The European Union slashed its earlier growth forecast for the 17-member Eurozone today to just 0.5 percent for the year. This is a significant reduction from the 1.8 percent projection made earlier this year.
The EU also warned that the region could fall into a “deep and prolonged” recession with no end in sight for the ongoing debt crisis. A recession in Europe will also impact other economies and could be the starting point for another global recession.
After a couple of false starts and a whole lot of unnecessary uncertainty, Greece has finally named the interim Prime Minister that will replace George Papandreou. Lucas Papademos, who has served as both the Greek Central Bank governor and a Vice President with the European Central Bank President, Papademos will face the task of keeping Greece in the Eurozone.
“He’s a leader who can temporarily see Greece through troubled times but keep in mind that he has no political base,” Spyros Economides, a senior lecturer at the London School of Economics, said in a phone interview. “A cross-party coalition will put up with him for a defined, temporary period only.”
Source: Bloomberg
Despite the recent decline in the US dollar and the increased risk appetite in teh marketplace, there is still major risk to the global economyemanating from Europe and the US, and now we can add China to the mix. Weaker export growth in China shos that their economy is slowing and this is not a good thing for the global economic recovery as China has been the main driver of activity.
Looking at this chart of USD/CHF, the dollar vs. the Swiss franc we can see that a double bottom was put in at 89.20 as the risk emanating form the Euro zone takes focus. As both currencies are “safe-havens”, it is interesting to note that money flows are moving toward the Dollar and out of the Swissie!
SNB intervention could be the worry, though more likely this is an indcitment of Europe in general. Stay tuned!
Minutes of the September 6-7 Bank of Japan meeting show that several board members believe more monetary easing could be necessary. There is a growing worry that should the global economy continue to deteriorate, Japan’s economy will suffer due to weaker export sales.
The Loonie (CAD) has already touched parity with USD earlier this morning and is likely to weaken further as higher CPI data in Canada has been dismissed in favor of risk aversion due to a slowing global economy and the Euro debt crisis. While inflation may be elevated and higher than expected, it is not out of line with what other regions are seeing around the globe, with the headline figure coming in at 3.1%. It is extremely unlikely that the BOC will move on rates considering the health of the global economy.
Part of the reason for the weakening of the Loonie is that the global economy is slowing which in turn reduces the demand for oil, which has a high correlation to the value of the Loonie. In addition, if the US Fed follows through with “Operation Twist” at today’s FOMC announcement, that is unlikely to weaken the US dollar significantly in the short-term.
If the US Dollar gains, then oil and the Loonie are likely to move lower. While there is triple-top resistance on the chart below at parity for USD/CAD, three times is usually a charm and I expect the Loonie to break through that resistance and trade up to its daily R4 pivot resistance level at 1.01 in the near term.
It appears that it is no longer a case of “if” the global economy will fall back into recession but “when” and according to some of Canada’s largest banks, it could be Canada that begins the trend.
Following a cut in the projected growth for Canada, the Bank of Nova Scotia today said that Canada could be one of the first major economies to experience two consecutive quarters of negative growth – the technical definition of a recession. The report noted that for the second quarter of the year, growth contracted by 0.4 percent and the latest projection for the third quarter suggests that, at best, no change in growth will be recorded for the three months ending September.
Source: CBC News
Japan’s second quarter results were worse than expected contracting by 2.1 percent for the three months ending in June, compared to an expected 1.3 percent decline. The earthquake and tsunami caused widespread destruction to the nation’s infrastructure while weaker demand for Japan’s exports also reduced sales.
“As capital spending is unlikely to grow as strongly as previously thought, a rebound in gross domestic product in July-September may be smaller than initially thought, although gradual recovery is still expected,” said Yuichi Kodama of Meiji Yasuda Life Insurance in Tokyo. “The pace of Japan’s economic recovery has apparently slowed since around August due to heightened uncertainty about the global economy.”
Source: BBC News
Well it looks like the markets have settled down a bit after last week’s wild ride with volatility contracting a bit and markets looking to trade higher. Despite the roller-coaster action we saw last week, equity markets ended the week down roughly 1.75% which isn’t a huge move in the grand scheme of things.
Stocks in the US are poised to move higher this morning, with European and Asian stocks having positive sessions. It should be noted that the short-sale ban in Europe on select bourses is still in effect. This shifts the focus back to the Euro zone where tomorrow a meeting between Sarkozy and Merkel will attempt to find some common ground on the Euro debt crisis.
The markets are now calling for the establishment of Euro bonds, which essentially would cover the entire region and help stabilize the debt crisis. Germany is against such a move as they would be left holding the bag if the countries with debt problems didn’t live up to their end of the bargain. Stay tuned for developments on this front.
Getting back to economic data, tomorrow will bring both German and overall Euro zone GDP figures which will show the health of the European economy despite the debt crisis they are facing.
Last night, Japan got a boost from better than expected GDP figures which showed that the economy contracted less than expected. This is positive for Japan as the rebuilding efforts from the natural disaster is creating economic activity. In addition, the Japanese Finance Minister was out saying he was prepared to take “bold action” to stem Yen strength, though it is unclear where that line in the sand may be.
The Swiss franc has also been weakening after last week’s comments about a possible peg to the Euro were followed up by new comments that the SNB may set a target rate for the Franc and then do everything they can to defend it. This jaw-boning alone has caused the Swissie to weaken considerable which may mean that the SNB does not have to do anything until the next round of risk aversion.
It’s been quiet for the Pound lately as they have been out of the economic spotlight but have been in the news because of social unrest. This week is heavy for UK data, which kicked off last night showing home prices fell some 2%. Tomorrow brings CPI data, followed on Wednesday by the unemployment rate and the release of the BOE rate policy meeting minutes. Recent talk has been that the BOE may need further quantitative easing to help foster economic growth as the government austerity reduces spending.
Another release of rate policy meeting minutes is coming from the RBA in Australia tomorrow, and there is some talk that perhaps the next move being considered is a rate reduction and not a rate hike. As commodity prices have been falling, inflation may follow which could give the RBA reason for pause or to reduce.
Rounding out the week is US CPI data on Thursday, which is not expected to show the recent sell-off in commodities so it could be artificially high at this point. This reading however will be largely irrelevant as there isn’t anything possible out there that would cause Bernanke to re-think his statement about leaving rates at current levels until mid-2013.
It appears as though last week’s market action has established a bit of a range, albeit a very large one. It is likely that will we continue to trade in this large range for some time until the markets can figure out what to make of the global economic climate.
Once again this will buy time for politicians to fix what ails us economically, and hopefully this time they will use this opportunity wisely. It is unfortunate the state of governments is reactionary and not pro-active policy-making hell-bent on creating jobs.
Yet that’s where we are.
Solutions to the Euro debt crisis and the US jobs problem will go a long way toward returning the global economy toward health, but if the can gets kicked down the road any further, it will be that much longer until we see recovery.
When markets are seemingly range-bound, the best course of action is to buy ahead of support and sell ahead of resistance until those levels break down or new trends emerge. With the terrific volatility from last week, there is ample room to make profits!
Been there, seen that. It sums up the actions from both the Fed and Swiss authorities. The Fed’s pledges have left the CHF exposed to a market having the currency in its crosshairs. Unless the Fed is willing to intervene in the FX space and stop ‘this’ dollar slide, the Swiss acting alone has an near impossible task.
Investors desires for a safe heaven outside of the Euro-zone and US debt dramas is producing massive gains for CHF against other majors. Reason enough for authorities to step up their efforts to cool ‘the’ move. The SNB this morning announced that it would rapidly expand banks’ most readily available deposits from CHF80b to CHF120b, and would conduct FX swap transactions. Last week, the SNB cut its three-month Libor rate target to zero in another effort to curb the CHF appreciation.
Looking at the post price action, this ‘symbolic’ act by the SNB is having limited reaction. Their measures are a repeat of earlier actions. The fact that they have failed to intervene and sell francs is again giving the market the green light to proceed, but, with caution!
The US$ is mixed in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.
Markets were probably looking for lies or half truth, instead, they got a Fed giving us the raw truth. Policy makers painted a dour picture of the US economy, going beyond the simple transient factors. Ben and company pledged for the first time to keep benchmark rates at a record low, at least through mid-2013, to revive a recovery that’s ‘considerably slower’ than anticipated. They were vocal about a range of policy tools in their armory to boost the economy and said it is ‘prepared to employ these tools as appropriate’. With these promises they stopped short of initiating a QE3 package of large-scale asset buying. Fed expect a ‘somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased’.
Interestingly the vote was 7-3. Dissent suggests that the Fed is still a long way off from providing ‘dramatic new support for an economy that even policymakers acknowledge has taken a turn for the worse’. However, in five months the dissenters become nonvoters at the Fed.
The dollar is lower against the EUR +0.06% and JPY +0.47% and higher against GBP -0.33% and CHF -0.25%. The commodity currencies are mixed this morning, CAD -0.47% and AUD +0.21%.
After printing parity in the previous session of panic liquidation, the loonie has found firmer footing, rising for the first time in eight days as an advance in ‘stateside’ equities reduced demand for a refuge in the greenback. Because of the stronger Canadian fundamentals, investors will want to divest away from the EUR and USD. Currently, there is an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.
Yesterday, Canadian housing starts climbed last month at the fastest pace in 15-months, proof that Canadian real estate remains buoyant as borrowing costs stay low. Work began on +205k units on a seasonally adjusted annual basis. Previously, the loonie has been trading on the back foot on concern slowing global economic growth will weigh on demand for raw materials and increase risk aversion trading strategies.
Last week’s historic S&P’s downgrade is creating a new financial and trading environment. For the time being in a while, the loonie will remain at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9810).
The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.
Recent domestic data is providing little support. In the O/N session, the market witnessed Aussie consumer confidence deteriorating for a fourth consecutive month, to the lowest level in more than two years (-3.5% to 89.6) and with no expected turnaround soon.
Big picture, the currency continues to find the going tough, as concern that the global economy is slowing is sapping demand for higher-yielding assets. The US credit downgrade has been pressurizing commodities, which in turn is negative for all growth sensitive currencies. In one session, the currency breached all major key support levels that resulted in parity again being printed, first time in five month. This new range now depends on how the market is digesting yesterday’s FOMC statement. In current climate conditions, investors remain better sellers on upticks (1.0355).
Crude is higher in the O/N session ($82.17 up +$2.87c). The decline of crude prices took a breather before the Fed’s communique. They rebounded from their ten-month low as US equity indices stopped the bleeding and on the belief that the earlier price rout was excessive. The market expected that the Fed’s commitment to monetary stimulus would help fuel demand in the world’s largest economy, however, the new ‘raw’ Ben soon put a stop to that. The Fed stating that risks to the economic outlook have increased and stopping short of initiating QE3, again put the black stuff under pressure. Investors are now betting fuel demand will increase amid shrinking stockpiles.
OPEC cut its oil demand forecasts for the remainder of this year and next as the global economic recovery loses momentum. They have reduced global consumption estimate for this year by-150k barrels a day. The organization is obviously worried about the global economy and falling demand. To date, they do not have a specific price target that would trigger member action.
Today we get the weekly inventory number and analysts expect another small build in the EIA report midmorning. Last week, US gas stockpiles rose sharply and demand over the past four-weeks fell-3.6% compared with a year-ago, adding to concerns about tepid consumption in the midst of the peak summer demand period. Currently, crude is straddling strong support levels and is in danger of penetrating the psychological $75 barrier medium term.
Gold has surged to another new record high, breaking through key psychological barriers, after a US downgrade and on escalating concerns that global economies are losing momentum. The yellow metal continues to be a recipient of safe-haven flows. The metal’s price has more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to two of its biggest economies, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.
With global bourses on the back foot, liquidation of the metal to cover margin calls in other asset classes could pare some of these sharp gains. Investors have bought more gold in the last month than in the prior six months according to CFTC data last week.
Year-to-date, the yellow metal has advanced +24.3%, heading for its eleventh consecutive annual gain. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on pullbacks until proven wrong. There remains a demand for the commodity for insurance purposes as alternative asset class. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,759 +$59).
The Nikkei closed at 9,038 up+94. The DAX index in Europe was at 6,003 up+86; the FTSE (UK) currently is 5,199 up+34. The early call for the open of key US indices is lower. The US 10-year eased 28bp yesterday (2.27%) and is little changed in the O/N session.
Treasuries are rising, pushing 10’s and two-year note yields to an all-time low after Ben promised to keep benchmark rates at record lows for two more years in a bid to revive economic growth. Yesterday’s government sale of $32b three-year notes drew stronger-than-average demand in the first note sale since their debt rating downgrade. Demand for US debt has surged in the last few sessions, as plummeting global bourses boosted the demand for the safety of US product.
The notes drew a yield of +0.50% with a bid-to-cover ratio of 3.29, compared with an average of 3.15 for the past 10 sales. Indirect-bidders took down +47.9% of the notes, compared with an average of +33.9% for the past 10 sales. Direct-bidders received +11.1% of the notes compared with an average of +13.2% for the past 10 auctions.
Today dealers get to take down +$24b of 10’s and +$16b of 30-year bonds tomorrow. Yield is hard to find.
Half-way home! Last night, the House of Reps passed the debt-ceiling bill and it is expected to pass the Senate today with the President to sign shortly thereafter. This removes the immediate fears from the market, but nevertheless a credit downgrade is still possible which could have uncertain effects.
This really has been a side-show though, as the it removed the focus from the real problem—that the global economy is slowing. Yesterday the relief rally taking place early in the morning completely reversed itself after the ISM manufacturing numbers came out here in the US which were worse than expected, posting a reading of 50.9 vs. an expected 55. This created a 200 point swing in the Dow and reversed the markets from risk-taking to risk-aversion.
Yesterday was interesting in that there was notable Swiss franc and Japanese yen strength, despite higher stocks and oil. This didn’t take long to revert to the mean, with stocks giving back early gains.
This morning the markets are lower as attention has returned to the fundamental fact that the global economy is slowing. The Euro is lower as the bond vigilantes have Italian debt in their cross-hairs as yields are stating to rise. A Spanish re-funding on Thursday has Euro officials on edge and waiting to see where yields settle.
This has prompted the RBA in Australia to leave rates unchanged overnight, citing the slowing global economy (particularly the US and China) as more of a detriment than intermediate inflation.
The recent Japanese yen strength has the markets hopeful that the BOJ will intervene again in its currency and the rate policy meeting on Thursday could bring about such action. The rate decisions from both the ECB and the BOE are expected to produce no change.
Lastly, this week’s Non-Farm Payrolls report on Friday is expected to show gains of 100K jobs. With the dismal number posted last month this may be a stretch, though reduced expectations could produce a positive result.
So prepare for a global slowdown, but be ready to seek yield when you can!
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