"The game is over," said Knight’s Mark Lapolla in a one-page note to clients today. "We expect a shockingly powerful rally in the dollar, broad-based weakness across the commodity sector, a dramatic widening of emerging market credit spreads, and what could prove to be a stampede of hot fund flows out of the emerging markets."
Lapolla’s assessment is based on many things, including a long-term decrease in credit, elevated unemployment, China’s implementation of price controls, the Federal Reserve’s quantitative easing program and a failure by developed markets to such as the U.S. and Europe to reduce their risk of credit shocks.
But, the core of his argument is simple: the world is done playing fair with each other. Government policy, economic security and resources, the tenets of global trade, are all in a fragile state.
"We believe the data and government actions out of China, the back-up in U.S. interest rates, the Fed’s emphatic commitment to QE2, intensifying pressures across the EU, broadly rising commodity prices, government efforts to control hot money flows, have finally pushed the global terms of trade to their tipping point," wrote Lapolla.
Commodities, along with equities, have surged over the last six months in anticipation of the Fed’s plan to buy a second round of U.S. Treasury securities. In six months, sugar is up 90 percent, cotton has climbed 65 percent and copper has gained 27 percent.
But since the Fed actually announced the ‘QE2’ policy earlier this month, stocks have actually fallen and interest rates have gone up. The S&P 500 is off 4 percent since its 2010 high reached on November 5th, two days after the FOMC announced the intention to buy $600 billion in Treasuries. Investors are fearful that the Fed’s actions will be too hard to unwind, sparking inflation hear and around the world.
Speaking of credit shocks, a European financial crisis is back on the table as European Union officials and the International Monetary Fund rushed to Ireland to resolve a debt crisis and figure out an aid plan.
China, which has strongly criticized the Fed’s easy money policy, is actively raising borrowing rates to stem inflation there. Today, the country went a step further, signaling it may institute price controls to keep prices of basic necessities like food down.
Knight, founded in 1995 just as the tech bull market was ramping up, was a market maker for online broker-dealers as trading activity during that bubble flourished. Today it describes itself as "the leading source of off-exchange liquidity in U.S. equities." But the firm now is also active in bonds, commodities and derivatives trading, as well as research.
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John Melloy is the Executive Producer of Fast Money. Before joining CNBC, he was an editor for Bloomberg News, overseeing the U.S. Stock Market coverage team