Prague Twin

Tuesday, February 27, 2007

Here Comes the Correction

Last Friday I posted on the Economy. It was a bit of a self-serving post, bragging I was, that I had outguessed the professional guessers with regards to interests rates. The one thing that hadn't gone the way I had planned was the deep correction in equities that would come along with the realization that the Fed would not cut rates.

If only I had waited a couple of days.

For no particular reason, Shanghai's equity market droped nearly 9% overnight. This has started a chain reaction around the world with European markets, and American markets well into the red today. The equities markets were clearly overextended, and I think a correction is actually quite welcome, but there is a danger of a pretty major pullback over the rest of the week. Now that traders have jitters, bad economic news (which is expected) could trigger some pretty sharp pullbacks this week.

I want to stress that this didn't happen because of a data release or a news event. This is a purely organic pullback, the kind that surprises everyone in the short term (i.e. no one predicted it would happend TODAY), but that is completely expected in the grander scheme of things (It has been too good for too long).

Side note: The Yen is starting to come back against world currencies, with the carry trade unwinding a bit. No one knows if this will continue, but if it does, expect major havoc. The U.S. dollar is dropping accross the board.


  • What should we look for in the next few days? Will there continue to be a pullback or will markets rally a bit before the weekend?

    By Blogger reality-based educator, at 12:53 AM  

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