Source: Wall Street Journal

Crude oil is now influenced more by the stock market than by its own inventory levels or demand patterns. Lately, that lockstep has reached an extreme, with the correlation between crude oil and the Standard & Poor’s 500-stock Index hovering around 70%, doubling the average of 34% since 2008.

Oil and stocks aren’t supposed to swing in sync with each other. Unlike stocks, which are priced off corporate earnings, oil is usually driven by supply-and-demand dynamics.

Last week, this high correlation was a double-whammy for investors who owned both oil and stocks. A 4% selloff in stocks was compounded by a 7% loss in oil prices.

“The typical low correlation causes many investors to include commodities into their portfolios of stocks and bonds to diversify and smooth out swings in their other investments”, It seems investors have to reconsider this strategy now for the portfolio construction

WASHINGTON: The number of Americans filing new claims for jobless benefits jumped unexpectedly last week to the highest level in six months, the government said on Thursday, adding to US recovery concerns.

Initial claims were well above most economists’ expectations of 465,000, climbing by 2,000 to 484,000 in the week to August 7 from the previous week’s upwardly revised figure of 482,000.

Treasuries were little changed, Most Stock markets fall.

As expected, the Fed kept its benchmark rates unchanged and adopted a more dovish tone in its press release by downgraded its US economic outlook

The phrase “for an extended period” appeared again. Once again, Fed Governor Thomas Hoenig was opposed to keeping this part of the statement. The Fed insisted on the fact that the pace of recovery in output and employment has slowed in recent months, Bank lending has continued to contract and the pace of economic recovery is likely to be more modest in the near term than had been anticipated

Source: Exane

Exchange Traded Fund (ETF) has become very popular in recent years. However, it appears to me that many people misunderstand the functions and abilities of ETFs

Today, I am going to just share a simple example of Contango Trap in Commodity ETF which deteriorate the return of your investment. After 2008 financial market crash, a lot of people jump into  U.S. Oil Fund (USO), hoping a big gain from the underlying crude oil market. However,the ETF never delivers the return which many people expected to be.

You can easily tell the significant difference from the chart below.

Source: http://www.dailymarkets.com

This is because when the future contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; however, during the time, they have to pay much higher price to buy back the same contract they just sold, resulting a loss. This phenomena is called Contango.

And who is the biggest winner in these trades, when your portfolio is bleeding? They are always the banks and financial institutions which you trust the most. I won’t go to details about how they make the money, but  you should always seek for professional advice before going into any such investments.

Only 7 (One German, One Greek and 5 Spanish Cajas) of the 91 banks that went through the stress test will need to be recapitalized by EUR3bn. The market was more expecting USD40 to USD60bn of new capital needed.

This shows that tests where not stringent enough. but also, given every analyst knew the criteria for the test, it may be a sign that banks health may not be so bad.

Source: Exane.

Last week, I wrote an entry “S&P 500, The end of Elliott Wave” Just before the rebound of the stock market world wide. Until today, the markets have up almost 10%. and after last night, Both S&P 500 and Euro STOXX 50 is approaching 200 days moving average. As the trading volume is slowly picking up, I believe it is very likely to break through and create a short term momentum.

Of course, Euro Debt concern will certainly come back to haunt the markets in the near future, so personally, I think it is very important for people who are in-the-money to lock the profit and who deeply out-of-the-money to reduce their equity holdings. You can always buy back in the near future.

[Exane] The Bank of Korea (BOK) raised its policy rate by 25 bp to 2.25%, after keeping a record low rate for 16 consecutive months.

The timing of the hike is somewhat earlier than what the consensus forecasted (3Q10).

Key takeaways from the statement and the press conference:

• First, the rate hike should not be seen as the beginning of aggressive tightening. The statement notes that monetary accommodation should continue.
• Second, BoK will not surprise the markets and will keep sending signals before further hikes. Inflation, labor markets, property markets and the global economy as key factors to consider.

Conclusion:

This is the start of a gradual and moderate withdrawal of monetary accommodation.

HONG KONG – The International Monetary Fund (IMF) yesterday raised its global growth forecast for this year even as it warned of renewed financial turbulence stemming from a European sovereign debt crisis that sharply raised potential risks.

The IMF projected the world economy would grow by 4.6 per cent, up from its 4.2 per cent forecast in April, reflecting “stronger activity” during the first half of this year and anticipation of fiscal action, especially in Europe.

The higher forecast was also due to “expectations of a modest but steady recovery in most advanced economies and strong growth in many emerging and developing economies“, the IMF said. It maintained its growth forecast for next year at 4.3 per cent in an update of its World Economic Outlook projections.

For Singapore, the fund projected growth of 9.9 per cent this year and 4.9 per cent in the next. Interestingly, there is also an article talking about Singapore May Pass China as Asia’s Fastest-Growing Economy from Bloomberg.

My two cents:

I think the forecast just come in handy as the stocks market have been severely oversold and waiting for a catalyst to rebound. IMF’s projection is just before Euro Stress Test Result scheduled on 23 July shows that the result might be favorable.

Yesterday the global indices stay where they are after a huge jump the day before. Market is obviously waiting for a confirmation the worst might be over, in short term at least.

Last night, Stocks surged, sending U.S. benchmark indexes up the most since May, while the dollar and Treasuries slid as growth in American retail sales bolstered optimism in the earnings season and investors speculated European banks will pass stress tests. (Source: Bloomberg )

I was monitoring S&P 500 recently and interestingly, I found they have formed a complete Elliott Wave (a model used to predict stock market movement) since last rebound. (refer to the chart below)

I agree with what London-based Mike Lenhoff, chief strategist at Brewin Dolphin Securities Ltd., said, whose parent company oversees $33 billion

“The markets were ready for a rebound, all they needed was a trigger. In this case, they are getting a trigger from the bank stress tests,”

Fundamentally, the world is in a much better shape than last year. If the rebound is accomplished, we may see another Elliott Wave, and that is really a good news for the long investors.

[Bloomberg] Congressional negotiators today approved the most sweeping overhaul of U.S. financial regulation since the Great Depression, reshaping oversight of Wall Street and some of its most opaque concoctions.

Lawmakers from the House and Senate worked through the night in a 20-hour session to reach deals on two of their most far-reaching and contentious proposals — a ban on proprietary trading by banks and new oversight of the derivatives market. This month, they’ve also agreed on measures to wind down big firms whose collapse might shake markets, to keep tabs on hedge funds and to make it easier for investors to sue credit raters.

“This is going to be a very strong bill, and stronger than almost everybody predicted that it could be and that I, frankly, thought it would be,” House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, told reporters June 23 as lawmakers prepared for the final round of talks.

Read the full story here.