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Even though I said in the middle of 2009 that I would not make macro comments on the market, I think the correction we have seen over the last few days warrants a view.
The correction started with a tightening of credit by China followed on by Obama's view to curb proprietary trading by US banks. The views of US market observers is mixed. Some think given the recent loss of the Massachusetts Senate seat to the Republicans means that President Obama will not be able to push this policy change through much like his health reform bill. I think this finance bill has stronger Congressional and Senate support given that the US finance sector caused the near collapse of the financial system as well as the weak US economy. An eventual passing of the Bill will curb global liquidity and with it liquidity premiums.
The net result of the China credit tightening and the Obama financial reforms pushed the "VIX" index higher overnight (see chart below). We should continue to watch this because a further rise in the VIX toward the 30 level signals greater market volatility ahead. We are already seeing some flight to quality with the strengthening of the US$. (see chart below).
What does this mean for stocks and this correction ?
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