2010 10 19

A rather eventful day!

We could expect a weak open last night when Apple announced earnings at 430pm. The earnings were great but they missed on sales for iPads which a lot of analysts believe to be the next big thin for Apple, the result was pretty weak looking after market action for Apple. That combined with lukewarm IBM earnings kind of set the stage for a weak looking open.

Then really a lot of action burst out when I came in office at 7am. China surprised everyone with a 0.25% rate hike. Now this was a major surprise because officials had been fairly open about keeping the interest rate at current level. The fact that it was 0.25% - and not the "normal" 0.27% they normally use (from old tradition. supposedly easier to use this number with abacus) probably made everyone say "huh?" including yours truly. The hike was especially surprising since earlier in the night Australia decided to not hike its rate (where rate hike was widely expected).

This tightening prompted a major reversal to the liquidity rally we have seen lately - stocks and commodities down sharply while US dollar rallied.

China tightening - and there are Europeans rioting on TV.

Last time we saw this it was in mid January when China increased mandatory bank reserves and Greek crisis erupted. SP500 slipped 6% in the final two weeks of that month.

Now, I don't really think this 0.25% rate hike is a HUGE deal. But it has been futile to forecast Chinese government actions and nobody knows what is really going on inside that country. As far as impacting what we do, I don't imagine 0.25% rate hike would have a big impact on commodity imports (higher financing cost would generally be a negative).

But it concerns me economic momentum is slowing everywhere - US, Europe, Japan, UK and Asia. Austerity measures are meeting huge resistance. I always thought they will fail which is why i have bearish long term view on Euro and I think we should look to start shorting some Euro to add to our short GBP position in Porc and IQ UCITS.

Making things much worse in the afternoon were Bloomberg reporting that NY Fed, PIMCO and BlackRock were suing BofA over mortgage problems. This news pushed financials down sharply which impacted most indices.

I need to think things over more, but I am having tough time finding reasons to feel bullish. Earnings this season have been much less upbeat than the past few quarters as well. Seems to me like it has been a while we saw any economic news that was a big surprise to the upside. The rally we saw in Sep and so far this month has been on a fragile ground.