Key News
* Chinese Banks Take Steps to Rein In Credit (WSJ)
* S&P Puts Negative Outlook on Japan (WSJ)
* Sterling suffers after GDP disappointment (FT.com)
* South Korean growth slows (FT.com)
*Obama to Call for Three-Year Freeze on Some Federal Spending (Bloomberg)
The Event Agenda
Afternoon Run-Down
UK GDP disappointed … Japan’s outlook was downgraded … China continues to tighten up on lending … Eurozone fiscal deficit problems continue … And the U.S. is talking tighter regulation and fiscal constraint. The storm of news is weighing on global stocks, commodities and currencies as investors are beginning to price in a less rosy outlook for the global economy. With the developments at hand, the prospects for double dip recessions are becoming more revered or, at best, a slower more painful recovery period than what has been anticipated.
Sentiment has been a huge driver of asset prices and economic stabilization over the past 10 months, but is likely to suffer another blow. And after enduring another round of pain, the appetite for risk will be far more difficult to regain. That’s an ominous outlook for stock markets, particularly in the higher risk regions of the world.
Volatility has jumped in both stocks and currencies in the past week. The VIX (a gauge of uncertainty about the future path of stocks) jumped over 60% higher since Monday of last week. Global investors are looking for downside protection in stocks and foreign currencies … driving up the price of volatility in the options markets.
Today, the UK reported weaker than expected fourth quarter GDP. The UK is the last major economy to technically emerge from recession, albeit barely. And if South Korea is any indication, these countries that have achieved only tiny growth thus far look very vulnerable to a another bout of economic contraction. South Korea was growing at 3.2% (ann’l rate) the prior quarter, but just barely eked out growth in the fourth quarter (+0.2%). South Korea has been one of many beneficiaries of the massive stimulus and credit surge in China over the past year. In the latest quarter, exports fell, a sign that the China engine is sputtering. That’s not good for Australia or New Zealand … two countries whose currencies have soared in the past 10 months on the China demand angle.
On that note, China has been reining in liquidity in past weeks, fearing bubbles, and today’s reports indicate that they have frozen new bank lending. That response follows the massive lending frenzy that took place in the first half of January.
The risk aversion bid continues to build as the market magnifying glass has turned away from the U.S. and is identifying the many ugly problems that remain from a global economy that was (and still may be) on the brink of depression. That’s good for the dollar, and bad for practically everything else at the moment.
It will be important to keep an eye on the developments surrounding Bernanke’s reappointment as it pertains to the global stability picture.
The Bank of Japan was unchanged on monetary policy today. The Fed will decide on policy tomorrow … as will the Reserve Bank of New Zealand. Both will likely continue the course with a cautious stance on their respective economies.
Here’s a look at the charts…
Key Charts
China Bank Lending
Some Chinese banks have been ordered to suspend new lending. China has been tightening the reins after reports say lending in the first half of January (the red highlighted area of the chart below) blew-out estimates for the month…
Hang Seng Index (Hong Kong stock market)
The China effect? Stocks in Hong Kong have dropped nearly 15% in thirteen days since China has attempted to tighten up on liquidity…
Commodities
The thought of slower global growth has taken the steam out of commodities … breaking important trendline support, the line that represents the run-up in risk appetite…
…And the same for U.S. stocks…
U.S. GDP
We get a first look at fourth quarter U.S. GDP on Friday. The number is expected to be big. But the third quarter number was expected to show 4.6% growth … the final number was 2.2%. Given the stimulus effect, it’s safe to expect variance from expectations. Here’s a look at the recent GDP numbers…
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Jan.30 – just read your M&M newsletter regarding the Fed saying they’ll discontinue foreign currency swaps. When you say this is positive for the dollar, you mean in relation to other currencies. But I’m also curious to know if the “pulling in” of dollars back to the U.S. affects the total $money supply. Will the Fed’s taking these dollars back actually shrink the money supply? In other words, will the dollar actually be stronger on an absolute basis, and not just on a relative to other currencies basis?