Appetite For Risk!

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By Mike Conlon | May 27, 2010

The US reported growth figures today that while positive, have missed expectations.  US GDP came in at 3% vs. and expectation of 3.4%.  In addition, initial jobless claims were reported at 460K, largely in line with expectations.

This morning has started out in full risk-taking mode, as no additional negative news has come out of the Euro zone.  As I mentioned yesterday, every day without news will embolden the market and encourage risk-taking.   Yesterday’s rumor du jour was that the Chinese government was re-evaluating its Euro zone holdings, which sent the market lower as fears of further selling in the Euro were heightened.  However, the Chinese denied that rumor and the markets have rebounded strongly this morning.

The Dollar has benefited as of late due to the flight to safety trade, so at this point while the fundamentals are improving, the US still has a long road to recovery ahead.

In the forex market:

Aussie (AUD):   The Aussie is higher on risk-taking this morning, as traders aggressively jump back into carry trades.  Because the Aussie had been sold off due to risk-aversion, carry traders buying here are essentially getting a discount which is giving them a better return on investment.

Loonie (CAD):  The Loonie is higher as well, as oil is back above 73.  The market is looking ahead to next week’s rate policy meeting, where the expectation is that they will raise rates.  If the Euro zone can stabilize, then this will most likely happen.

Kiwi (NZD):  The Kiwi is also up on carry trades and NZ reported last night a better than expected trade surplus, showing that demand for imports declined as exports increased.  However, an IMF report said that the Kiwi may be 10-25% over-valued and that a lower valuation would help narrow its account deficit.  So there could be a pause at the mid-year expectation if inflation is contained, though carry traders don’t mind as they are content with the yield differential.

Euro (EUR):  Hooray for the Euro!  They have finally had a day where everyone was on the same page and the message to the marketplace was clear and concise: the Euro is not in danger of failing, and the debt crisis is likely to be contained.  CPI figures in Germany came in on target, showing that inflation is contained despite a weaker Euro.  Growth in the US and China may offset the Euro zone debt crisis.  China did not pile on to the mess, claiming that they are not reviewing their Euro holdings quelling fears that a further sell-off was imminent.

Pound (GBP):  The Pound is higher as risk-appetite in the market has picked up, and the lack of negative news from the Euro zone is providing support.

Dollar (USD):   The Dollar is lower this morning as risk-taking has reduced demand for the safe-haven trade.  GDP figures came in slightly lower than expected, but positive nevertheless.  Initial jobless claims were slightly higher; showing signs that while the US economy is improving, it is moving very slowly.  Some may claim that part of this GDP growth was due to government stimulus programs, which are starting to expire shortly.  Whether or not the economy can remain on this trajectory remains to be seen once the stimulative measures are removed.

Yen (JPY):  As expected, the Yen is the worst performer this morning as risk-appetite has increased the selling of yen as yield-seeking traders put on their carry trades.  Tomorrow will bring a plethora of economic data, from CPI to the jobless rate; however don’t expect these to be market movers unless they are grossly out of line.

Yesterday’s blog article about the market “proceeding with caution” was prescient in that it showed that market was still jittery.  What started out as a positive day quickly reversed as rumors of a potential Chinese sell-off of Euro assets.

However, with an additional day of Euro stabilization due to the lack of negative news, the markets gain confidence in the global economic picture.  As you see, it doesn’t take long for the market to have a “short memory”.

As long as the market believes the Euro debt crisis can be contained, then we should see risk-taking occur.  Whether or not this will be the case is yet to be seen.  So take yesterday’s advice and proceed cautiously, as potential Euro zone landmines haven’t gone away.

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