MacroScope

Not everyone agrees that using high-speed machines to trade stocks in less time than it takes the average person to blink is a bad thing, but the people who do might be heartened by the letter a congressman sent the U.S. Securities and Exchange Commission on Friday.

Rep. Edward Markey, a Massachusetts Democrat who has waged a decades-long struggle against computerized trading sent the SEC a hint: The power to curb high-frequency trading has been within its grasp all along.

In his letter, Markey described a law he co-sponsored in 1989 to increase the agency’s power to regulate computerized trading, a precursor to HFT that employed computer programs to make trading decisions without the participation of conscious humans. The law lets the SEC “limit practices which result in extraordinary levels of volatility,” according to Markey’s citation.

Markey, nudging further, added: “If the commission simply makes a finding that the markets are currently in a period of extraordinary market volatility and that HFT is reasonably certain to engender such levels of volatility, the Commission can immediately promulgate rules that restrict or eliminate the practice.”

Do current market conditions warrant this? HFT proponents say high-speed trading reduces volatility in liquid stocks. Volatility in the stock market is the lowest it has been since 2007. But incidents like the May 2010 flash crash, a head-spinning plunge in the stock market precipitated by computers, or the glitch that nearly brought down Knight Capital last summer, could count as their own sort of volatility.

The European crisis has thinned the ranks of countries considered safe-havens for investors, and may be contributing to an increase in foreign ownership of Canadian assets. Canada, whose comparatively robust banking sector helped it weather the 2008-2009 financial crisis better than many peers, saw capital inflows in July that helped reverse a June decline, according to the latest figures.

Foreigners resumed their net purchases of Canadian securities in July, taking on C$6.67 billion ($6.88 billion) after having reduced their holdings by C$7.76 billion in June, Statistics Canada said on Monday. Canadian authorities have said foreign investors view Canada as a safe haven. So far this year foreigners have made C$41.23 billion in net purchases, a substantial amount though down from C$54.31 billion seen in the first seven months of 2011.

According to Charles St-Arnaud, economist at Nomura, stocks saw their biggest inflow since February 2011:

Overseas investors have yet to sour towards U.S. assets despite high government debt levels, according the latest figures on capital flows.

Including short-dated assets such as bills, foreigners snapped up $107.7 billion in U.S. securities in February, following a downwardly revised $3.1 billion inflow for January. At the same time, the United States attracted a net long-term capital inflow of just $10.1 billion in February after drawing an upwardly revised $102.4 billion in the first month of 2012.

The data showed China boosted purchases of U.S. government debt for a second month in February, but also some waning of demand for longer-dated securities.

After the Easter break, a bit of perspective — to paraphrase the immortal Spinal Tap, maybe too much perspective.

Over the past two weeks, Spanish and Italian borrowing costs have continued to rise – in the former’s case they have now relinquished more than half their fall since December and are heading back into the danger zone. Stocks have also appeared to have given up on their first quarter rally, presumably testament to the realization that the ECB and other top central banks are unlikely to be writing any more blank cheques for banks to reinvest.

Late last year, it was Italy that seemed to have the power to drag Spain into the debt crisis mire. Now, it’s the other way round and after the ECB anaesthesia  wears off, it’s clear the euro zone patient is still sickly.

Want the recent rally in stocks to last? Don’t count on it, says John Praveen of Prudential Financial. The Dow Jones industrial average is up over 20 percent since September, and has gained 7 percent since the start of the year. But Praveen sees too many headwinds for the boom to continue.

The pace of gains thus far in 2012 is likely to be unsustainable and volatility is likely to remain high as several downside risks remain. These include:

1) Greek risks: The second Greek bailout and debt restructuring deal are likely to be a short-term reprieve, with still high Greek debt/GDP burden and Greek elections due in April.  A negative election outcome with no clear mandate and/or a new government reneging on its commitments (to reduce debt) could potentially roil markets.

Food and electricity bills are high. The cost of filling up at the petrol station isn't coming down much either. The U.S. economy is in trouble and suddenly the job isn't as secure as it seemed. Maybe that designer handbag and new car aren't such good ideas after all.

That's the kind of decision millions of middle class consumers in developing countries are facing these days. That's bad news for purveyors of everything from jeans to iphones  who have enjoyed double-digit profits thanks to booming sales in emerging markets.

Brazil is the best example of how emerging market consumers are tightening their belts. Thanks to their spending splurge earlier this decade, Brazilian consumers on average see a quarter of their income disappear these days on debt repayments. People's credit card bills can carry interest rates of up to 45 percent. The central bank is so worried about the growth outlook it stunned markets with a cut in interest rates this week even though inflation is running well above target

Depending on how you look at it, August may not have been as bad a month for stocks as advertised. For the month as a whole, the MSCI all-country world stock index  lost more than 7.5 percent.  This was the worst performance since May last year, and the worst August since 1998.

But if you had bought in at the low on August 9, you would have gained  healthy 8.5 percent or so.

In a similar vein, much is made of the fact that the S&P 500 index  ended 2009 below the level it started 2000, in other words, took a loss in the decade.

The wave of popular discontent now sweeping the Middle East and North Africa has been driven by the region’s youth, frustrated by chronic umemployment and enraged by widespread corruption.

In a special report entitled ‘Youth bulges and equities’, Deutsche Bank argues that the proportion of angry young men to the general population is not only a gauge of socio-political stability but also a key indicator of market performance.

The ‘youth bulge’ — the ratio of males between 15-29 versus those aged 30-59 – came in at an average of 106 percent in the 251 conflicts seen around the world between 1950 and 2006. Two-thirds of countries that suffered social upheaval had a young-to-old men ratio of above 100 percent compared to the current 45-55 percent average seen in developed countries.

Can nature's cycles enrich our finance and market theories?

Market predictions based on the alignment of the sun, moon and the earth and other cycles could help investors stay disciplined and profit in economic storms, says Daniel Shaffer, CEO of Shaffer Asset Management.

Shaffer writes that sunspot activities show that the sun has an approximate 11-year cycle and as of March 31, 2009, sunspot activity has reached a 100-year low (this, interestingly, coincides with a cycle low in equity markets, reached sometime mid-March in 2009).

But a low in solar activity seems to be followed by a high. Scientists are predicting a solar maximum of activity in sunspots in 2012 that could e the strongest in modern times, according to Shaffer.

Proof  that a little surprise can be quite big.

Ahead of the Federal Reserve's decision on more quantitative easing there were three possible outcomes that  could have threatened what is becoming a strong global equity rally. In short:

-- Meeting expectations could have been seen as boring, leading to a sell off

-- Not meeting expectations could have been seen as widely disappointing, leading to a sell off

-- Exceeding expectations could have been seen as a sign that the U.S. economy is in worst shape than  feared, leading to a selloff.