Last Friday’s Euro Bank Stress Tests have come and gone and have the left the markets feeling unsatisfied as fears have not been assuaged. The major problem of how a sovereign default would affect these banks has been largely ignored, which means that the tests are ineffective.
Meanwhile, we are no further along in the debt ceiling talks here in the US, which adds additional uncertainty to the mix and makes for a risk-averse investing environment. As we would expect in a risk-averse environment, gold is reaching new nominal all-time highs, trading over $1600, as the additional threat of QE3 has the inflation hawks squawking.
The Swiss franc, US dollar, and Japanese yen are all higher as well, with oil and the commodity currencies trading lower, as well as stock markets around the globe.
Two countries moving in seemingly different directions with regard to inflation are New Zealand and the UK. In New Zealand, CPI data came in hotter than expected, showing inflation of 5.3% vs. an expectation of 5.1%, and in the UK, home prices fell 1.6% last month.This means that there is the possibility that the RBNZ may have to “normalize” interest rates (hike), while the BOE is content to do nothing. If QE3 pops up here in the US though, look out!In the forex market:
Aussie (AUD): The Aussie is mostly lower on risk aversion as world markets are lower to start the day ahead of tomorrow’s release of the RBA rate policy meeting minutes. The market expects the next move in Australia to be a rate reduction, rather than a hike at this point in time.
Kiwi (NZD): The Kiwi is mostly lower though seeing some strength as CPI data came in hotter than expected. In addition, the Performance of Services figure also came in better than last month showing signs that the NZ economy is improving and that a return to “normalized” rates may be necessary to thwart inflation after the RBNZ lowered more recently in response to the devastating earthquakes.
Loonie (CAD): Tomorrow’s rate policy decision is expected to produce no change to interest rates, leaving them steady at 1%. Wednesday’s monetary policy report could give some further clarity, but expect the Loonie to trade on risk themes and with oil prices, as well as US economic data. CPI data is due out on Friday.
Euro (EUR): While there is some ancillary data due out this week on manufacturing, we all know that the market will be focused on the bond yields of the periphery countries and whether contagion spreads to Spain and Italy in a big way.
Pound (GBP): The Pound is mostly lower after house prices came in lower than expected, but the big news this week will be the release of the BOE rate policy meeting minutes which will show if they have any concern about inflation at all, or if they will continue to allow austerity alone to hopefully bring prices lower. Retail sales figures on Thursday will show how citizens are responding to the economic times. (Click chart to enlarge)
Swissie (CHF): The Swissie continues to be the safe haven currency of choice for the moment, and new highs vs. the Euro at 1.14 have already induced the calls for parity and SNB intervention. Economic expectations figures are due out on Thursday. (Click chart to enlarge)
Dollar (USD): The Dollar is higher on risk aversion though overall sentiment is for weakness with the debt ceiling debate and the possibility of QE3 on the table. There is a slew of housing data due out this week which is likely to show continued weakness, but US corporate stock earning have been coming in better than expected which could balance out the weaker economic data.
Yen (JPY): Congrats to Japan for winning the women’s World Cup, though that happiness may be short-lived if the Yen continues to strengthen. Expect the Yen to continue to trade as a proxy for risk, and for BOJ officials to try to jawbone it lower if given the chance.
This week is apparently setting up as just more of the same. Euro bank stress tests from last week were essentially a joke, and the US is no closer to a debt ceiling resolution as the clock continues to tick.
Meanwhile, corporate stock earnings here in the US have been pretty good to start out and with week monetary policy in place markets could rally if either the US or Euro zone can get their house in order.
While no one is expecting a solution to either problem to happen overnight, meaningful progress needs to be made to show the markets that solutions do indeed exist and that they may actually happen despite the political climate.
Otherwise, these politicians will be fighting over smoking embers as the whole system will come crashing down!
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