Japanese Market sleeping for a coming Golden week, USDJPY vs N225

This year, Japanese people have the longest consecutive national holidays for 10 days, and it started today. Tokyo market will have been closed for next week and on Monday in another week after the next. While Japanese stock market is closed, Forex market is opened in the world and the price naturally moves in Japanese Golden week.

As many investors who look at Japanese market know, N225 and USDJPY are positively correlated though the correlation has been relatively lower than before. Still, compared with other markets, for example FTSE100 vs GBPUSD, CAC40 vs EURUSD or DAX vs EURUSD, the two indexes of N225 and USDJPY have always positive correlations for a reasonable time frame (e.g. 1 year).

The point of this Japan's holiday season is how N225 moves on the first business day after the Golden week, 7-May-2019. Let's have a look at the historical correlation between N225 vs USDJPY, whose correlation period is 250 points for each.

[USDJPY and N225 for last 5 years]

[250 days Correlation USDJPY vs N225]

The current correlation (250D) is at around 40%. Whatever this number is considered, it could anticipate N225 after the holidays follows the direction of USDJPY for next week. USDJPY's latest closing is at around 111.60. Japanese investors would hope the market not to be volatile drastically...

The one side correlation seems be particular in Japanese market, and it is not for some other markets. In European markets, the stock indexes and exchange rates are correlated actually, but the correlation moves in positive as well as negative territories.
Look at other examples in European markets, the below figures describe the correlation between FTSE100 vs GBPUSD.

[GBPUSD and FTSE100 for last 5 years]

[250 days Correlation GBPUSD vs FTSE100]

And the correlation between CAC40 vs EURUSD and DAX vs EURUSD. (Correlation figure only)

[250 days Correlation EURUSD vs CAC40 and DAX respectively]

Their latest correlations are positive, but the numbers are varied from time to time more than Japanese market. However, Europeans do not have such Golden week anyway...

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.

"Asian Forex traders attracted to Bitcoin because of its higher volatility" sounds nonsense only to me?

Some articles have said Asian Forex traders, so called Mr/Mrs.Watanabe symbolically, have been shifting from fiat FX trading to crypto FX trading, betting on BTCUSD, ETHJPY, LTCEUR ...  It is also said that those traders are attracted to higher volatility compared to the lower volatility in fiat FX market. It would be a true fact that crypto's volatility is higher than fiat's one. The volatility of BTCUSD could be about 10 times more than the volatility of GBPUSD for last 6 months.

Well, if you are more experienced traders, you would agree that the volatility is not (only) a reason to choose underlying assets. Before making conclusion which of fiat FX or crypto FX are more reasonable underlyings, let's take a look some fundamental data. Here is a comparison between BTCUSD and GBPUSD in Bid/Ask quotes and the spread, observed at one of regulated brokers today.

Quotes: BTCUSD and GBPUSD

It tells that the spread/quote is about 65 times in BTCUSD against GBPUSD. In case of investing USD 10,000 for each BTCUSD and GBPUSD respectively, the immediate cost for BTCUSD is about USD 98 while one for GBPUSD is about USD 1.5.
Some Watanabes would claim that they expect higher volatility driving their profit and absorbing the cost. So let's take another measure of the expected profit in case of one-sigma moved to a favour direction. Using daily volatility for last 6 months, it is estimated below.

P/L by one-sigma up

Oops, BTCUSD performs more than GBPUSD even after the expensive cost. (Gap = USD 365)
It is the fact, but does it mean we should invest in crypto FX rather than fiat FX?

The brokers usually allows investors to leverage, so see how much investment will bring same return in fiat FX as crypto FX. It is not a big deal. In this case, if you leverage only about 8.7 times on the fiat position, you will get same returns by one-sigma up.

Leveraged on the fiat position

Brokers offers more leverage on fiat FX while far small leverage is allowed on crypto FX, so you could only put your money USD 10,000 at the account.

Ok, but some might argue that BTCUSD performs same as GBPUSD but does not need such leverage. We took the case for upside this time, but how about the downside risk?
Under the same condition, but in case of one-sigma down, the P/L is estimated below:

P/L by one-sigma down, leveraged on the fiat position

You lose USD 147 more from BTCUSD position while both BTCUSD and GBPUSD have same returns from one-sigma up. This is naturally because the Bid/Ask spread is wider in BTCUSD.

Relatively lower volatility at fiat FX can be compensated by just 8.7 times leverage. The downside risk is smaller in fiat FX than crypto FX, to expect same upside. If you do not have very specific preference, it seems be more reasonable to trade fiat FX rather than crypto FX, doesn't it?

I have no intention to stop Mr/Mrs.Watanabes trading crypto FX, but probably worth to rethink about it.

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.

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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.

Too soon to call it "Crisis"? 22-Aug-2015

SSE Composite Index in CNY and USD

Stock price has steeply gone down in major economic zones in the world, lead by Chinese market, followed by such US, UK, Western Europe, Asia and Pacific.

Without particular events, such as Sub-prime loan crisis or Lehman crisis, the crisis is defined after the stock market crashed into bottom. Although the stock market has plunged sharply, in SSE Composite Index, the current level is still almost same or slightly above the level at the beginning of this year.

This is both in CNY and USD.

S&P/ASX 200 in AUD and USD

It means, even though CNY itself has been devalued this month, the stock index is still higher than the value at beginning of the year.

However, looking at Australian stock index S&P/ASX200, the level is already record low within last 4 - 5 years in USD, while it is still above the level at beginning of 2015 in AUD. This is because of weakness in AUD in last 3 years.

The stock market is highly correlated as realized last October or movement in this month.

CITY A.M. >> Chaos on European markets as FTSE 100 tumbles, while S&P 500 crashes below 2,000 points

There still seems be room where Chinese stock market is going down, the correlation could bring more chaos into other economic zones than China itself.

See Stock indexes for other economic zones.

Check international business news on Newsensus. Available on GooglePlay

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

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Currency is stronger when the economy growing

In a last few years, GBP and USD are the strongest currencies in the global market, and it is considered that those economies are on recovery.

On the other hand, particularly Japanese economy, it has been said strong currency prevent the recovery and weak JPY is better for the economy. Weak currency may help exporters to rise revenues in their local currency while importers suffer from cost rising in the local currency.
Weak currency could lead to excessive inflation. In order to control inflation, long term interest rate have to be pushed up.  However, it implies the lending cost become  more expensive and their credit is degraded.

In terms of credit, strong currency is generally good for the economy. But why some government prefer their currencies weaker? One fact is that weak currency makes their debt smaller. In economic zones where "borrowed" exceeds "borrowing", lower currency helps their debt be shrink.

Even if strong currency convinces healthy credit, it is still unclear that the economy is actually recovered and financially sustainable. Below tables shows economic indicators for US, UK, Japan and Australia.

(Blue indicates maximum number and Red indicates minimum.)

Short rate target: Target rate decided by central bank.
Long rate bench mark: 10 year government bond yield.

(Debt / GDP)
 The figure of Japan is 227.20%, which means government debt is more than twice of GDP. This figure is outstanding in developed countries. Even Greece currently struggling with their financial situation, the figure is 177.10%. According to Debt/ GDP, Japan is facing financially difficult situation though they have great industries such as auto industry.
 On the other hand, Australian figure is 28.60% which is one of the lowest levels of developed countries. However, Australian interest rates have sharply fallen for the last few years, and the economy is not growing as well as before because mining industry had been shrink. Australian government could borrow more due to such economic situation, helped by the lowered interest rate.

(Inflation, Interest rate and FX)
 Looking at Inflation y/y and interest rate target, Japanese figure only indicates the inflation is higher than short rate target and long rate bench mark. One reason of this figure is that increased consumer tax has driven the inflation. However, as the inflation is lower than interest rate benchmark, monetary policy is still eased to provide money into the market. The central bank should seek timing to tighten the policy in order to control inflation.
 On the other hand, US and UK figures indicate they are facing deflation, despite the record low interest rate. Since later 2014, crude oil price has fallen and it helped consumer price down. Their strong currencies also helped the price of import goods down, too. Both factors are good for them, and the deflation is unlikely considered as weak production.


Ref)
Trading economics
World Interest Rates - FX street
Investing.com


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[Interest rate] Forward rate of LIBOR

 Interest rate mentioned in this post means short rate such as LIBOR or EURIBOR. Forward rate is the expected interest rate in future, derived from financial market. The forward rate in USD typically going up along with tenor.

 The question is how the forward rate is reliable while the interest rate has always stayed low for a last several years despite forward rate expected higher level all the time.

 Ultimately and generally, no one knows interest rate in the future, but mathematical model has challenged to predict the trend of interest rate in stochastic differential formulae which non-mathematician do not have to know details as it may annoy you.

 Even though the mathematical methodology is hard for the most of people to understand, it is important to know two approaches to predict the future rate in the modelling. One estimates the parameters by observing financial instruments in the market, which can be interest rate swap. Another estimates the parameters from historical data of the interest rate.
 When bankers or traders talk about forward rate, it typically implies the first approach which estimates higher rate. On the other hand, despite the gap between the forward rate and reality, people has not mentioned about the forward rate derived from the historical data, so now time to see how different between those two approaches in the forward rate.

 The chart describes historical USD 3M LIBOR in last 10 years, the forward rate derived from historical data in last 30 years and the forward rate derived from current financial market.
The point is the huge gap between the two different forward curves. As the lowest rate in a last few years, the market consensus seems to expect the lower rate in the future. However, the market still expect relatively higher interest rate compared with the rate estimated from historical data. Historical period covers the period when the interest rate had been certainly high level.
 Forward rate by market has been always shape like that in the figure, but the rate has stayed low. The forward rate will betray again or it is actually time interest rate going up?

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

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AUD interest rate review on this Tuesday

AUD has been declined against major currencies since later January. GBPAUD 1.941, AUDUSD 0.7768 and AUDJPY 91.05 at the moment, and those were around 1.860, 0.810 and 96.0 respectively.

Reserve Bank of Australia (RBA) will review the cash target rate on this Tuesday, 3-Feb at around 3:30 UTC. The interest rate has been at 2.50% since Aug-2013, which is the lowest rate in the last 20+ years.

According to RBA's comment for a last few months, the rate will not hike for next several months. The rate is expected to be unchanged for this review, however AUD is considered relatively higher than the level RBA expects and the interest rate could be cut further.

Already mentioned in previous posts, Australian economy strongly depends on Chinese demands. If Chinese demands start slowing down, RBA could cut interest rate further.

Swiss Franc massive jump 17-Jan-2015

Last Thursday 15-Jan, CHF has soared in the largest scale as soon as Swiss National Bank (SNB) revealed they abandon currency ceiling on CHF. It was big surprise as seen in the market though it had been known that SNB was one of the biggest buyers for Euro bond.


Who won? Who lost?
 This is general perspective. Obviously, anybody who has asset in CHF got benefit and anybody who has debt in CHF will face heavier repayment. Export companies will have less revenues in CHF. Import companies will have more revenues in CHF unless they cut goods price. Or they could cut the price, and it would push the economy into deflation.


FX brokers
 However, things are more complicated for market players. This CHF jumping laid FX brokers in financial difficulty as they cover customers' loss. Alpari UK had entered insolvency as customer's loss exceeded their balance on the account, other brokers are looking for financial aid.

(Reuters) - The Swiss National Bank's abrupt move on Thursday to abandon its cap on the Swiss franc led to massive losses, and at least one insolvency, among retail foreign exchange brokers and trading houses across the globe.

Alpari UK

Online foreign exchange Broker Alpari UK said on Friday it had entered into insolvency after clients sustained losses on the Swiss franc. It said volatility and lack of liquidity had "resulted in the majority of clients sustaining losses which exceeded their account equity".

(http://www.reuters.com/article/2015/01/17/us-swiss-franc-brokers-factbox-idUSKBN0KP1EQ20150117)

USDCHF last 3 months

FX brokers provide spread-betting with leverage on the customers' account. The customers could enjoy profit in bigger scale by smaller deposit. Downside, they could make loss on their deposit and the loss may exceed their deposit due to the leverage. However, most of regulated brokers exercise margin-call which force positions closed before exceeding break-even point to avoid negative balance.
Basically, FX brokers hedge customer's position. When the position is closed by margin-call, it has to be traded at break-even point. However, CHF has jumped massive scale in few seconds on last Thursday, and the brokers fail to close positions at break-even point. Customers who had short positions in CHF must have gotten huge loss from the jump, and some of them were forced into margin-call at far way from break-even point.

SSMI in CHF and USD last 3 months

Stock market
Stock price has gone down after SNB made the announcement, but it could said the market is not so gloomy despite the price down in large scale. Looking at the figure, it describes SSMI stock index for last 3 months.
You see SSMI in USD did not go down after CHF jumped while SSMI in CHF massively went down. It implies objective value of the stock index has not gone down in USD.
It will probably take more time that the impact is realized in the real economy rather than immediately.


By the end of this month, the market is expected highly volatile as uncertain losses from CHF trade could be revealed in big banks, ECB makes decision of additional QE and Greek election where Syriza currently has the largest support rate.

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

Probability of Default for average person 12-Dec-2014

Probability of Default is shortly called PD, the probability that individuals or entities become insolvent.

Although the most of people earning average salary may not think of their becoming insolvent near future, mathematical analysis shows certain level of the probability of default for average people.

(Example 1)
 UK household
 Employee
 30 - 34 years old
 Savings: 5,000 [GBP]
 Salary: 30,000 / 1Y [GBP]

 Bonus: 5,000 / 1Y [GBP]

 Expense: 15,000 / 1Y [GBP] + Loan repayment

 Loan 15Y: Outstanding 150,000 [GBP], repayment: 900 / 1M [GBP]

Probability of Default is 72.0% for next 15 years. (35.0% for next 10 years.)

(Example 2)
 US household

An US household

 Employee
 30 - 34 years old
 Savings: 4,000 [USD]
 Salary: 45,000 / 1Y [USD]

 Bonus: 7,000 / 1Y [USD]

 Expense: 30,000 / 1Y [USD] + Loan repayment

 Loan 15Y: Outstanding 120,000 [USD], repayment: 750 / 1M [USD]

Probability of Default is 72.2% for next 15 years. (36.0% for next 10 years.)

The analysis is based on mathematical models. Future income, expense and employer's credit are modeled as uncertain factors. It does not take into account changing jobs or financial assets other than own savings.

You can quote your own Probability of Default at http://www.iamdefault.com/AnalysisInput.php.

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.

Are we in Stagflation? 15-Nov-2014

Imagine that your money in the bank account is gradually decreasing time to time.

Obviously, you never see your savings decreasing, instead, you see the savings increasing according to the interest rate. In this meaning, your savings will be same or even more amount time to time.

However, consumer price is increasing time to time as well as your savings are increasing. Question is which of them is increasing in larger scale? If interest rate is greater than inflation, you implicitly win the spread between interest rate and inflation. If opposite, you implicitly lose.

This figure shows the spread of annual interest rate and inflation rate after FX impact adjusted.

Scores of the economic zones, US, UK, Europe have stayed in negative since Lehman crisis. Japanese and Australian scores have been up and down since that time. Currently, only Chinese economy has positive score.

It implies that value of money is relatively decreased in those major economic zones except for China.

Normally, once inflation is going up, the interest rate is also going in order to limit the inflation. But it seems major economy is vulnerable to deflation back again, and this may lead the interest rate being kept at record low level for coming years.

In this situation, diversification into other asset classes can be hedging strategy against inflation risk.