Carry Trades Could Reverse Over The Next Few Days-Video Update

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07:05 Potential Event Risks Mount/May Lead To A Rise In Risk Aversion Sydney,
June 24: Investor risk appetite has been extremely strong in recent months and
investors have shrugged off a number of potentially worrying events during that
time. The market has shrugged off higher energy prices, rising global yields and
attempts by China to slow down their rising stock market and cool their fired up
economy. There are a few more worrying events on the immediate horizon that
might cause some of the investor nerves to fray a bit in the weeks ahead. Below
are a few of the events that might see investor concerns on the rise.

Bear Sterns Woes Might Be Alarm For Broader Credit Problems Bear Sterns said
on Friday that they will provide a 3.2 BLN USD infusion into two of their
troubled hedge funds that are nearing collapse due to their exposure to the sub-
prime mortgage market through investments in CDOs. Analysts feel that if the
losses are confined to the two hedge funds and a few lenders the markets will
shrug off the news and move on. If on the other hand there is a fire sale of
CDOs with sub-prime exposure the infection could spread to many other funds with
similar exposure negatively impacting a number of lenders with the end result
being credit drying up.
Irwin Stelzer writing in the Sunday Times states: "There might be collateral
damage. If the assets that underlie the fund, now being auctioned off, bring
only knockdown prices, similar assets now valued in trillions of dollars might
also be revalued sharply downwards. That would hit the earnings of several big
banks, reducing their willingness and ability to lend, possibly contributing to
the slowing effect on the economy of falling home sales."
Fed Chairman Bernanke warned a little over a week ago that economists might
be underestimating the effect of the housing sector woes on the wider US
economy. He highlighted what happened to Japan after the Japanese property
bubble burst leading to the "lost decade" of the Japanese economy.

Iran Warns Against Nuclear Sanctions - AP A senior Iranian official warned
Saturday that further U.N. sanctions over Tehran"s contentious nuclear program
could derail ongoing negotiations toward a settlement. The US, Britain, Russia,
France Germany and China are discussing enforcing a third set of sanctions
against Iran due to concerns that they a covertly continuing their quest to
build nuclear weapons.
Oil prices rose on Friday due to concerns surrounding tension in Iran.

Zhou Says That China Can"t Rule Out Raising Interest Rates Again Bloomberg
reports that Chinese central bank Governor Zhou Xiaochuan said he can"t rule out
raising interest rates again to curb inflation and take the steam out of a
surging stock market. "We don't rule out further rate increases if necessary,"
Zhou told reporters in Basel, Switzerland, where he attended a meeting of
central bankers at the BIS. Zhou added: "We"re certainly concerned about
inflation. We"re not sure whether there"s a clear bubble but we worry that
price-earnings ratios may be too high. We"re closely watching the stock market
in China."

Safe Haven Buying Noted As Risk Aversion Comes Into Play Rising concerns over
a potential disaster in the CDO market, tensions between Iran and the west along
with the usual Friday fear over whether or not China will raise rates led to
Treasury prices rising in the short-end and a big sell off on the Dow. LatAm
currencies were also hard hit with the USD/BRL surging as high as 1.9460 after
closing on Thursday around 1.9200.

AUD Appears To Be "Teflon Coated" The AUD/USD closed on Friday within 10 pips
of the 18-year high at 0.8494 it reached earlier on Friday. The strong showing
by the AUD was despite signs of rising risk-aversion due to the event risks
highlighted in previous stories.
Analysts note that the AUD and NZD have performed relatively well on a few
occasions in the past few weeks when the Dow has been sold off and emerging
market currencies have suffered. The AUD is starting to look a bit "Teflon
coated" and some analysts feel that besides being a carry-trade beneficiary and
a commodity currency it is starting to be a mini-safe-haven destination for
yield seeking investors. In other words when risk aversion rises a bit,
investors rotate out of some stocks and emerging market investments and into the
AUD. These analysts feel that it would take a major shock to investor confidence
to see all of the peripheral currencies and investments sell off and only then
would we see the AUD (and NZD for that matter) reverse sharply lower.
It could be argued that the "Teflon" perception could lead to a very nasty
sell off in the AUD once sentiment shifts. During the dotcom boom there was a
chorus of analysts saying that the "new paradigm" meant that the old rules no
longer applied and the dot com boom was impervious to external shocks and would
go on and on and on and on. [email protected]

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