Friday Recap … February 5, 2009

Key News

 

* U.S. Economy: Unemployment Rate Unexpectedly Declines to 9.7% (Bloomberg)

* Papandreou Says Greece Has No New Deficit Measures (Bloomberg)

* U.K. Personal Insolvencies Jump to Record in Aftermath of Slump (Bloomberg)

* U.S., China must lead global rebalancing-euro zone (Reuters)

The Event Agenda

Afternoon Run-Down

The long dollar trade is looking very healthy.  Risk aversion is back.  Sovereign debt problems in Europe are intensifying, and the potential contagion has global investors running for cover.  Below is the change in markets over the past two weeks…

 

Credit default swaps are spiking on all high-debt countries, including the U.S.  But treasuries are being bought, not sold– and gold is being sold.  That tells me, even in the event of a widespread sovereign debt crisis, where major economies also land in the crosshairs, people want to own U.S. dollars—nothing else.

Adding to the uncertainty, tensions are growing with China.  Reuters obtained a document prepared by the Eurozone for the G-7 meeting going on today and tomorrow.  The G-7 won’t publish an official communiqué from the meeting, but the message is from the euro land is a push for the U.S. and China to rebalance economies so that the world economy can find a path of sustainable growth.  The message isn’t new, but the pointed recommendations for China are…  China won’t likely be amused.

Add to that, over past days, President Obama has made the most direct statement about China’s currency policy without actually saying the word manipulation (a charge that would warrant a report to the World Trade Organization).  Instead he implied the obvious, China’s goods are “artificially deflated.”  Larry Summers has said that perhaps free trade shouldn’t include trading partners that are pursuing mercantilist policies.  China says U.S. protectionism is jeopardizing trade ties.  Rising tensions and protectionism do not bode well for risk appetite nor the global recovery. 

With the continued resistance from China on the yuan, the market expectations are pricing in just 2% appreciation over the next twelve months.  Look for this issue with China’s currency to only grow in intensity.  And despite what’s said, I wouldn’t expect China to move on their currency.

Here’s a look at the charts going into the weekend…

Key Charts

Euro

The euro is down 10% from its highs made in November, the day before the Dubai debt problems were announced.  Just months ago, pundits were calling for the euro to become the new world reserve currency—ignoring the problems in the eurozone and structural problems with the euro …  2008 lows aren’t out of the question. 

 

British Pound

The pound is likely to be the next target in the growing sovereign debt crisis.  It will be seen as the vulnerable major developed market economy … currency devaluation coming?

Australian Dollar

In a zero interest rate world capital plowed into the Aussie dollar on speculation RBA would start rate hikes sooner and more aggressively than others.  And AUD outpaced the bounce in commodities.  With RBA, now on hold, and global economic picture cloudy … look out below.

Global Stocks

In a world of rising uncertainty, regions that were thought by many to represent the best investment opportunities for 2010 are down big in the past three weeks, especially for foreign investors.  Investors in Brazil are down 12% in stocks from peak plus another 10% on the currency.  In China, stocks are down 11% since the second week of January.  US stocks are down 8% from highs.

 

Volatility

One month euro implied volatility– a good meaures of the markets degree of certainty about the outlook for the euro– is climbing, but still cheap relative to the levels it was trading 12-months ago…