We are officially in a bear market.
The bloodshed in the markets last week was breath-taking, with more than US$3.4 trillion (s$4.4 trillion) erased from equity values and over US $1 trillion in the US equity market alone.
Here’s a snapshot of some of the carnage:
1) The Dow Jones Industrial Average suffered its biggest loss since 2008
2) Gold had its biggest one day drop in almost three years, shedding 5per cent
3) Asian currencies had their biggest weekly drop since 1998
Even the MSCI All-Country World Index sank 7.6per cent, entering a bear market for the first time in more than two years.
The main concern among traders and investors is that governments are running out of tools to avert a double-dip recession. Last week, finance ministers and central bankers urged European officials to intensify efforts to contain their debt crisis.
Bank of Canada Governor Mark Carney estimated that as much as 1 trillion euros (S$1.8 trillion) may be needed to contain the crisis while the Federal Reserve warned of “downside risks” to growth if the European debt crisis went unresolved.
Issuing a statement in Washington late last week, the Group of 20 finance ministers and central bank governors said that they are “committed to a strong and coordinated international response to address the renewed challenges facing the global economy.”
During such volatile times, actions certainly speak louder than words. Verbal intervention by the world chiefs will be futile if concrete steps are not taken urgently to stem the bloodshed.
One of the options which should be looked at immediately is the size or the scope of the 440 billion European Financial Stability Facility (EFSF). The current objective of the EFSF is to issue bonds guaranteed by the European member states- to fund cash-strapped governments.
Amidst all the carnage and volatility of the past week, one currency stood tall – the almighty US dollar.
This is because in times of fear and panic, cash is king. Many traders and investors flocked to the safety of US Treasuries because of the US’ deep and liquid bond market.
Treasuries due in 10 or more years have returned 28 per cent this year, exceeding the 24.4 per cent gain for the whole of 2008 during the financial crisis. The dollar continued to strengthen the whole of last week as well, after the Fed announced “Operation Twist.”
For now, it seems that the most dangerous place is still the safest place.
Trade Call
Short AUD/USD at 0.9832
On the H1 chart, AUD/USD has fallen over 600 pips in the past week alone. Yesterday, it hit a new-low of 0.9621. This is a price not seen since December. Hence, our bias to the downside.
Resistance is seen at 0.9845 and we will enter for a short once prices turn back down from Resistance. Entry is at 0.9832 and we will place a protective stop 50 pips above the entry price at 0.9882.
This is a range trade and we will have 2 profit targets. The final position will be exited with a favourable 1:2 risk/reward ratio at 0.9732.
Entry Price = 0.9832
Stop Loss = 0.9882
1st Profit = 0.9782
2nd Profit = 0.9732
