A Financial Market Inflection Point Has Been Reached As Yen Based Carry Trades Are Unwinding In Response To The Yen Having Moved Higher And Bonds Have Turned Lower As The Fed Has Communicated A Purchase Of Treasuries

I … Introduction

A stock market inflection point has been reached as yen based carry trades, such as the EUR/JPY, are unwinding in response to the Yen having moved higher, and bonds have turned lower as the Fed has communicated its intention to purchases Treasuries.

The sustained rise of the Yen, FXY, today has likely created an insurmountable hurdle for ongoing long yen based carry trade investing. The early morning turn lower in the Euro Yen Carry Trade, that is the EUR/JPY, seen in FXE:FXY, as well as other carry trades, such as the Australian Dollar Yen Carry Trade, FXA:FXY, the Canadian Dollar Yen Carry Trade, FXC:FXY, the Swedish Krona Yen Carry Trade, FXS:FXY, the Indian Rupe Yen Carry Trade, ICN:FXY, the Emerging Markets Yen Currency Trade, CEW:FXY, turning lower but recovering, has likely recommenced the debt deflationary bear market that began April 26, 2010, which occurred with the onset of the European Sovereign Debt Crisis.

Bonds, BND fell lower. More money money flowed out of the US Government Zeroes, ZROZ, than the 30 Year US Government Bonds, TLT, causing the 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX, to fall lower. Mortgage Backed Bonds, MBB, rose strongly. But, short term government bonds, SHY, intermediate US Government Bonds, IEF, Pimcos Mint Bonds, MINT, Build America Bonds, BAB, Municipal Bonds, MUB, TIPS, TIP, all fell lower. Investment will be coming out of bonds now that QE2 has been confirmed. Now investors are concerned that the purchase of Treasuries constitutes monetization of debt. The spigot of investment liquidity coming from government spending was turned off today.

II … Financial Market Report For October 12, 2010

A strong rise in the Yen, FXY, to 121.86, induced an early morning sell off in the Euro, FXE, the Australian Dollar, FXA, the Swedish Krona, FXS, before they recovered to close higher on the day; the Euro, FXE, closed at 138.65.

The British Pound Sterling, FXB, the Brazilian Real, BZF, the Indian Rupe, ICN, and the Emerging Market Currencies, CEW, closed lower.

Carry trade disinvestment flowed from United Kingdom, EWU, Sweden, EWS, Emerging Markets, EEM, India, INP, and Australia, EWA.

One can use this Finviz Screener of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, CYB, BZF, XRU, FXY, BNZ, DBV, and CEW to create a portfolio to follow currencies.

The US shares, VTI, traded up. Down heavily were Ireland, EIRL, South Korea, EWY, Japan, EWJ, EZJ, Metal Manufacturing, XME, Basic Materials, WDFC, BHP, CBI, and Copper Mining, CU.

Small cap pure value shares, RZV, rose 0.2%. Small cap pure growth shares, RZG, rose 1.1%. The ratio of the two fell lower.  The small cap pure value shares, RZV, have likely reached full expansion.

Banks, KBE, traded up on the likelihood of good earnings reports, resulting in the Russell 2000, IWM, rising. Semiconductors, SMH, and Solar Energy, TAN, rose. Exxon Mobil, XOM, rose as well.   

Word shares, ACWI, traded down, while the S&P, SPY, rose. Technology, MTK, took the Nasdaq, QQQQ higher. Retail holders, RTH, fell, while Retail stocks, XRT, rose. Semiconductors, SMH, rose.   

Frontier Markets, FRN, rose. Columbia, GXG, Peru, EPU, Thailand, THD, Malaysia, EWM, all rose to new highs.   

Volatility, VXX, fell, and inverse volatility, XXV, rose.

The sustained rise of the Yen, FXY, today has likely created an insurmountable hurdle for ongoing long yen based carry trade investing. The early morning turn lower in the Euro Yen Carry Trade, that is the EUR/JPY, is seen in FXE:FXY with a closing value of 1.15.

For a more accurate presentation of the Euro Yen carry trade, ActionForex provides a chart of the EUR/JPY trading at 113.14, after falling from 1115.65. And Yahoo Finane provides a chart of the EUR/JPY trading at 113.20

I say the Euro Yen carry trade is turning lower; and that this will turn the Euro and stocks in Europe and globally lower. 

Today’s turn lower can be seen in other other carry trades as well, such as the Australian Dollar Yen Carry Trade, FXA:FXY,  the Canadian Dollar Yen Carry Trade, FXC:FXY, the Swedish Krona Yen Carry Trade, FXS:FXY, the Indian Rupe Yen Carry Trade, ICN:FXY, the Emerging Markets Yen Currency Trade, CEW:FXY, turning lower but recovering, has likely recommenced the debt deflationary bear market that began April 26, 2010, which occurred with the onset of the European Sovereign Debt Crisis.

At that time, the small cap value shares fell more than the small cap growth share. Today, RZV fell relative to RZG, suggesting that currency devaluation has started yet another bear market.  This time a competitive currency debt-deflationary bear market, has likely been induced by a small group of currency traders who took the Yen, FXY, higher, killing off continued global expansion of investment.

Today the emerging market currencies, CEW, closed lower (inducing emerging markets, EEM, to sell off) as the developed market currencies, DBV, closed higher. With the higher Yen, FXY, it is likely that both will fall lower.

The currency war conducted between currency traders and the Bank of Japan, with its quantative easing purchase of J-ETFs, and ZIRP, have scorched the investment skies; welcome to the investment desert of the real; we don’t live in Kansas any more.

The rise of the Yen, FXY, to 120.86, and the inability of the major currencies, DBV, as well as the developing currencies, CEW, to overcome that rise as is seen in their carry trades, DBV:FXY and CEW:FXY falling lower, suggests that the spigot of investment liquidity that has come through yen carry trade investment was turned off today; global competitive currency devaluation resulting in unwinding yen based carry trades, will be taking stocks, ACWI, lower.   

The US Dollar, $USD, traded down to $77.36;  its 200% ETF, UUP, fell lower as well. The chart of each suggests that a bottom is forming.

Because of the strong Yen, FXY, the USD/JPY languished around 82; and JYN remained stubbornly high at 72.2.

Bonds, BND fell lower. More money money flowed out of the US Government Zeroes, ZROZ, than the 30 Year US Government Bonds, TLT, causing the 30:10 US Sovereign Debt Yield Curve, $TYX:$TNX, to fall lower. Mortgage Backed Bonds, MBB, rose strongly. But, short term government bonds, SHY, intermediate US Government Bonds, IEF, Pimco’s Mint Bonds, MINT, Build America Bonds, BAB, Municipal Bonds, MUB, TIPS, TIP, all fell lower.  Investment will be coming out of bonds now that QE2 has been confirmed. Now investors are concerned that the purchase of Treasuries constitutes monetization of debt. The spigot of investment liquidity coming from government spending was turned off today.  

Tyler Durden in article Weak 3 Year Auction Closes At Lowest Bid To Cover Since February, Highest Primary Dealer Participation Since February 2009 relates: “Primary Dealers had to step in and buy nearly two thirds of the auction, or 59.1% to be specific.” I consider this to be a monetization of US central bank debt by the Federal Reserve’s Primary Dealers.

Today, those short TMF profited and UBT.

Interest Rates on US Government Debt rose across the board: $UST2Y, $TYX, and $TNX all rose higher.  The bond vigilantes captured the day and called interest rates higher. The US Federal Reserve now longer has total sway over interest rates; the bond market definitely now controls the longer end of the bond market and rates. The chart of the Interest rate on the 30 Year US Government Bond, $TYX, shows a breakout and rise to its 20 day moving average.

One can follow bonds by using this Finviz Screener of BND, TLT, ZROZ, MUB, JNK, LQD, EMB, CMF, BLV, MBB ,TIP ,LTPZ, IEF, SHY where one can create a sample or trial bond portfolio.

Chart of $TYX:$TNX suggests that the yield curve will now be flattening, quickly destroying the wealth of those invested in longer out, that is in he greater duration bond investments, such as the mutual fund American Century Target Mat 2025 Adv, ACTVX.

Today, October 12, 2010, marks an inflection point where both spigots of investment liquidity have been turned off, evidence of such comes from Junk Bonds, JNK, falling lower.

With the Yen rising to 120.86, we have passed through Peak Currency Trading. And with the confirmation of QE 2, and bonds, BND, falling to 82.72, we have passed through Peak Credit, that is Peak Bond Wealth.  

Today, the world passed through peak investment liquidity; and thus have gone from the age of prosperity into the age of debt servitude. The coming age will be market with adversity and austerity, as well as much conflict.

Gold, GLD, traded down 0.23%; the gold mining stocks, GDX traded down .42%, and the junior gold mining stocks, GDXJ, traded down 0.57%.  

I envision that the Federal Financial Regulator, the Secretary of the Treasury, will exercise the broad discretionary power assigned to him by the Dodd Frank Legislation to manage economic, investment,  lending and credit. He will rise to be Segnior, that is top dog banker who takes a cut. It is interesting that one definition of credit is trust. Many will come to trust in him to conduct their commerce, trade, banking and credit.

Tyler Durden in ZeroHedge article “Just The Tip Of The Iceberg” quotes from the Adam Levitin, Associate Professor of Law at Georgetown University, legal briefing prepared for CitiBank on the mortgage foreclosure issue which outlines a systemic problem that may see an extreme resolution: “Our speaker predicted that more and more lenders are likely to stop their foreclosure processes in both judicial and non-judicial states. He also expects more states’ attorney generals to get involved. At the federal level, it is possible than banking regulators might step in as there is legal and reputational risk for the banks involved. Ultimately, if these issues do in fact escalate, the Administration may try to broker some sort of settlement. If such deal brokering does take place, Levitin believes that “some payment” will be exacted from the lenders and servicers. The Administration could bargain for more mortgage principal write downs.” In other words, the endgame will likely end up being the extraction of material concession from the banking syndicate, in the form of systemic mortgage writedowns, with Obama’s blessing, which will likely put the 25% of homeowners who are underwater on equal footing with the other 75%. It may turn out that this was the plan all along. And people naively wonder why banks have hundreds of billions in cash stashed on the sidelines.”

Alex Veiga and Alan Zibel in Associated Press report in article GMAC, Wells Fargo To Review Foreclosures:  “Two big mortgage lenders are reviewing foreclosures as public officials heighten pressure on the industry over allegations that they made errors in documents used to evict homeowners.

GMAC Mortgage, a unit of Ally Financial Inc., said Tuesday that it has enlisted legal and accounting firms to conduct independent reviews of its foreclosure procedures in all 50 states. GMAC has already halted foreclosures in 23 states. Separately, Wells Fargo & Co. said it would review pending foreclosures for potential defects in response to requests from lawmakers and public officials. The San Francisco-based company says it has not turned up any evidence of problems. “We have no plans to initiate a foreclosure moratorium,” company spokeswoman Vickee Adams said. In May, a Wells Fargo executive acknowledged in a deposition that he verified only the dates on up to 150 foreclosure documents he signed daily. The executive said he relied on co-workers to ensure that other information in the documents was correct.”

Keywords: Federal Financial Regulator, Financial Regulator, Seignior, debt deflation, EUR/JPY, yen carry trade, carry trade investing, Peak Liquidity, Peak Investment Liquidity, Peak Credit, Peak Bond Wealth, yield curve, mortgage foreclosure crisis, foreclosure crisis, Peak Currency Trading, Investment Liquidity,  QE2, QE 2, currency war, global currency war, competitive currency deflation,  foreclosure moratorium, foreclosuremoratorium, topdog,

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