Key News
* Fed Effort to Stoke Growth May Be Undermined by ‘Tight’ Credit (Bloomberg)
* ADB China Chief Cautions Downside Risks To China’s Growth (WSJ)
* Oil Rises for First Time in Four Days on Dollar, China Imports (Bloomberg)
* China set to swing from trade surplus to trade deficit (MarketWatch)
G20 ‘to call for economy balance’ (BBC)
The Event Agenda
The Morning Run
After a strong bounce in the dollar yesterday, the pro risk taking environment is in full force today. The dollar is very heavy, commodities and stocks are rallying. The New Zealand dollar has broken-out to new 12-month highs and the euro sits just shy of the Sept 22, 2008 highs.
After a peak below $1,000 an ounce yesterday, gold has bounced aggressively today. But with the strength in gold and weakness in the dollar, treasuries continue to chop around giving no interest rate confirmation to the inflation-theme. If the dollar is being sold and gold is being bought to express perceived inflationary and currency debasing policies of the U.S. government then rates should be rising. But that’s not the case.
The G-20 agenda is continuing its theme of coordination. And now it will allegedly tackle global imbalances in coordination in effort to rebuild a global economy that is more sustainable. That would mean China has to learn how to consume and the U.S. has to learn how to produce again—a necessary and long road of rebuilding, but a road that has been avoided to this point by policy makers to this point in favor of band-aids.
There are a lot of moving parts in the markets this morning. There is mixed news out of China overnight. Two key negatives from an Asian Development Bank report:
1) They warned about downside risks to China’s growth,
2) And they acknowledged that China’s stimulus package and liquidity spigot has done nothing to help move the economy away from its dependency on exports.
But the report also bumped up growth estimates for Asia (ex-Japan) for 2009 and 2010. Chinese stocks finished 2.3% lower but the growth upgrade for Asia fueled positive sentiment for the resilient rally in risky assets.
Since September has opened, gold has been a trade the represents the fear of central bank diversification away from those countries that have been most involved in quantitative easing: the U.S., the U.K. and Japan.
Recently the pound has been the weakest of all major currencies. Bank of England’s quarterly report yesterday suggested that the long run sustainable exchange rate may have fallen due to the country’s economic imbalances. Further weighing on the pound is the news last week that the BOE is considering cutting the interest rate on bank reserves to get banks lending. The BOE minutes tomorrow will be important to watch discussion on this topic.
Other key events this week…the FOMC tomorrow, the RBA Financial Stability report tomorrow night, the BOJ minutes Thursday night, and G-20 into the end of the week.
Key Charts
EUR/GBP has become the conviction trade at bank research desks, calling for parity.
The dollar index is sitting on the lows of the 15% move down from March highs. All-time lows are another 7% lower.
I showed this record high long gold position on Friday (white line). Here’s a look at the market position relative to the price of spot gold (orange line)…
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