Key News
* U.K. Economy Shrinks (WSJ)
* September Sales of U.S. Existing Homes Jump More Than Forecast (Bloomberg)
* Bernanke Says Financial Firms Should Pay for Closings (Bloomberg)
* Eurozone economic activity surges (FT)
The Event Agenda
Morning Run-Down
Third quarter GDP out of the UK shocked the market this morning. The market expectations were for growth of 0.2% for the third quarter, yet the number showed contraction of 0.4%. That makes six consecutive quarters of economic decline.
The pound plunged over 350 points. The UK story has been volatile. It’s been a yo-yo of optimism and pessimism. Before this morning’s GDP number optimism had taken hold for the last nine trading days taking the pound 6% higher. With a higher pound came growing support for the recovery scenario and a new confidence that the quantitative easing was taking hold.
But the fact remains the UK economy is underperforming all major economies right now. The quantitative easing program is larger than the U.S. as a percent of GDP and it’s looking probable that it will be expanded again. That’s all bad news for the pound.
There’s daily speculation and prodding by the media for clues on when major central banks will begin reversing the easy money conditions. Yet prices are continuing to fall in most of the top developed countries, demand remains depressed and economies have a ton of excess capacity…all reasons the interest rate market is showing no signs of inflation concerns. Plus central banks have made clear that rates will remain low for some time, but that is apparently not good enough for the drama appetite of the financial journalist community.
The FT ran an article today implying that Fed officials were mulling over ways to change the language in their next statement to soften the message that rates would remain low “for an extended period of time.” That gave interest rates and the dollar a little nudge today.
Overall, stocks and crude oil are off more than 1% today. The dollar is nicely higher and the pound is the biggest currency mover of the day.
Downside in stocks will get dollar bears nervous. It’s a question of how much downside is necessary before they run for the exits. For those that fear the dollar is in crisis, the implied volatility in currencies (where uncertainty is expressed) has been in a slow decline back to pre-Lehman levels. Ho-hum. And traders are buying protection against a reversal in the dollar at increasing rates. Neither of these are signs of any panic or crisis in a currency.
Where concern is more properly placed is for those fragile economies trying to work their way out of recession with a strong currency. It’s bad for the all important exports and that’s why the fuss is intensifying…
Ø The Bank of Canada released its minutes this week and said that the strength of the Canadian dollar is offsetting recovery. The BOC governor also said the intervention is always an option.
Ø The Eurozone finance ministers met this week and reiterated the ill effects of excessive currency volatility.
Ø Central banks in South Korea, Taiwan, the Philippines, Thailand, Indonesia and Hong Kong all intervened to curb currency strength.
Ø And Brazil slapped a 2% tax on foreign investment to help curb the rise in its currency and asset markets.
Growing protectionist measures are a danger for the global recovery. It creates retaliatory responses which further crushes an already weak global demand. This growing contentious behavior is not being priced into the risk-loving, “world returning to normal” theory.
Here’s a look at the charts going into the weekend…
Key Charts
The pound collapsed following the GDP disappointment. It rallied from 1.5708 to 1.6693 over nine days and gave back 387 points today…
The euro made its biggest move against the pound today since February, which kept the euro/dollar exchange rate stable most of the day around the 1.50, as traders bought euros against pounds. The euro/dollar hovers at the 1.50 area, a level that proved very difficult to breach the first time around (left area of the chart).
Commodities have been staging a move higher since the early October but remain well off historic highs, and well contained.
The S&P 500 had a slippery end of day sell off on Wednesday and wasn’t able to regain those levels. Stocks are running into big trendline resistance of the entire move down from the 2007 highs. This area should be resilient and should put the staying power of global risk appetite to the test…
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