signals available on Google play.

Australian dollar attractive now? 12-Jan-2015

Australian interest rate, 2.5% in policy rate, is the highest rate in developed economic zones whose sovereign bond holds top credit rating, AAA by S&P for example.

Some of the investors are likely looking Australian bond as the attractive product in the market. (Australian bonds yields touch recordlowin investor flight to safety)
 Australian dollar has declined against some major currencies, such as USD or GBP for last 2 - 3 years, and the trend reversal might be expected.

Source: Government of Western Australia
Department of Mines and Petroleum

The most important risk factor to keep in mind is China risk. Australian economy highly relies on Chinese economy, particularly, in Australian mining industry. China is the top importer of major commodities from Australia, such as Iron ore, Gold or Heavy mineral sands.

Australian mining sector contribute for around 20% of GDP, and the top importer from the sector is China. When Chinese economy slow down and their demand for commodities is shrink, Australian economy will decline due to the high dependence on Chinese economy.

Despite those risk factors, uncertainty in global economy, particularly European economy would be riskier for the investors.

Ref. Government of Western Australia Department of Mines and Petroleum

FX rate for last 10 years against USD 21-Dec-2014

As you know, Russian Ruble (RUB) has massively dropped in its value against other major currencies, particularly against USD,  since the Crimea issue and crude oil price plunged.

This RUB dropping is one of topics in the latest FX market, however other major currencies have been under the trend reversal for last ten years over the Lehman crisis.


1. Currencies down around 50% for last 10 years

< Figure I >

 The chart on the right describes the change rate of USD value per each currency value per since Dec 2004. RUB value has gone down to less than half of the value at 2004, and South African Rand (ZAR) value has also dropped around half of the value at 2004.



2. Brazilian real

< Figure II >

BRLUSD have changed only 1.1% from 2004, but the current value has gone down 42% from maximum value in last 10 years. BRLUSD at Dec 2011 was around 0.5358 and BRLUSD at Dec 2014 is around 0.3743.

If you bought 3yr BRL bond for BRL 2M at Dec 2011, the equivalent value in USD is

 (Issue at Dec 2011) 1,071,600 [USD]
 (Redemption at Dec 2014) 748,600 [USD].

It means you would lose 323,000 [USD] from this investment. BRL is a non-deliverable currency, and it could be settled in USD. Even if the interest rate in BRL is as high as 5.0%, the capital loss could not be covered.


3. Trend reversal within last 3 years
Another remarkable trend reversal after the Lehman crisis could be observed in JPY and AUD whose values have been downward trend since 2012 - 2013. Those currencies are considered relatively stronger after the Lehman crisis but the trend has reversed around that time.

< Figure III >

JPY has dropped against major currencies since the Japanese election on Dec 2012 and quantitative easing with the new administration. Australian interest rate has cut from 4.25% (Jan 2012) to 2.50% (Aug 2013) record low level, and AUD has turned into downward trend for that time and after. JPYUSD and AUDUSD have changed -34% and -17% respectively for last 3 years only though -14% and +4.7% for last 10 years.


4. General comments
AUD, CAD, SEK, NOK and RUB, which are considered sensitive to the oil price, have gone down later 2014 due to the crude oil price down.

< Figure IV >

GBP, NZD and CHF have been on flattened trend relatively since 2011 while other currencies have started dropping against USD.

< Figure V >

For earlier 2015, the crude oil price is one of the biggest factors leading financial trend. RUB is the most sensitive currency at the moment. If those were going to out of control, emerging market could collapse and even the developed markets could be in crisis like domino.


Related posts)
Stock Market Risk: Correlation and Triple top 26-Nov-2014
Crude Oil vs Stock market in correlation 1-Dec-2014

Crude Oil vs Stock market in correlation 1-Dec-2014

Crude oil price has declined for last two months in large scale while the stock market look competitive in major stock indices.

Basically simply thinking, oil importer have benefit from the oil price down and exporter will suffer from it.

For example, US, UK and Japan has imported oil more than exporting, and they should have benefit from oil price down.

< Figure I > 75% of correlation

However, looking at stock market, it seems that they have not always had the benefit.

Figure I shows 20yr historical values of Dow Jones industrial average [USD] and WTI Crude Oil price [USD]. The correlation of them is around 75%, which means the stock index and oil price are highly correlated each other.

< Figure II > 52% of correlation

Figure II shows 20yr historical values of FTSE 100 [GBP] and WTI Crude Oil price [USD]. The correlation of them is around 52%. It is less than US market, but it could be said highly correlated.

Figure III shows 20yr historical values of NIKKEI 225 [JPY] and WTI Crude Oil price [USD]. Different from US and UK market, the correlation between the stock and oil price is around -40%, which means the stock price tends to go up while the oil price goes down.

Observing WTI Crude Oil price, the largest declining has been occurred at Lehman crisis, and larger up & down for last 2-3 years.

< Figure III > -40% of correlation

The point is whether current downward trend is just a part of up & down or beginning of oil crisis.

If the oil price is going down further, it concerns the stock indices which are highly correlated can be going down.

Even in Japanese stock market, the stock price has largely declined while the oil price is going down.

Global stock market has been volatile particularly for last a few months, and the oil price is remarkably going down. The low oil price bring benefit for oil importers but it may cause deflation in the market and this can be a downside factor in stock markets.

It will not wasted to re-balance risky portfolio into conservative now.

Stock Market Risk: Correlation and Triple top 26-Nov-2014

In the market crisis, such as Lehman crisis, stock prices have going down simultaneously in global markets. Uncertainty is always related with Correlation.

I. Correlation

You might have wondered that global stock markets are correlated each other. Last month of Oct-2014, stock indices in global market has been steeply declined simultaneously only except for Chinese market, Indian market or a few others. (See the post.)

Statistically, correlation among global stock indices exists. A below table shows correlation matrix among some major stock indices, which has been estimated from last 18 years. (Click to see in large scale)

Elements whose correlation is more than 50% is filled in blue. You see those stock indices are highly correlated each other.

Although each stock index is dominated in each domestic currency and FX effect exists in measuring, the higher correlation implies those stock indices tend to go up or down at the same time.

Statistics tells us that global stock indices seem be highly correlated each other.

II. Triple top

The idea of triple top may not scientific, but it says stock value is going down after the value has reached at top three times. Naysayers will say it is case by case in scaling of chart, how to define the top, ....

However, the most major indices, FTSE 100 and Dow Jones Industrial Average, are described with triple top for last 18 years. Applied trend & momentum fitting, the right figure implies somehow market cycle is observed and the current market seems be near the top of a cycle.

Obviously, this is just statistics and out of fundamentals discussion. But to avoid uncertain disaster, we must keep structure of our own portfolio in mind and restructure as necessary.

Economic Growth or FX Trick? 20-Nov-2014

When the stock market has gone up from 6,400 [GBP] to 6,700 [GBP] in UK market, many people recognize this fact as positive news.

Probably, it would be positive new or at least not negative. However, if GBPUSD has moved from 1.6136 to 1.5414 at the same time, the stock market price in USD is unchanged at 10,327 [USD].

USD is still a key currency in the global market, and it could make us to discover the gap between real economy and stock market trend.

First example is NIKKEI 225, Japanese stock index. Since early 2013, BOJ started large scaled QE in the financial market, aimed at economic growth.

Nikkei 225 index had gone up both in JPY and USD that time.
However, since another QE announcement at the end of last Oct, Nikkei 225 has largely gone up in JPY but not in USD. Correlation between Nikkei 225 in JPY and USD is lower at the moment comparing with 2013.

This implies that the market jump in 2013 has economic growth or expectation but the jump since last Oct is caused by FX effect in USDJPY. While Nikkei 225 is going up in JPY, USDJPY is going down to offset the value in USD.




Another example is S&P ASX 200 in Australian stock market. Most of the period since 2004, correlation between the index in AUD and USD is higher except for the period from 2013 to early 2014. RBA had cut Australian interest rate since 2012 to 2013, and AUDUSD had gone down.

Looking at the stock index, value in AUD had gone up in stable pace during 2012 to 2013 while value in USD had moved in more volatile pace. The correlation between value in AUD and USD has
been relatively smaller in the period.

Assuming USD is a key currency to measure the value, economic growth or expectation had been unstable during the period, and it is probably true considering uncertainty in Chinese market and European debt crisis.

Common point in both Japanese and Australian stock market is that the central bank provide liquidity into the financial market by monetary policy or quantitative easing in the particular period. In such period, actual value of the local currency can be changed and it makes stock market jump even if the value of stock unchange.