Global Markets Analysis for 2010

Panos Dantis

Major Markets

1. Bonds2. Commodities 3. FX4. Stocks

1.Bonds The majority of analysts expect

that 2010 will be a bad year for US Treasuries

BUT with a 10% unemployment , we are still almost twice the level consistent with non – inflationary growth.

Bonds 2 Unemployment will remain high until

the economy starts creating 150,000 jobs per month

It needs 6 months for that. Even then, FED will bide its time Remember 1992 : it raised rates after

14 months the peak of unemployment (7.8%) and June 2003(6.3%)

Bonds 3 Also deflation still remains a possibility

given the amount of slack in labor and product markets.

The withdrawal of unconventional policy support will no have a negative impact on

government bonds that is widely SO US TREASURIES ARE NOT A BUBBLE

and expect the 10 year yield to DROP to 2.3%

2.Commodities The current pick up in inflation in the

major economies is mainly due to base effects of energy prices.

These base effects will soon fade out if oil prices remain around 70 – 75$ pb.

But since we expect $ to recover and global demand to disappoints, we think oil will drop back to around $50pb .

Commodities – oil

We see 3 downside risks: Financial factors:speculative

pressures drove oil to 147$ pb. In July 2008.

If oil rises and fears of inflation and asset bubbles fade , oil prices should drop back in 2010.

Fundamental demand of oil is weak.

Global Growth and oil We expect that growth in key

economies – US and China – to be firm until the middle of 2010.

But then the stimulus boost will end and the demand for oil should slow again.

When economies recover the supply response to increased demand –if any - will recover too.

Oil price and USD/EURO rate

Brent Futures

Crude oil futures chart: 1983 - 2009

What GS says….

Commodities - Gold Gold is a seasonal asset. It has increased 11,6% on average

from September to February since the beginning of its Bull market in 2000.

All time classic asset Should be included to every

portfolio

Gold – Long run facts Population has increased and more and

more people would like to have gold. Gold fundamentals remain very bullish Global mined supply declines Central banks are looking at Gold after

the crisis and have reduced gold sales.

Gold - history

When gold hit 850& :\ The average US household income

<18K New houses average price = 76k New cars average = <6k So, 850 in 1980’s is not 850 today So 850 translates into 2,358 $ today

Gold – Fed policy But with the excessive monetary

growth of FED , Money of zero maturity has increased 11,5 times since 1980.!!

So real Gold price highs is well above 2,358, close to 4,800$ in today's’ dollar terms

Gold - 2010 However, for the next year there

are a few problems: China and South Korea central

banks are thinking of selling part of their gold

The ratio of GOLD/OIL = 15.4 The ratio Dow Jones / Gold = 9.2 on

10 average.

GOLD - 2010

But BUY GOLD as a HEDGE against:

Runaway inflation USD collapse Any bubble market collapse A new bear or panic stock market.

Gold Chart : 1833 - 1999

                                                                                 

Gold chart: 1975 -2009

                                                                                 

Commodities – Silver 1792 - 1999

                                                                                  

Silver 1985 - 2009

                                                                                 

Platinum: 1992 - 2009

                                                                                 

                                                                                 

                           

3.Forex – EURO / USD We often think that Fed’s monetary

expansion will lead to a USD collapse. The reality is more complicated The increased in USD supply is offset

by an increase in demand The additional liquidity has been held

within the banking system . Same happened in Japan between 2001 - 06

Forex : EURO/USD Foreign demand for USD and dollar

assets will increase from countries where policy is less supportive like the euro –zone.

Fed’s policies have reduced a debt – deflation spiral, which is also positive for the currencies involved

So we expect EURO/USD = 1.30

What GS says…

GS:”Eur/USD very seldom moves above or below 2SD from fair value”

FX : USD/JPY The % decline from the june high is

very similar of that of the August 98 peak.

At present levels there is good support Monthly oscillators are attempting to

diverge positively The downside risk is heavily

increasing.

GS says: “the real key remains US short end yields”

4. Stock markets US markets European Markets Asian ASE

A. US Markets –major Indexes Dow Jones S&P 500 Nasdaq

Dow Jones 10 years weekly

Dow Jones daily

Dow Jones Daily – zoom in

Nasdaq 10 years weekly

Nasdaq daily

S&P 500 weekly – 10 years

B. Europe – DAX weekly 10 years

Dax Daily

FTSE 20 daily

CAC40 - daily

C. Asia – Nikkei daily

Asia – Hang Seng daily

SSEC ( China) weekly 10 years

D. The Greek Stock Market

Currently Is depending on The Hellenic government fiscal

policy The effectiveness of the Hellenic

government The support of foreign investors The support of EU officials The US stock markets

and mainly on

The bond market situation

We should not forget that While “ Emerging markets have been

viewed in the past as a source of systematic risk , they are now viewed as a source of stability and indeed a crucial driver of the global recovery” according to Capital Economics International Forum

That’s why our esoteric economic problem is taken so seriously globally.

Latin America Short term external Debt

Hellas vs California

Hellas vs California According to FT: “Why is Greece such a

big problem for Eurozone since ..the far -worse California is not raising similar concerns about the US or USD?”

Greek economy is only 3% of eurozone California economy is 13,5% of US GDP

The Paradox The US economy Allows fiscal

transfers between states to help the…weakest!

The eurozone ?

Actually… Eurozone is only 11 years old, a child.. Greece is not a big problem to eurozone But EU officials over – reacted and confused

markets Financial markets are biased against euro

and will grab any chance to talk about the prospect of EMU breaking up

Eurozone politicians have much greater freedom to act because there is no single government.

ADEX The OPEN INTEREST of FTASE20 Futures is crucial.. Generally speaking above 24 –

25,000 futures and certainly close to 30,000 futures means that selling pressure will increase in the short term at the spot market.

FTASE 20 weekly -10 years

FTASE 20 daily

What about VIX ?

VIX is the benchmark index for US stock options

VIX = Chicago Board Options Exchange Volatility Index

Measures the cost of using options as insurance against declines in the S&P500

VIX

All time high : 80,86 in November 2008, 2 months after the bankruptcy of

Lehman Brothers Has now dropped 72% for its historic high Is now 9% higher from its 15 - month low

on Nov 24th, 2009 The average price of VIX is 20,29 during

the last 20 years.

VIX December 2010 puts @55 48,577

volume, of which 76% traded at ask price.

So buyers initiated the majority of transactions…

PUT 55 open Interest = 120,000 Why 55 strike? Is about half the price

of SPY = 111, the ETF of S&P500.

One year implied volatility

On the S&P500 is 24,80 , that is 5,5 points higher than 30-day contracts, while the gap widened to 6,84 on November the 24th which as the HIGHEST in the LAST % YEARS.

The last time the gap approached current levels was in August 2008 = JUST BEFORE LEHMAN’S BANKRUPTCY

Forecasting VIX Many economists and derivatives

traders expect a rise in VIX “ it will be a year of heightened

volatility…north of 30 …close to 40..because inventors underestimate risks of the Global economy”

Actually the cost of hedging is currently very low

Forecasting Most of the times VIX dropped to 20 -22

it signalled an uptrend wave. Also S&P has advanced 63% since

March Profit Growth are projected to rise 25%

in 2010. Average P/E of S&P500 : 13,9% So: the odds are increased that S&P will

fall

IF S&P 500 falls Under 1070 then a move towards

Simple Moving Average 200 is possible (960)

Global indexes will turn down to their SMO200.

In that case GD will not be able to move above 2401.

S&P500 warning signals CBOE put/call ratio < 80 for a couple of

weeks ( today @0.90) Mini S&P futures > 3,5 m. for a couple

of weeks or > 5 m. for a couple of days VIX <20 for a couple of weeks

(today@21.59) Remember : big call volume trades at

tops while big put volume trades at bottoms

VIX daily

VIX weekly

S&P 500 Weekly zoom in

S&P 500 daily

Is there a correlation? GS supports “that an extended

topping process makes sense” An up trend in the USD means that

either yields break higher(2-year yields > 1.10 ) or S&P 500 < 1029.

GS says : S&P 500 might topping..

IF S&P 500 turns down, then Under 1070 then a move towards

Simple Moving Average 200 is possible (960)

Global indexes will turn down to their SMO200.

In that case GD will not be able to move above 2401.

GD weekly –10 years

GD - daily

GD – Hourly

ETE - daily