2010 The Return to Normal (Hopefully)

What a year we have seen in the markets with share markets globally clawing back nearly all of the losses seen throughout the global financial crisis. The currency markets are by and large close to levels seen prior to the crisis and commodity markets have also seen gains with records getting shattered in gold day after day.

I have been thinking for a while now what 2010 will bring us, so this could be quite a post so I will try and break it down in sections so it doesn't get too long winded.

Sharemarkets

In 2009 most of the developed sharemarkets worldwide have moved together in an upwards motion. The emerging world is very overinflated and whilst all the world attention is always on the big three (Nikkei, FTSE and S&P500) markets like the Shanghai Index (China), Kospi (Korea), NSE (India)and the BOVESPA (Brazil)have seen enormous gains throughout 2009. These gains in part should be consolidated and added to mainly cause of the rising local demand that countries like China are now creating.

Other factors include the large amount of money that has been invested by American companies looking to escape one of the worst recession's in living memory and put some real growth on the bottom line. Some of these emerging markets are starting to look very bubbly especially in areas like property. I note that China is starting to make noises about putting interest rates up and raising property taxes in an attempt to take some of the steam out of it's market and return some common sense to it.

The 10 Year US Treasury Note I find is the best indicator of the overall US economy and a look at this years chart is pretty interesting



2010 should be a year with continued growth in the emerging world and some mild growth in the developed world. In the UK and USA especially the unemployment rate is the bull in the china shop and will continue to keep GDP low, most recoveries start with temporary employment going up and that inevitably leads to full time employment. These numbers will be interesting to watch as we go through the year.

Currency Markets

2009 was an interesting and at times a puzzling year in the FX market. The British Pound seemed like it was a permanent short this year and that sentiment was constantly backed up by BOE Governor King saying that a devalued pound was desirable for a UK recovery. The euro was back bigger, and better than ever and in stark contrast to the pound was an almost permanent long with ECB governor Trichett refusing every opportunity to comment on fx rates only to say a strong USD was desirable and China amongst others was a huge buyer of the euro keeping it nice and inflated at least until the 8th December anyway. The star of the show this year in performance terms was the Aussie it was in the early 61's at this time last year and as we end the year its just below 90, a stellar performance indeed fueled by Chinese demand for Australian commodities like iron ore and natural gas.

2010 I believe will be a year in two distinct parts. The first will be full of speculation about when the Federal Reserve will lift rates and the second half will be what now that the fed has lifted rates.

Euroat the end of 2009 lost ground against the USD, there has been lots of speculation as to the nature of this fall. In my opinion it wasn't so much the selling of the euro that was pushing this move but more an unwinding of USD short positions. The first part of next year I expect to see more of the same of what we have seen in 2009 with an added dose of caution for two main reasons:
1. Traders may be less likely to short the USD with speculation from the Fed that a rate increase is forthcoming
2. The Euro zone has perhaps suffered more than anywhere else in the world with structural failures through this crisis. Greece is an excellent example and whilst Greece only represents 2% of the total euro zone it does send a shockwave through financial markets about the stability of the area and with Spain in the queue with similar problems to Greece the euro could be in for a bumpy ride if a Spain failure eventuates as Spain represents upwards of 10% of the GDP of the Eurozone. The Euro is a watch this space carefully proposition in 2010.

Yen fate firmly rests with the Japanese Government and the Bank of Japan, the new government's reluctance to intervene in FX, and worse their broadcasting of this policy to the markets has made traders around the world want to test this theory. The Yen's strength this year was part safe haven, and part testing of the pain threshold.

At the end of this year the BOJ increased its quantitative easing program and also started talking up the weak yen and backing this up by not increasing rates and also noting that rates will stay very low for a very long time. In 2010 in my opinion the yen will return to its traditional role of one half of the carry trade and with low rates for the foreseeable future its hard to see the yen strengthening any further into 2010.

Pound is going to be a bit difficult, with the BOE constantly telling the market that a weak pound is a good thing, and while the economy recovers it probably is, but ultimately from a macro economic perspective if it's not rained in soon and extraordinary measures such as quantitative easing and the economy starts to recover then inflation is a real concern.

In 2010 I expect the pound to reverse for the most part and become a buy again against most of the other pairs. The economy should get the injection it needs if a change of government is forthcoming. I expect like this year the pound will be a difficult pair to trade.

USD is the one to watch in my opinion, what happens here will have large ramifications for the whole market. As 2009 was in most part the recovery year, the year of easy money, the year no matter how bad your balance sheet it as long as you were big enough you got bailed out. The Federal Reserve always play an integral part in the FX market but none more so as the role it will play in 2010 as the fed will be forced sooner rather than later to unwind the extraordinary measures it has in place, the buying of toxic mortgages will cease or slow to minimal levels at the very least (that in itself is bullish sentiment for the USD). In my opinion by the time we get to September 2010 the unemployment rate should be somewhere between 9.00% and 9.5% at this point the fed will be under pressure to increase rates even a little to stop a bubble affect building. We have already seen some pre emptive moves with mortage companies raising the fixed mortage rate, they know a rate rise is coming the writing is on the wall.

During the Global financial crisis the USD along with US treasuries became the safe haven play, so markets settled into a familiar pattern stronger USD, meant weaker sharemarket and stronger US treasuries, this has become the new normal for a while, prior to the crisis this was not how it was in previous years and in 2010 I hope we see a return to a market that is more like the one prior to the crisis, where a drop in the sharemarket didn't necessarily mean a rise in the USD.

Overall I believe the USD will be weaker at the end of 2010 than where we are today so a bear market is my forecast for the USD, but I wouldn't expect one way traffic like we have seen in 2009, I would expect some substantial rallies in the USD posible up to 7% and 8% in strength at the economically significant points during the year.

At the end of 2009 and on the verge of 2010 I wish all traders good trades, always remebering that every trade you take this year should be well thought out with good reasons for getting into and out of the trade. Its a dangerous game we play and the line between success and failure is thin but you can widen it with good analysis and management

Good Luck and Happy New Year.