The rally in risk derailed suddenly today as the SEC charged Goldman Sachs with fraud. The SEC charges essentially that hedge fund legend John Paulson was allowed to piece together the most miserable toxic mortgage paper he could find and then sold that product to unwitting investors without telling them who the counterparty shorting it was. A conflict of interest, to say the least. The details on the case can be found everywhere, as this is by far the biggest story to hit the wires in a long time. As we wrote in our monthly report published just yesterday: "There are few conclusions to draw from the indicators...at present, other than there are no apparent immediate causes for alarm, suggesting that any move into risk aversion would require some kind of exogenous, anticipated shock." Well, here's your shock, market - let's test your mettle now...
Our two cents on this situation will inevitably be drowned out by the endless commentary this issue is generating, but this feels like "a big deal" that won't simply be wiped away in a matter of days, even if risk bulls and those who have been endlessly frustrated looking for a dip in the action think they have found their golden moment to go long on Monday. That's because, if the rally in risk were purely built on healthy fundamentals and organic growth, we could write this off as an ephemeral confidence shaker. But the rally is built as much on easy liquidity and increasingly extreme complacency as it is on the real prospects for economic improvement.
The market does not like the uncertainty of an SEC on the warpath - there will be more cases. Going straight after a Paulson/Goldman Sachs deal smacks of the agency wanting to go high profile, and of SEC charges go to the heart of the economies greatest liquidity generators, who may fell the need to hoard cash to fend off lawsuits and settlements and whose more "daring" activities in the spirit of the cowboy days of five years ago, may be heavily curtailed by corporate risk managers.
Chart: AUDUSD
A huge dip in one of the more consistently risk-sensitive FX pairs today: AUDUSD. A very key zone around 0.9220 almost came into play today. A move and close through this area early next week would help to confirm the bearish divergence in the stochastics and one would think that this Goldman Sachs story has opened up a large enough can of worms in risk appetite to trigger a pullback to the previous major wave low around 0.9000.
A huge dip in one of the more consistently risk-sensitive FX pairs today: AUDUSD. A very key zone around 0.9220 almost came into play today. A move and close through this area early next week would help to confirm the bearish divergence in the stochastics and one would think that this Goldman Sachs story has opened up a large enough can of worms in risk appetite to trigger a pullback to the previous major wave low around 0.9000.
Looking ahead:
This news could take some time for the market to sort through the implications. It may more or less mean the end of the risk rally if economic indicators flatten out again - the key in coming days will be to judge movements in the risk universe, as well as the markets reaction patterns to incoming data. Monday could see considerable swings as investors sort through this story over the weekend and decide on a course of action.
This news could take some time for the market to sort through the implications. It may more or less mean the end of the risk rally if economic indicators flatten out again - the key in coming days will be to judge movements in the risk universe, as well as the markets reaction patterns to incoming data. Monday could see considerable swings as investors sort through this story over the weekend and decide on a course of action.
Be extra careful out there.
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