Where are the markets headed?

By julian Sudre

While major investment banks started licking their wounds and faced the rude awakening of issuing profits warnings with a write-down of altogether more than $10bn, caused by the sub-prime and credit woes. The turbulence in the money markets with the aggressive fed rates cut by half a point and a three-month Libor rate hovering at some vertiginous 6 per cent – those were decidedly the anaphylactic shock that has sent the American currency packing.

But to add insult to injury, the Australian dollar could be taking a leaf out of his Canadian counterpart when the “Aussie” yesterday reached its strongest level against the US dollar in nearly a quarter of a century. Worryingly enough, if the Fed would further step in for a cut, the dollar would be once again the one that would carry the can and European economists would be the ones who would try staunchly to dampen the rise of the Euro as a result. The effects could be dramatic, but all things considered that would explain the surge of funds into emerging markets and the outperformance of companies with profits outside the US.

The gymnastics of stocks fluctuations alongside fears of dipping into recession and flying speculations over the malaise in the credit markets have made themselves felt on the European markets – which remain below their highs.

Whereas in the US, The S&P 500 and the Dow Jones Industrial Average have retouched all-time highs perhaps thanks to last week’s US job report that was better than expected. So the American dollar could actually not be headed for the dungeon?

Some insiders have it that the dollar is cyclical not structural and a rally in 2008 could be a possibility. Well, it's noteworthy to take a long-view of factors that could destabilise the dollar. Thus, the real-estate bubble starts collapsing, the continued trade deficit, oil trading in Euro and the Iran oil Bourse; and the Bank of China's decision to to allow investors to buy and sell gold using their USD, and the increasing risk of conflict with China. Syria indeed, rattled the US's cage on February 14 2006 when it switched of all the state's foreign currency transactions to Euro from Dollar and Venezuela's president Hugo Chavez is also trying to get away from the fiat Dollar.

Over, at the other end of the financial spectrum, the steel industry has been on a roll. Over the last five years, demands and profits booms have proven that countries such as China are the main driver of the prosperity of the commodity. The reason behind this has been an increase in car production but also the 2008 Olympic Games. Ergo, prices of raw materials show no sign of easing; iron ore prices are on the increase with a 9.5 per cent rise this year after soaring 19 per cent in 2006 and jumping 71.5 per cent in 2005. It certainly is good news for the mining industry. But also, these are good time to be in aluminium with perhaps not such a dramatic boom as that of copper but it has triggered some of its biggest takeove deals.

Rusal of Russia in April completed a takeover of its smaller compatriot, Sual, and the aluminium assets of Glencore, the Swiss commodities trader, creating a company estimating to be worth in the region of $30bn. Today United Company Rusal has overtaken Alcoa of the US as the world's biggest aluminium producer. So now, where do we get from here?