Tuesday, June 28, 2011

The Final Countdown!

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By Mike Conlon | June 28, 2011

The market is in a bit of a holding pattern today as the countdown to the Greek vote on austerity is due in the next 24-hours, and as I have mentioned before, this is most certainly not a done deal. Protests in the streets of Greece (riots) have demonstrated the displeasure with the austerity measures and all it would take is a few votes against the austerity to sink the Euro.

Contagion is a much larger concern than Greece itself, which only represents some 3% of the Euro zone economy. If the Greeks end of not accepting the measures and end up defaulting, then this could set off a downward spiral which the Central bankers may not be able to prevent. So there is still a good deal of risk in the marketplace, and this is reflected so far this morning with lower equity prices and mild risk aversion to start the morning. But overall, the markets appear confident that this deal will get done, and that Greece will live to fight another day.

In the UK, GDP figures came in showing a decline in GDP to 1.6% from an expected 1.8%, though the quarterly number came in as expected at .5%. Yesterday noted BOE dove Adam Posen dismissed the BIS call for higher interest rates as “nonsense”. I guess he doesn’t consider 4.5% CPI data as inflationary and cites lower wage growth as reason enough to be dovish.

Later this morning the Case/Shiller home price index is due out and is expected to show declining home prices of around 4%, though consumer confidence figures are expected to have risen from last month’s reading.In the forex market: Aussie (AUD): The Aussie is now higher as the markets have just flipped from risk aversion to risk taking without a major catalyst that can be identified. It should be noted that there is now sentiment in the market that next move for the RBA in Australia may be a rate reduction rather than a rate hike as China attempts to slow their growth. (Click chart to enlarge)


Kiwi (NZD): The Kiwi is mostly lower after yesterday’s trade balance figures came in lower than expected, but there is additional sentiment that the recovery in Christ Church after the earthquakes has been slowing.

Loonie (CAD): The Loonie is mixed as higher oil prices trading up to a 92 handle have counter-balanced the weak US economic outlook that is causing some US dollar selling this morning. Tomorrow CPI data will be released which could show inflationary pressure.

Euro (EUR): The Euro is mixed as all eyes are on the Greek vote for austerity as riots in the streets of Greece are taking place. Tomorrow will bring German CPI data but this is of little importance in the grand scheme of things.

Pound (GBP): The Pound is mixed after GDP figures came in lower than expected showing that stagflationary forces may be rearing their ugly head. BOE dove Posen’s comments may not be so far-fetched if the economy continues to worsen. (Click chart to enlarge)


Swissie (CHF): The Swissie is higher across the board as money flows from the Euro to the safe haven currency with the risk of the Greek vote in full force.

Dollar (USD): The Dollar is actually weakening at this point despite the risk in the market as investors want to get in one more day of risk-taking going into the Greek vote. Home price figures are expected to show declines later this morning, though consumer confidence is expected to be up from last month.

Yen (JPY): The Yen is mostly weaker but not by much as risk is still prevalent in the marketplace. Retail trade figures came in better than expected showing gains of 2.4%, but big box retail sales decrease by that same amount.

The Greek vote is expected tomorrow morning and represents the single largest risk event currently in the markets. The US debt ceiling debate is also something to be concerned about, but that discussion is for another day.

It is no secret that economies are contracting around the globe, however the days of extend and pretend are over and it is time to face the harsh realities. Look no further than what is taking place in Greece as a microcosm for the global economy.

What happens if the citizens of the UK decide that they have had enough of 4.5% inflation even though the BOE continues to avoid dealing with it for fear of sinking the economy? Or what happens if the confidence in the full faith and credit of the US is called into question if the debt ceiling debate can’t be resolved?

These are all precarious positions which need to be handled by governments and not avoided. Unfortunately, most wait until there is a crisis to provide political cover for making difficult choices which can have negative effects going forward.

So keep an eye on this Greek vote and mitigate your risk exposure.

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