Tuesday, July 18, 2006

Assume Crash Positions Please

EUR/USD 1.2537 / 40 Hi 1.2559 Low 1.2495
USD/JPY 116.92 / 96 Hi 117.24 Low 116.68
EUR/JPY 146.59 / 63 Hi 146.79 Low 146.22

In the current Middle East flare up it's hard to know what to count: the number of civilian casualties or the number of nuclear bombs currently sitting in the Israeli arsenal? Of course, now that the boys from the G8, the U.N. and the E.U. are on the case we have nothing to worry about. Just kidding.

Anyway we all know that we can trust the responsible people in Israel not to do anything too awful. Yeah right. So given that they have a blank cheque from W. and his cronies, and given that the U.N., the EEC and the Arab League are currently trapped in some kind of time warp we can all relax and enjoy the Summer. Meanwhile Israel has kindly suggested that the Lebanese civilians start evacuating and appears determined to occupy all of the territories which it recently withdrew from, and then some. Deadly Double Standards

Although the world is obviously in good hands, the Japanese stock market isn't looking all that relaxed and comfortable. The 2.75 % fall today came in spite of the signals from the BoJ that there will be no rush to follow up on the recent rate hike and confirms that the Nikkei is in a bear market. The U.S. market held yesterday but the bullish case for stocks looks more and more like yesterday's story. And selling pressure continues on European markets while emerging markets appear to have thrown in the towel altogether.

The outlook for global stock markets continues to be poor: tighter monetary policy is spreading like bird flu, oil prices are stratospheric, there is no government with a clear game plan for current economic and political difficulties/crises/etc. The U.S. is fighting wars in Iraq, Afghanistan and potentially (if the neo-cons get let out of their cages) with Syria and Iran. Prudence would suggest that risk reduction is the recommended strategy. The mega-prudent would do well to assume crash positions.

The USD is hanging in there, with the market hoping that the Bernanke testimony (which is now widely expected to be hawkish) and the escalation in the Middle East will spark more USD short covering and some old fashioned "safe-haven" buying. Short term this strategy might work, but no-one should mistake this for a long-term position. The U.S. is chronically in debt and dependent on foreign capital inflows. It needs to maintain offshore investor confidence in the face of policy strategies which seem misguided at best. Only confusion on financial markets and well placed media blurbs can keep the strong USD ball rolling.

Inflation and capital flow data out today will be poured over by analysts looking for clues about the direction of interest rates and the state of offshore confidence in the USD. Today's data really isn't so important. Longer term the writing is on the wall for the USD.

OIL 75.93
GOLD 648.10

Selling GOLD at the first hint that a ceasefire with Israel is possible is a misplaced strategy. The neo-cons in the U.S. keep beating the drums of war and are now openly suggesting that the U.S. move to "hit" Syria. This would open another front in the war on terror and would be a prelude to open hostilities with Iran, which seems to have been the real target all along. I guess there are people in the oil industry who never really got over the fact that the Iranians kicked out their boy the Shah. These kindly souls have a score to settle. A score they didn't settle when they armed Saddam and encouraged him to attack Iran in a bloody and futile conflict. So this Act II. Or III or something. Whatever.

The neo-cons must have missed the fact that the Bush Administration can't afford the war on terror that they are already running, that the U.S. electorate is unhappy and that U.S. "allies" are increasingly hostile. The only leader who still seems to be on board the Bush bandwagon is Tony Blair, and he has a whole line of snipers just waiting to shoot him down at the first real opportunity. Still the neo-cons are the only people on the scene with an agenda which is crystal clear. Which means odds are their favour.

Sell oil if you think that something will be done shortly. Otherwise don't.

Decisive action is needed if the current crisis is to be addressed and the chances that we can expect anything like decisive action soon are depressingly small. Unless, of course, your definition of decisive action is bombing Syria.

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