The financial Markets facilitate Trade and spread risk among market participants
There is a fundamental difference between equities, debt instruments, Currencies, forwards/futures, and commodities... and this has to do with what the purpose and the participants playing in these markets.
I will give examples here of three markets and differences
according to Fabozzi (you can read "foundations of financial markets and institutions")
The way for a person to spread risk on operational costs could be through debt instruments that borrow x amount of $ and pays interests to the party that is willing to invest capital but does not want to take on the risk of ownership of the company. Once the capital is repaid the risk is liquidated and the investing party no longer holds and skin in the game. The risk is the faith in the credit of said institution.
Here is my view
Why is this even relevant? well as we are seeing a world post Credit event triggered via CAC's by the Greek government there is much uncertainty especially in the private sector regarding the credibility of sovereign debt markets. This leaves the ECB in a particular conundrum especially working against the fundamental philosophy in monetary policy of the most important Central Bank in the EZ, The Bundesbank. Credit is drying up for the sovereigns with PSI weary and Banks also no longer consuming so much of the debt as they have been flushed with liquidity and capitalized through LTRO, their appetite is weaning; due to the fact that before they needed collateral for cash at the ECB and as their reserves are sufficient the reason to consume the collateral will fall. This was evident as Spanish and other peripheral bond yields showed widening in spread with the German yields.
Germany is still seen as a solvent tangible economy with value.
The Equities Market are being propped up by this liquidity due to the low federal funds rate keeping Bond yields in the US low so Banks need to invest their Cash into something...usually risky assets at this point, and commodities. This is the reason why a perceived possible increase in interest hikes at the FED is causing so much uncertainty.
this is very basic portfolio theory... the balance of risk for yield.
Now the implications here is that with increased GDP, increased Employment in the US economy will bring more investment, and the credit markets will being to unwind their huge reserves into the economy causing inflation (I am sure economists here at FF know more about the subject and I welcome corrections) So the fed will cool that off via hawkish policy capital re investment and the appreciation of the USD, thus depreciation of positive correlated pairs, and bullish negative correlated pairs.
as commodities have a negative correlation coefficient prices will also come down.
Let's keep in mind that the movement we see on the charts are mere statistical representations of transactions conduced in the macro economic environment with normal variations in a random like way.
So if in fact this plays out this way then your chart will show lower euro,gbp,aud,nzd.
my technical view of this is to be continued
There is a fundamental difference between equities, debt instruments, Currencies, forwards/futures, and commodities... and this has to do with what the purpose and the participants playing in these markets.
I will give examples here of three markets and differences
according to Fabozzi (you can read "foundations of financial markets and institutions")
The way for a person to spread risk on operational costs could be through debt instruments that borrow x amount of $ and pays interests to the party that is willing to invest capital but does not want to take on the risk of ownership of the company. Once the capital is repaid the risk is liquidated and the investing party no longer holds and skin in the game. The risk is the faith in the credit of said institution.
Here is my view
Why is this even relevant? well as we are seeing a world post Credit event triggered via CAC's by the Greek government there is much uncertainty especially in the private sector regarding the credibility of sovereign debt markets. This leaves the ECB in a particular conundrum especially working against the fundamental philosophy in monetary policy of the most important Central Bank in the EZ, The Bundesbank. Credit is drying up for the sovereigns with PSI weary and Banks also no longer consuming so much of the debt as they have been flushed with liquidity and capitalized through LTRO, their appetite is weaning; due to the fact that before they needed collateral for cash at the ECB and as their reserves are sufficient the reason to consume the collateral will fall. This was evident as Spanish and other peripheral bond yields showed widening in spread with the German yields.
Germany is still seen as a solvent tangible economy with value.
The Equities Market are being propped up by this liquidity due to the low federal funds rate keeping Bond yields in the US low so Banks need to invest their Cash into something...usually risky assets at this point, and commodities. This is the reason why a perceived possible increase in interest hikes at the FED is causing so much uncertainty.
this is very basic portfolio theory... the balance of risk for yield.
Now the implications here is that with increased GDP, increased Employment in the US economy will bring more investment, and the credit markets will being to unwind their huge reserves into the economy causing inflation (I am sure economists here at FF know more about the subject and I welcome corrections) So the fed will cool that off via hawkish policy capital re investment and the appreciation of the USD, thus depreciation of positive correlated pairs, and bullish negative correlated pairs.
as commodities have a negative correlation coefficient prices will also come down.
Let's keep in mind that the movement we see on the charts are mere statistical representations of transactions conduced in the macro economic environment with normal variations in a random like way.
So if in fact this plays out this way then your chart will show lower euro,gbp,aud,nzd.
my technical view of this is to be continued
AVT INVENIAM VIAM AVT FACIAM
