Monday, March 28, 2011

European Woes!

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By Mike Conlon | March 25, 2011

Yesterday I wrote that the situation in Europe was starting to come to a head as Portugal rejected austerity measures, forcing their PM to resign. Well the two-day European Summit that was supposed to provide clarity into the process for further bailouts became more complicated.

Germany pushed other leaders to reduce the amount that they put in the pot, rather than offering more. Political pressure within Germany is causing Merkel to take a tough stance, though the unpopular message to the Germans should be that they have been able to prosper because of the PIIGS countries and not despite them. Meanwhile further downgrades of Portugal are likely and if bond yields continue to rise, then a bailout may be inevitable.

There’s not a lot of market-moving news today, but last night Japan reported continued deflation that was largely in-line with expectations. I don’t think the market will trade on Japanese fundamentals at this point, as the nuclear crisis is much bigger news. Speaking of, it is hard to tell what is new or stale news. I awoke this morning to hear that there was a reactor leak, though the market has brushed it off. There was also another earthquake there today as aftershocks continue to persist.

In the US later this morning, we will get personal consumption and revised GDP figures, as well as some Fed speak. They announced that they will be holding press briefing with regard to policy in the near future, which could lead to some market volatility if this turns out to be anything more than a PR stunt.

Markets appear to be taking the risk out there in stride, and stocks are higher to start the morning.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as risk appetite appears to still be strong in the market. While there could be a sell-off later in the day heading into the weekend, the Aussie has been strong as of late. (Click chart to enlarge)


Kiwi (NZD): The Kiwi is also higher across the board, riding the wave of the better than expected GDP report that came out 2 days ago.

Loonie (CAD): The Loonie is mostly lower as oil prices have pulled back from recent highs, yet is still trading around $105.50. It wouldn’t shock me to see it move lower as traders pare back risk going into the weekend.

Euro (EUR): The Euro is lower as the bickering taking place at the EU Summit does not inspire confidence despite the fact that German economic sentiment figures came in better than expected. Without a workable solution to the debt crisis, things could get worse for the Euro in a hurry. (Click chart to enlarge)


Pound (GBP): The Pound continues its downward momentum following the BOE’s inaction regarding rate policy. Perhaps consumers will just stop buying which would reduce demand thereby taking prices lower. Great policy!

Dollar (USD): The Dollar is picking up strength as the morning moves forward as perhaps the market is starting to come around to the idea that indeed there is risk in the market. As bad as the Dollar might be from an investment standpoint, it still is the world’s de facto reserve currency so it should be in demand when the stuff hits the fan.

Yen (JPY): The Yen is weaker against all but the Euro and Pound as CPI data last night showed continued deflation. While this was expected, the bigger story is still the on-going nuclear situation and another aftershock that hit today could exacerbate the crisis.

We are in extraordinary times right now, having emerged from what could have been the second coming of the great depression. But the question is now, how do we move forward? There are many obstacles to growth and prosperity which in turn affects how the populace feels.

When there is uncertainty over how people feel, that sometimes trumps all of the economic formulas that government types rely on. Then the head-scratching ensues, as policy-makers are in disbelief that the people just don’t get it.

So perhaps it is better to get out in front of them and tell them what they SHOULD be feeling. That way the economy improves. Brilliant! At least that’s the Fed plan.

Germany on the other hand, is not doing such a good job in the PR department. Perhaps if someone explained to them that without the PIIGS countries lack of economic production that drags down the value of the Euro, Germany might be back on the DM which could potentially be the strongest currency in the word thereby making German exports too expensive for anyone to buy. Cue the unemployment as factories lay workers off to remain profitable.

In either case, they should be careful what they wish for!

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