Marc Chandler on the latest FX moves.
The German Constitutional Court ruling, allowing the European Stability Mechanism to go forward, which in turn bolsters the ECB’s Outright Monetary Transaction program, has reduced the extreme tail risk that had been rising after the impact of the Long Term Repo Operations had worn off. It not only reduced peripheral yields, but has also re-opened the bank and corporate bond markets in Europe. The Dutch election results favored pro-European parties. The latest signals suggest that the risks of Greece being ejected from the monetary union has diminished and the odds of a country leaving EMU this year, according to the policy market at www.Intrade.com have fallen to about 15%, near its lowest level in two years.
In the US, following two disappointing monthly jobs reports, the Federal Reserve took bolder action than many, including ourselves, had expected. The open-ended nature of its newly announced purchases, which will focus on newly created mortgage-backed securities, is both quantitative easing and a way to encourage new mortgage lending. It also suggested that the bar to additional long-term asset purchases was low in the sense that the only thing that would prevent it would be a significant and substantial improvement in the labor market. Given the uncertainties surrounding the fiscal cliff and the dampening effect this has on investment and hiring decisions, the kind of improvement does not look particularly likely.
Greece’s centre-right New Democracy party scrapped its way to victory over Syriza, its radical leftist opponents, on Sunday in an election pivotal to the efforts of European leaders to hold the eurozone together. According to interior ministry projections, with 97 per cent of votes counted, New Democracy was set to take 29.7 per cent of the vote and 129 seats in the 300-member parliament, compared with 26.9 per cent and 71 seats for Syriza. http://www.ft.com/intl/cms/s/0/333c9448-b845-11e1-a2d6-00144feabdc0.html#axzz1y7J4LjIF
The global recovery has stalled again as confidence in policy makers’ ability to provide conditions for growth has slipped away, according to the latest FT/Brookings Institution Tiger index of world economic conditions. Professor Eswar Prasad of Brookings said: “The global economic recovery is being held hostage by political brinksmanship that has created policy paralysis, undermined confidence and stymied the effectiveness of macroeconomic policy tools”. http://www.ft.com/intl/cms/s/0/fb7b2ab8-b882-11e1-a2d6-00144feabdc0.html#axzz1y7J5y2wM
The head of Denmark’s central bank has warned that the Danish krone is coming under intense pressure from investors seeking a haven in Europe and betting that the currency’s peg to the euro could be cracked by the crisis. Nils Bernstein, the governor of the Danish central bank, said that the upward pressure on the krone was the most severe he had seen in his seven years as governor, and warned that negative interest rates could be on the cards if the problem continues. http://www.ft.com/intl/cms/s/0/06836ec2-b6c9-11e1-8c96-00144feabdc0.html#axzz1y7J5y2wM
The Bank of England committee charged with ensuring the stability of Britain’s banks is split over George Osborne’s plan to oblige it to support the government’s new growth agenda. In a little-noticed section of his Mansion House speech last Thursday, the chancellor said the BoE’s Financial Policy Committee should no longer focus narrowly on safeguarding the banking sector. The FPC should not be creating “the stability of a graveyard”, he said, and in future would have a “secondary objective to support the economic policy of the government”. http://www.ft.com/intl/cms/s/0/2196b248-b884-11e1-82c8-00144feabdc0.html#axzz1y7J5y2wM
Spanish news dominating the scene today again. People are still talking about the bull, but let’s not forget, the MIB is down some 8% and the IBEX some 20% YTD. Spanish economy is now in recession. From Banco de Espana.
In 2012 Q1, Spanish economic activity continued on the declining path initiated in the closing months of 2011, in a setting of high financial tension. On the as-yet incomplete information available, the contraction in GDP is estimated to have been slightly higher than that in 2011 Q4, with a quarter-on-quarter rate of change of -0.4%. National demand fell once again (-0.9 pp), as has been the case over the past four years, although the decline was milder than in the preceding quarter, while the contribution of net external demand was positive once more (0.6 pp), but likewise lower than that in the previous three months. After posting rises for seven consecutive quarters in year-on-year terms, GDP fell back to a rate of -0.5% (0.3% in the previous quarter).
Employment fell once more, sharply so, posting an estimated year-on-year decline of close to 4%. And compensation per employee slowed across the economy, leading, in combination with high productivity growth, to a significant reduction in unit labour costs, prolonging the trajectory of the last eight quarters. The considerable sluggishness of domestic spending prompted a slowdown in the year-on-year rate of change of consumer prices from December to March, and the CPI stood at a 12-month growth rate of 1.9% in this latter month. Easing was more visible in the CPI excluding unprocessed food and energy, the year-on-year growth rate of which fell to 1.2%. In terms of the HICP, the inflation differential with the euro area stood in March at -0.9 pp, reflecting a reduction which was extensive to all the main HICP components.
Guest post by Azizonomics.
From South Africa’s City Press:
South Africa will this week take some initial steps to unseat the US dollar as the preferred worldwide currency for trade and investment in emerging economies.
Thus, the nation is expected to become party to endorsing the Chinese currency, the renminbi, as the currency of trade in emerging markets.
This means getting a renminbi-denominated bank account, in addition to a dollar account, could be an advantage for African businesses that seek to do business in the emerging markets.
The move is set to challenge the supremacy of the US dollar. This, experts say, is the latest salvo in the greatest worldwide currency war since the 1930s.
Well — like the rest of Africa alongside all of its natural resources which (in spite of Kony 2012′s best efforts) becomes more Chinese by the day — it is clear where South Africa’s allegiance lies. Most interestingly, though, this is the first nation with an Anglo-American economic elite to come out against the present global order and more or less endorse China.
Readers are reminded of this chart:
Hussman on the current awful time to invest. From Hussman Funds.
Last week, the estimated return/risk profile of the S&P 500 fell to the worst 2.5% of all observations in history on our measures. This is not a runaway bull market. Rather, it is a market that again stands near the highs of an extended but volatile trading range. I am convinced that the breakdown of the market from this range has been deferred only through repeated and extraordinary central bank actions.
Importantly, the market is again characterized by an extreme set of conditions that we’ve previously associated with a “Who’s Who of Awful Times to Invest.” The rare instances we’ve seen this syndrome historically are reviewed in that previous weekly comment. They include the 1972-73 and 1987 market peaks, and several instances since 1998. The more recent instances of this syndrome are shown by the blue bands on the chart below. Each of the separate instances in the 1998-2000 period were followed in short order by intermediate market declines of between 10-18%, and of course, ultimately by a plunge of more than 50% in 2000-2002. Likewise, the 2007 instance was followed in short order by a correction of nearly 10%, and a few months later by a plunge of more than 50% in 2007-2009. The more recent instances in 2010 and 2011 have also been followed by substantial market selloffs in each case, though with a longer lag in 2011 (due to ongoing QE2 operations). Aggressive monetary policy did not prevent the ultimate declines, though massive central bank interventions have undoubtedly helped to short-circuit the more violent follow-through that occurred in 1973-1974, 1987, 2000-2002, and 2007-2009, at least to-date.
Clearly the correlation has worked on the way up. With the Eur falling over the past days, maybe we could expect a time lag in the SPX chart to take place, or have the Algos been re programmed?