Yesterday’s continuation sell-off from last week was a slight deviation from the activity we were expecting as the usual dose of weekend risk aversion and the re-establishment of risk positions to start the week did not take place. In fact, just the opposite occurred as the selling accelerated throughout the US trading session.
Part of the reason for this was news out of the Euro zone from the EU Finance Ministers’ meeting regarding what it will take for Greece to receive the next tranche of bailout money. One of the impediments had been Finland’s insistence upon some sort of collateral agreement to receive their participation and some sort of deal was reached. But there was also talk that the private sector participation may need to increase. Known as a “haircut”, essentially this would mean that the private sector would have to agree to accept greater losses on the debt than had previously been agreed upon at the July meeting. While no definite level has been mentioned, should the haircut increase significantly banks with heavy exposure to European debt could experience big-time losses.
Thus there has been selling in bank stocks and the overall stock market indices which has dragged the Euro even lower and ignited further safe haven risk aversion via the US dollar and gold buying. PPI figures in the Euro zone came in slightly higher than expected so Thursday’s ECB rate decision could produce no change but serve as a platform for Trichet to speak on the debt crisis.
Overnight, the RBA rate decision in Australia produced no change as expected but they did leave the door open to rate reductions if the economy begins to slow significantly or if employment starts to fall. Causing dual stress on the Aussie is the fears of a Chinese slowdown which is evidenced by their lower PMI numbers. On top of this, the US Senate is proposing legislation to combat China’s unfair trade practices of undervaluing their currency which could ignite a trade war between the world’s top two economies. While I believe that something needs to be done about the Chinese currency peg, the timing of this may be disastrous. The Aussie is trading at 1-year lows.
Meanwhile the flight to safety has strengthened the Japanese yen to 10-years highs vs. the Euro and Pound and intervention is unlikely unless the Yen strengthens above 76 vs. USD.
Speaking of the Pound, UK GDP figures are due out tomorrow and bets are increasing that the BOE may increase their bond buying to combat a declining economy. While the numbers have been weakening, I’m not sure they are weak enough to warrant further easing at this point. We shall find out on Thursday.
With major risk aversion causing massive selling, thankfully we have Bernanke to the rescue today—not! He is set to speak to the Joint Economic Committee on the state of the economy and I’m sure he’s going to say, “all is well” or words to that effect, and he may even go so far as to hint at further monetary easing. The problem he has and hasn’t understood from the start of this crisis is that cheap money is not the end all be all but that consumer confidence in our economy and policymakers is tantamount. Confidence is near an all-time low and the psyche of the American consumer—and frankly their ability to consume with declining wages and high unemployment—further adds to the downward economic spiral.
Friday’s employment report is a crapshoot at this point as there is no telling what the number of new jobs added will be. Estimates are for 50K jobs to be added though it is unclear if that will be an acceptable figure to the markets even if it is reached.
We are entering very dangerous economic territory here and the recent history has shown that we may be heading straight for the type of market activity we saw after the US financial collapse in mid-2008. With the Euro debt crisis on the brink of disaster, demand for US dollars to increase bank liquidity further contributes to risk aversion and the correlative effects of taking all other markets lower. Demand for Treasuries and Dollars has been high for the past few weeks and despite “Operation Twist” this may continue for some time.
There is no magic bullet at this point that can immediately fix the problems, but solutions at this point are more welcome than non-action. Everyday that passes without resolution hastens the speed at which the problems accelerate. We feel eerily close to that point, so continue to avoid risk until some clarity emerges.
No comments:
Post a Comment