Tuesday, July 04, 2006

Quiet day on the markets

4th of July holiday. Volume was low and FX trading range bound. But FX volatility hasn't gone away, it's just skulking in the background.

Potential for market volatility is sky high.

You only have to look at the recent very hairy roller coaster ride on 1) Emerging markets (Turkey, Hungary, Iceland) and in 2) Commodities (Gold, Copper, Zinc) and 3) Stocks to know that all is not well out there.

Market leverage has grown exponentially over the past decade and that leverage means volatility is here to stay. The impact of increased volatility on the Real World Economy will ultimately be brutal. The powers-that-be are apparently confabulating behind closed doors about how to address the problem.

Let them confabulate. But it's a bit late. The genie is well and truly out of the bottle.

There are rumours about the existence of a mythical PPT (Plunge Protection Team) and hopes that the PPT will emerge from the shadows if anything goes seriously wrong (in the United States that is) but no-one really believes that the PPT or anyone else can stand in front of a market Tsunami.

And things can go wrong.

The big question on everyone's mind is how safe is the dollar and by extension the current global financial system. After all when you use the USD as your global reserve currency and the fundamentals behind the USD are looking shaky as never before, then your global financial system just might have a problem.

That certainly seems to be the concern of the big boys at the BIS (Bank of International Settlements).

This being the case it seems fair to ask if the recent financial market volatility was just a dress rehearsal for the big one.

To be cont.

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