Following on from the weakness the previous day and a very interesting snub from the boss of the PBOC who decided not to attend the IMF meeting in Tokyo, markets were in a funk again last night.
Greece seems to be part of the problem once again with a big 24 hour strike being called and its stock market fell 3.5%. Perhaps the best thing Europe could do is merge all the stock exchanges so that the weakness in Greece, Spain and elsewhere can be balanced out by strength elsewhere – that way contagion cant happen because the volatility is muted. Just a thought.
Anyway the FTSE fell 0.6%, the DAX fell 0.4% and the CAC dropped 0.5%. The IMF warned on asset sales for Europe saying that if this debt crisis doesn’t get solved then “the region’s banks could be forced to sell as much as $4.5 trillion worth of assets, up from an earlier estimate of $3.8 trillion”. Fitch also warned that governments could suffer further ratings downgrades.
I’ve written recently that I think that this earnings season feels like it is going to be like the one we had at the same time of year in 2007 and at this very early stage that seems to be the case. Over the past 24 hours we’ve had Cummins give a profit and revenue warning and last night we saw a similar warning from Chrevron. Chrevon warned its 3rd quarter earnings would be “substantially lower”. The thing to remember about QE3 was nicely summed up by one of the globe’s best economists and market strategists, David Rosenberg from Gluskin Sheff who was quoted this morning saying:
“You could argue that the Fed has put a higher floor under equities…but the Fed can’t prop up earnings.”
The Fed’s Beige book was released and showed “modest” growth across most regions of the US with housing the “bright” spot. But the market was not happy and the Dow suffered it second tripple digit loss in a row closing 135 points lower. The S&P 500 lost 0.66% to 1432 and the NASDAQ dropped about half a percent.
If QE3 was about weakening the US dollar, as I believe it is in a very large part, then the Fed and Bernanke will be very disappointed. The Dollar Index traded over 80 last night for the first time since the launch of the Fed’s latest monetary bazooka and as I continue to write I think the idea that it is going to weaken significantly is misplaced. FX is a least ugly competition and the US dollar is just a little better looking than some. I like the way that Michael Derks from FXPro in London summed it up for the Wall Street Journal (Micheal is a really good stratyegist and was at Deutsche in Sydney when I was doing the currency strategy thing full time):
“Defiantly ignoring the negative prognostications of the vast majority of currency strategists and commentators, the dollar has recorded a modest appreciation of 1.5% since the Fed announced unbounded QE four weeks ago,”
Indeed as the stock market swoons again the US Treasury issued $21 billion of 10 year securities at 1.70% which was the 4th lowest issuance rate ever and had a bid to cover ratio of 3.06 – people still want the USD and US Treasuries.
Which makes the Australian dollar’s rally all the more remarkable in light of the weakness in stocks. Maybe I’m wrong, maybe the Aussie is really a safe haven now because the price action over the last couple of days when the Dow has dropped more than 200 points is truly amazing. Least ugly contest perhaps is why the Aussie is doing so well because even with all the challenges facing the economy the IMF and World Bank have reiterated that we are opne of the few countries on the planet which is going to grow at “trend” over the next year or so. That in itself, or at least the expectation, is remarkable – so why wouldn’t the Aussie rise against other currencies? As I write the AUDUSD sits at 1.0230 and EURAUD has just slipped back below 1.26. The again, it might be the function of the recent rally in iron ore.
The euro and other currencies came off their lows as the US dollar index retreated back below 80.
On commodity markets Nymex crude reversed off the move toward the range top fall 1.2% to $91.29 Bbl, gold sits at 1770 oz and the Ags were mixed with corn down 0.71%, wheat up 0.63% and soybeans down 1.7%.
No charts today sorry as my Laptop has a virus and I’m on a different computer.
Twitter: Greg McKenna . He is the Chief Investment Officer of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.
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