Tuesday, December 29, 2009

Illiquidity & Pessimism

Last 24 hours, I have seen extreme volatility in FX markets, first seeing the USD shed valued across the board but on illiquid trading conditions. USD regained strength with confirmation that US consumer confidence improved markedly from the previous reading.

This illiquid holiday trading conditions are still affecting markets – a phenomenon that we will see for the remainder of this week and possibly early part of next year with many market makers and dealers are still away from their desks for holidays.

On the other hand, the short-term momentum indicators of pound sterling are showing that bearish sentiment continues to build over the UK’s rather abysmal fiscal condition and still deteriorating economy. I am seeing rising trading positions adding to the short GBP positions.

Treasury two-year note yields reached the highest levels since October. Least money overall is bidding on US debt but specifically less foreign central bank money is buying US debt. And this is on the short end of the yield curve!

I have been surprised to see the air thick with pessimism in recent weeks. Not so much the stock market, where the sentiment indexes show the bulls are dominating the bears by slightly more than 52%, but among the general public.

An NBC/Wall Street Journal poll last week found that 55% of all Americans feel the nation is heading the wrong decision. This is the highest level since January of this year – when the financial crisis was red hot and US President Obama was just entering the White House. Also, a recent CNBC ‘Wealth in America’ report found more negativity. Negative sentiments were expressed about the economy, home values and wage growth. Faith in institutions like the Fed Reserve, the US Treasury and the financial sector were very low.

President Obama’s approval rating has fallen below 50% for the first time. And now what? Well, we have moved from abundant optimism in 1999 to rampant pessimism in 2009. But there is one equal possibility that from this environment of low expectations, great things can happen.

Trust me, I was there back in 1999 when optimism reigned!

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