Monday, November 5, 2007

The week ahead - Interest Rates, Child Care and Leverage, USD, Emerging Markets and other Hogwash

There are a few interesting items coming up on for the Aussie equity markets this week, including the reserve bank's decision on rates. At my latest mark, it was about 90%+ priced in. So it'll be interesting to see if this slows the market at all. My feeling is that it's got to start hurting some of the highly leveraged margin traders who are bidding the market higher, particularly in some of the index heavy weights.
Early Learning Services (ELS.AX) the soon-to-list child-care provider will follow in the footsteps of larger rival, ABC Learning . We've all seen the progression of ABS.AX and I'm sure there'll be plenty of investors looking to get in on this trade. The company, which owns seven child-care centres and has contracts to buy a further 44, will float on the Australian Stock Exchange next month.
Sixteen contracts for difference (CFDs) products, listed over Australia’s top companies, will debut on the Australian Securities Exchange (ASX.AX) today. Later in the month, the ASX will also launch two index CFDs, seven foreign exchange CFDs and one commodity CFD. These will include a product based on the Dow Jones Industrial Average. This will provide more unneeded leverage for the average punter. With so many of these products already available. (CFDs, Warrants, Minis, Options, Margin Lending etc etc.) The only people likely to be impacted by this are people like CMC Markets, with investors taking it easier option of purchasing ASX listed CFDs instead of the bespoke ones from third party providers.
Emerging market equities have out-performed major markets in recent months. It is as if emerging markets are the new safe haven from the US and other developed nations. This makes some sense , given the strong external accounts of many emerging countries. It is hard to imagine that emerging market growth could diverge from developed market growth for a long period of time.
Fiscal policies in China and other emerging Asian countries, have resulted in accelerating FX reserves growth. The result is a world that sees the glass half-full, and problems in the US as a local problem. However, as the diversion in market performance becomes clearer, the risk grows that something gives, and that may be a global equity market rout and global risk aversion trading. If the USD continues to fall out of bed, the risks that it falls dramatically in a single session continue to stack up. I would not be trading USD from the long side at any point, the risks are simply too great. A friend of mine recently predicted the USD to be buying 50 Euro cents within 18 months, and while he's mad, he might be right.

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