Key News
* Japan finance minister likely to quit (FT.com)
* Pending Sales of U.S. Existing Homes Dropped 16% (Bloomberg)
* Kraft Adds Cadbury Cash; Buffett Opposes Share Issue (Bloomberg)
* Fed may re-enter MBS market later in 2010 – Market News (Reuters)
The Event Agenda
Afternoon Run-Down
Climbing commodities and speculation about when and how global policymakers will reverse rock bottom interest rates in 2010 are influencing financial markets in early New Year trading. Currencies are continuing to break away from the risk correlation (dollar one way/ everything else the other), trading mostly mixed with relative strength shown in the commodity currencies …. weakness in the euro, pound and yen.
A couple of key news items of interest that address the threats to the improving growth them…
In the asset bubble category: Bloomberg reports, emerging markets are attracting more money from initial public offerings than industrialized nations for the first time ever.
And in the rising geopolitical risk category: European Central Bank policymaker Lorenzo Bini Smaghi upped the pressure on China in an FT editorial…
“Policymakers have urged parts of Asia to allow their dollar-pegged currencies to strengthen to ease imbalances posed by big current account surpluses in countries such as China and large deficits in the United States and elsewhere.
“The removal of these rigidities would contribute to a better-balanced world economy, with benefits both in surplus and deficit countries,”
But … “Overall, the global crisis seems to have strengthened the influence of those parts of society favoring a continuation of the current regime and weakened the voice of those asking for much-needed reform.”
“The same short-sightedness that prevailed in the run-up to the crisis is once again in evidence.”
“This is an additional risk for international policy co-operation and for the recovery of the world economy”
Key Charts
Pimco says it will be a net seller of UK bonds this year. That puts a bid under Euro/GBP as fears grow that the UK may be headed for its first sovereign debt crisis since the 1970s.
The move in crude oil is important to watch. The surge began in mid December and is now challenging its October highs. A break above $82 would open up a move to $90. That would put more upward pressure on the commodity currencies (Australian dollar, New Zealand dollar and Canadian dollar). Meanwhile metals made a strong move higher yesterday and continued higher today giving a bounce to gold and silver and taking copper to highest level since 2008.
The below chart shows the change that has taken place in short term rates from the end of ‘08 to the end of ‘09. Despite the magnitude of change or absolute level of current yields, currencies tended to perform throughout the period based on the reversal of the risk aversion trade as opposed to yield– i.e. capital flowing back out of the $ and into the rest of the world, particularly emerging markets.
That’s the yield side. On the growth side…this data is from the Economist magazine…
