On June 11, at the start of the World Cup, I had put out a note to clients warning that the World Cup may trigger a correction in the euro. While the title made good copy, the point I was really trying to make was that it is impossible to pinpoint turning points in markets — even nominally unconnected events can appear to turn things around.
Of course, you could make a case that the World Cup is more than nominally connected. First of all, it is the most widely watched sporting event in the world, and there is no doubt that a significant number of market-makers and investors do get hooked to the extravaganza, resulting in less sleep and a diluted focus on real life. Again, with Europe being the key focus in the cup, it is possible — indeed, likely — that the performance of leading European teams could affect sentiment over the euro.
In my note, I had visualised that the European teams would perform well early, putting weight behind a euro correction, which, it had seemed, was overdue. The market was so long dollars against the euro (and other so-called risky assets) that it had even started bidding up gold, breaking its normal negative correlation with the dollar in the second half of May.
As things turned out, I was correct about the euro correction — it has gained nearly 4 per cent in the week since the start of the World Cup. But I was wrong about the performance of the top European teams. Spain, Italy, France, even Germany, went down tamely in some of the qualifying games; and well-considered Portugal could only draw with the Ivory Coast. Only Greece, of all countries, has shown itself to be more than a deadbeat, taking three points off a strong Nigerian team.
Of course, the party isn’t over. Some of the European majors — notably, Spain and Germany — will likely make it into the qualifying rounds. But the surge of newer Europe teams — Slovenia and Serbia, among others — and, of course, the resurgence of Latin America were the real stories of the early days of the World Cup.
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Writing this a week before it is published, it is probably foolhardy to forecast the fortunes of the various teams (as foolhardy, indeed, as forecasting currencies). But it is part of the ticket, so I will barrel on with both sets of forecasts: football and markets.
Football is easy, of course. Messi will continue to scintillate and Argentina will beat Brazil in the finals: 3-1. Maradona will run through Buenos Aires naked, as he has promised to do. Andrew Lloyd Weber will write another musical — I have already been offered a part — and the tango will get bastardised on some US reality show.
Markets — well, that’s a trickier call. In my earlier note, I had expected the euro to correct till it crossed 1.25, which would trigger stop loss buying, building momentum till 1.30 came into sight. I thought there might be some football news keeping the run going, but clearly and importantly, it hasn’t been needed so far. Perhaps the real impact of the World Cup has been to push other news off the front pages so we are spared the daily terror of Greece’s near-certain restructuring; the potential trauma to European banks and its impact on their lending; and the increasing possibility of a double-dip recession as European demand thins further as a result of the various austerity programmes.
Come to think of it, this might be quite significant as a force to give the correction enough legs to where some people might start to call it a rally. Hmmm!
Of course, as the game wears on, these goodies could well come home to roost, as they always do. The Dow, which has been inching steadily higher (undaunted by America’s surprisingly poor showing in the World Cup — but then all of America was watching the NBA playoffs — yeah Kobe!), seems to be forming a dangerous head-and-shoulders pattern and, unless it cracks through 11,200, could be setting itself, and other risky assets, up for another sharp fall. The key parameter to watch is the yen. If it strengthens definitively beyond 90 to the dollar, my sense is the jig is up, and we will return to risk-aversion-as-temporary-religion. Interestingly, Japan has been performing much better than expected at the World Cup.
And, what about the rupee?
Well, I understand the government is serious about trying to launch first a Commonwealth and then a World Cup for kho-kho. That’s when you will see the rupee back to the good old days of unbridled appreciation. Allahoakbar!