Wednesday, June 02, 2010

Will Hatoyama's resignation cause a small stock market rally?

I know things are pretty dismal and bleak for investors. Even the better than expected ISM numbers from the US cannot shore up the DOW. Investors probably feel like throwing in the towel. Threats of a double dip recession, anxiety over the problems in the Eurozone, the BP gulf leak and erratic performance of economies around the world weigh on stock markets. Nothing good seems to be happening to lift confidence.

Have you heard of chaos theory? The flutter of a butterfly somewhere in Africa can trigger a chain effect the lead to dramatic events half way around the world. I suggest a similar chain effect might have occurred with the resignation of Hatoyama...but wait isn't the resignation of a prime minister of a G7 country going to add to the host of problems the global economy is already facing???...Here is how his resignation can actually trigger a small stock market rally. For the past 5 weeks, markets have been plagued by erratic exchange rate movements. When the Euro weakens, it sinks stock markets ...when the Yen or US$ strengthens, it leads to commodity and equities selloffs. Movement in currency markets leads movements in equities....people mistake economic reports etc as drivers of stock market movements but it is currency and the carry trade dominate movements of markets.

Hatoyama's resignation has caused the Yen to weaken vs all major currencies. This weakening of Yen has reversed a vicious cycle of selling and liquidation of stocks and commodities. When the Yen weakens, it gives the economic factors a chance to assert and influence the markets helped by the carry trade.

If my understanding of market correlations and inter-relationships is right, markets should start to rally....and as usual the talking heads on CNBC will tell you it is because the US economy is strong, stocks are cheap, and Europe is now stable...but the real reason is Hatoyama resigned and that is like the flutter of a butterfly that set in motion a chain of events seen only by those who can connect the dots......

9 comments:

Hun Boon said...

I haven't done any in-depth research into the financial markets.

But my current feeling is that Japan is so used to changes in government/prime minister anyway, any impact will be temporary.

And chaos theory is just a theory. :)

Anonymous said...

Since the day he took over office, nothing changes. Such was his performance and therefore he is unlikely to affect the market sentiment much. But, getting the Right Successor to replace him may cause some market movements.

Lucky Tan said...

anon 17:16,

My hypothesis is the fall in the Yen vs US$ will trigger a chain reaction which leads to a small stock rally.

The Yen has already fallen...so we need the next few dots to connect.

Anonymous said...

With all the good news bonus, increased wages & CPF, GST, looks like Singapore is bucking the trend of world economic woes to pave the way for a snap GE.

Otherwise 夜長夢多.

Anonymous said...

Mr Lucky

What talking you?

I believe after the election many already told you Hatoyama-san is just the same and DPJ is a just another faction. No?

GS & friends account for 80-90% of ALL trades in US. The market will go up or down pretty much according to their whim. Are you still waiting for Obama to save the world? Unless some1 made a mistake on his teleprompter .. ain't going to happen.

Btw, did u know the Nikkei's fate was sealed when they allowed the US to trade their futures? Wonder if China will suffer the same fate. Hopefully not.

Anonymous said...

Lucky, this depress market will have to work its' way thru. So long as the world cup is on, the market will be more down than up.
There are plenty of liquidity but only available to those who are solid. Banks are extremely careful as to who they lend.

Lucky Tan said...

anon 10:20,

I think this world cup will be an exception for stocks. I got this feeling they will rise throughout the world cup ...and the rally will end in end-Jul....

Anonymous said...

Lucky... you really have the midas touch... Dow rebounded 200 plus yesterday!
Kudos to your analysis man...

However, I do not really understand one of your point.
You mentioned that Yen will weaken once Hatoyama resigns... how is this so?

Lucky Tan said...

anon 10:46,

Why I typed the post, Yen already weakened because traders dumped the Yen due to poltical uncertainty in Japan...they don't want a currency of a country where the leadership is in question.

It is this single Yen movement that broke the vicious cycle of selling....