Shanghai stock market CRASH

[Tingkai]

Originally posted by One_more_turn
Hoho! The entire Asian market is melting down.

Yup, should be interesting to see what happens today. For the HSI, 18,000 is probably a fair value, but at this point, perceptions will rule. Still, there will be bargain hunters. HSBC at $133 is a pretty good price. Although I think I'll wait a bit before dipping back in.

[Zkribbler]

Originally posted by Saras
Not if there's a lot of labour supply or increasing productivity / hour

Except unemployement in the U.S. is really low. So there's not a lot of labour supply.

There is increasing productivity/hour because employers are demanding more work be done off the books.

[Kidlicious]

Wages will rise with profits if there is especially high demand for the labor such as in the US throughout much of it's history or China with the imbalance. Normally though wages will remain pretty constant or diminish.

[DanS]

Bearish day on Wall Street. Open lower than yesterday's close, then close even lower on the day. Nobody wants to hold these stocks at the end of trading.

Blue = Dow
Orange = S&P 500
Red = NASDAQ Composite

[DanS]

Thought the following WSJ primer of the Yen-Dollar carry trade was interesting reading.

Understanding the Carry Trade
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
March 5, 2007 3:20 p.m.

Markets have been preoccupied with tales of the "yen carry trade," part of the reason for the decline in stock markets around the world. But not everyone quite understands what this is all about, so here's a brief primer on just what this trade is.

Please see Corrections and Amplifications below.

What is the carry trade?

Very simply, such a trade involves borrowing money in a currency where interest rates are very low, such as Japan (where the central bank's key lending rate currently sits at 0.5%) in order to purchase assets in a currency where rates are higher, such as the U.S., where the Federal Reserve's federal-funds target is 5.25%. A trader using this strategy attempts to capture the difference between the interest rates, which is often substantial. The yen carry trade is generally thought to be the most popular, although investors do use other carry trades with low-yielding currencies, such as the Swiss franc.

Why is the yen carry trade so popular?

To encourage borrowing and investment in its weak economy, Japan's central bank had maintained a zero-interest-rate policy, setting key lending rates at 0%. With interest rates so low, the difference between that rate and those of other major markets, such as the U.S., Germany and Australia, were substantial, and as a result it was consistently profitable for traders to use such a strategy.

The availability of cheap funds in Japan, along with the relatively low volatility in the currency, encouraged investors to take on additional leverage and use that to not only purchase bonds in other countries, but commodities and stocks as well. Without any fear that Japanese interest rates were going to rise, and with the currency itself remaining weak, investors maintained such trades profitably.

How big is the yen carry trade?

Quantifying the size of the borrowing used specifically for carry trades is difficult. The Bank for International Settlements, in its mid-2006 quarterly update, noted that cross-border yen borrowing increased by about $161 billion in the two years ended in 2005, with about $120 billion of that channeled to international financial centers, including the Cayman Islands, where many hedge funds (natural participants in the carry trade) are based.

However, it is important to note that daily volume in currency trading topped $2.7 trillion as of April 2006, according to International Financial Services of London. This suggests that carry trades account for a minority of forex trading, although their impact may be increased due to leverage taken on by investors participating in the trades. "On a short-term basis, these are marginal dollars that could be significantly impacting movement, but you can't know how much is unwound at any point in time," says Tony Crescenzi at Miller Tabak.

What started the unwinding?

What has sustained the carry trade in recent years is the substantial difference in interest rates between key players -- i.e., the U.S. and Japan -- as well as reduced volatility. Both of those conditions are changing. Japan's central bank has begun to raise interest rates, albeit very slowly, while the expectation in the U.S. is that the Federal Reserve's next move will be to lower interest rates. While the differential is still large, the expectation is that it will narrow, therefore making such trades less profitable.

In addition, the currency markets were less volatile in 2006 than they were historically. Leveraged investors have to watch out for sudden movements against them; when those movements are diminished, they feel more comfortable taking risk. If the expectation is that the value of the currency isn't going to change much, investors don't have to worry that the weakening dollar will offset the positive effects of the difference in interest rates. But Kathy Lien, chief strategist at DailyFX.com, says the expectation is for at least a 35% increase in volatility in dollar/yen this year, and that uncertainty makes the trade less advantageous.

But still, if the difference between Japanese and U.S. rates is still large, why is the unwinding continuing?

Anticipation of changes in interest rates were responsible for some of the unwinding at the outset, but it doesn't account for the ongoing movement in flows. Leveraged investors, when seeing a trade move against them, have to respond by reversing their positions, that is, buy back yen and sell the other currency. In addition, speculators were large short-sellers of the yen in recent weeks. They had built a record short position of 173,000 contracts in February, according to Merrill Lynch, and as that trade turned against them, they were forced to cover their shorts. As of last week, the short position was reduced to nearly 115,000 contracts, still the 10th-highest reading on record.

These occurrences have exacerbated the moves seen in the currency markets -- as a result, dollar/yen has dropped to 116.10 from 121.60 in seven trading days. "At first, [the selling was driven by] the expectations for the central bank, but at one point, it became a mass liquidation," says Ms. Lien.

We've heard the gloom and doom about this trade sinking markets before -- how do we know it's for real this time?

As mentioned above, quantifying the size of the carry trade or the real-time movement of such funds is difficult. But the recent strength in the yen, along with the decline in global assets, suggests that the unwinding of such trades is definitely having an impact on the markets. Because investors had been using leverage in borrowing yen and buying other assets, more selling in U.S. stocks, foreign stocks and other assets may continue. Bianco Research estimated this week that short-covering in the yen could continue until dollar/yen reaches 110.

Has the trade disappeared entirely?

Not at all. The interest-rate differential remains high, and expectations for interest-rate increases in Japan remain low, while the Fed is largely on hold. The trade may not be as popular as in the past, but that doesn't mean it won't be utilized. Once again, however, the greater the volatility and the greater a chance the yen appreciates, the less favorable it becomes. "The yen carry trade has been with us for more than a decade. It has a long way to go in any unwinding given the level of Japanese interest rates and the wide spreads," Bianco Research noted.

Corrections and Amplifications: An earlier version of this story said, "The recent weakness in the yen…suggests that the unwinding of such trades is definitely having an impact on the markets." In fact, it is the recent strength of the yen that is a sign of the carry trade unwinding.

Write to the Online Journal's editors at newseditors@wsj.com

[DaShi]

Originally posted by Tingkai
Dashie, could you be any more boring? Actually, you probably could. And the bit about me being an apologist for the Tiananmen massacre, you do realize only a fool would believe that.

Well, doesn't change that fact that you were. Now you may have changed your opinion, but you had made some strong arguments for the Massacre. At least back then you put thought into your responses. This isn't intended as an insult but an observation.

But I knew you couldn't resist me.

Could it be because I hit a nerve? Maybe you have a secret crush on me? Or maybe you just like proving me right by your own responses (I appreciate it, by the way.)?

[DinoDoc]

Is there something I'm missing about misspelling DaShi's name as Dashie? Is it somesort of Chinese curse word or something?

[DaShi]

No, it's a childish attempt at demeaning me by giving me a pet name. One of his better methods. Unfortunately for him, it weakens his case against me, while strengthen mine. But I don't make him do it.

[Kidlicious]

Originally posted by DanS
Bearish day on Wall Street. Open lower than yesterday's close, then close even lower on the day. Nobody wants to hold these stocks at the end of trading.

Blue = Dow
Orange = S&P 500
Red = NASDAQ Composite

Let the good times roll

[Kidlicious]

Originally posted by DanS
Thought the following WSJ primer of the Yen-Dollar carry trade was interesting reading.

Oh thank you DanS. You must have read my post a few days ago regarding this.

[Tingkai]

Originally posted by DaShi


Well, doesn't change that fact that you were.

Like I said, only a fool would believe...

[Tingkai]

Originally posted by DinoDoc
Is there something I'm missing about misspelling DaShi's name as Dashie? Is it somesort of Chinese curse word or something?

It's a hockey thing.

[Tingkai]

Originally posted by DanS
Thought the following WSJ primer of the Yen-Dollar carry trade was interesting reading.

Pretty basic stuff, and biased, but that's the WSJ.

The big question for the carry trade is the yen's rate relative to other currencies (the trade can be done in any currency, not just U.S. dollars). The WSJ cites one person who contends there will be greater volatility in the yen's value. That's just one opinion.

At the beginning of 2006, a majority of economists interviewed by Bloomberg predicted that the yen would be volatile during the year. They were wrong. The Japanese government is very reluctant about letting the yen appreciate.

[Colon™]

They were wrong.

Unbelievable!

Anyhow,

http://www.bls.gov/news.release/prod2.nr0.htm

Productivity growth: 1.0%

Hourly compensation growth: 7.5%

Ouch.

[Kidlicious]

Originally posted by Tingkai


Pretty basic stuff, and biased, but that's the WSJ.

The big question for the carry trade is the yen's rate relative to other currencies (the trade can be done in any currency, not just U.S. dollars).

Another question is the interest rates. If those change you'll surely see changes in the currency rates if the carry trade is as big as some people say it is.