Wake Up Call - Mar 1

Good Morning. Major U.S. equity markets are indicating a sharply lower start to the day. After markets weakened again in China, and the NIKKEI dipped while the yen rose on the reversal of carry trades, weakness spread to Europe. A new psychology has overcome the market, and the self-fulfilling prophecy for a correction in the U.S. has an increased in likelihood now of playing out. Today's economic data shakes the unstable ground even further, as a key price gauge showed an increase above expectations and ahead of Fed concern levels. Even though we predicted the bounce yesterday correctly, we now anticipate that high flying emerging markets could collapse and destabilize the global investment market. We are decidedly short now in our viewpoint.

Asia:

Hang Seng Index -1.55%; Shanghai/Shenzhen 300 -2.79%; NIKKEI 225 -0.86%; BSE SENSEX 30 +1.71%; KRX 100 -2.76%

U.K. & Europe:

DJ STOXX 50 Index -1.2%; FTSE 100 -0.85%; CAC 40 -1.75%; DAX -1.37%; Russian RTS Index -2.26%

Americas & Middle East:

Tel Aviv 25 -1.56%; DFM General -0.78%; Tadawul All Share -1.65%

KEY HEADLINE NEWS

• It looks like the earthquake on Tuesday destabilized the ground beneath emerging markets, and this correction may now build upon itself. Within the American market, a self-fulfilling prophecy may play out as investors have been awaiting a correction for a long time. So, even though we called the bounce yesterday, we are now again concerned that this unstable ground in high flying speculative emerging markets could fall from underneath us, and drive a global correction. Investors within the Chinese mainland market include a large degree of unsavvy investors, the ingredients for a market panic. Investors are concerned that a parliament session that begins this weekend could play out in an unfavorable manner for equity investment, despite government comments that stability and safety are the government's main goals in financial market reform. We expect Chinese shares to decline further this week, and possibly crash next week, depending on the developments of the session.
• In Japan, the yen rose to near a 10-week high against the dollar as investors exited the so called carry trade, borrowing in the yen to buy higher yielding assets elsewhere. With global markets in turmoil, the trade is reversing. Going long the yen here seems wise.
• January personal spending came in higher than consensus, but investors are focusing on an increase in the report's price gauge, the Fed's preferred measure of inflation, which rose 0.3% and was up 2.3% year over year. That level is ahead of the Fed concern threshold of 2%, and is not heading in the right direction.
• Weekly jobless claims came in higher than expected, at 338,000, which still marks a healthy level for the economy. However, planned job cuts for February rose 33% from January, according to a report from Challenger, Gray & Christmas. We predicted that housing related layoffs would begin to impact the market in 2007 in a noticeable manner. The auto industry played a role this month as well.
• See the rest of our Headlines section within the sidebar of our site for the remaining stories we view most important today.

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