Forex Market Outlook 12/9/11
Well we have have had quite a wild ride over the past few days as was to be expected thanks to the news out of the Euro zone regarding the debt crisis and the rate policy meeting. Yesterday’s markets sold off in a major way as ECB honcho Draghi stated that the ECB would not be breaking treaties and stepping up its purchases of distressed sovereign debt. I also mentioned that Draghi said that he was concerned about deflation yesterday, but this was not the case. He said that he was NOT concerned with deflation so that he would not be inclined to ease further. So while the intent was different, the outcome was the same. Apologies for the error yesterday.
So what do we have today? Well today is a case of good news, bad news so this morning I will start with the bad so that I can leave you on a high note. The major bad news is that the EU leaders failed to agree on changes to the existing treaties to increase the fiscal union and allow for better governance. Between that news and Draghi yesterday, the Euro tanked taking down most risk assets in the process.
Now for the good news; just about everything else came through as expected. The ESM will be sped up, the IMF and European banks will be bolstered, and greater fiscal discipline will imposed with penalties for those who don’t abide by the rules. Here is a good re-cap of the details of the results from the Summit.
While this news is not “good” per se, it is not horrible either and the markets have rallied as a result. While the hope was that they would do a lot more, optimism faded quickly as the reality of the situation came to light. At the end of the day, there is nothing new here that hasn’t been discussed and is just a further “can-kicking” measure that will hopefully buy more time for countries to get their fiscal houses in order. Bond vigilantes are probably licking their chops right now and are making plans to push yields in the new year and it will be interesting to see how long it takes before EU leaders need to act again.
This agreement was made by all EU members with one notable exception– the UK. They have balked at some of the intended fiscal union stuff including the financial transaction tax though it doesn’t matter much in the grand scheme of things because the UK has their own currency and runs their own economy despite being geographically bound to the others.
The markets are still mostly higher to start the morning but have given back some earlier gains. Taking a look at the news, there was sort of a mixed bag from the Asian session.
In China, retail sales figures came in better than expected, but industrial production figures were worse than expected. More importantly though, was that CPI and PPI data came in lower than expected with the former posting a 4.2% reading vs the expected 4.5% and the latter coming in at 2.7% vs. 3.4% expected. This means that inflation is subsiding in China and would give the Central bank room to be more accomodative to kick start the economy if need be. They have been using bank reserve requirements lately and could ease on that freeing up more capital for loans.
In Japan, GDP figures came in better than expected posting a 5.6% annualized figure vs. the expected 5.2%. This is positive for Japan but yen strength has been weighing heavily on exports so there may be a push to weaken the currency in the new year. Global demand is shrinking so having a currency advantage would make them more competitive so I’m starting to look to the new year already.
Outside of the the Euro summit news, German CPI data came in as expected though their trade balance figures were lower than expected on lower exports. In the UK PPI figures came in higher than expected but this shouldn’t surprise as the BOE has essentially ignored inflation there anyway. In the US, trade deficit figures came in slightly better than expected and the U of Michigan consumer confidence figures are due out later in the morning.
So what does this all mean going forward? Well that’s hard to say because everyone has a different time-frame. I think that risk assets can rally into the new year and then continue into January, only to see markets pull back shortly thereafter. There are many headwinds in the global marketplace so the market is likely to be ruled by shorter-term volatility and range-bound activity. It is highly possible though that these ranges expand (making higher highs or lower lows) but by and large I don’t think we can see major gains until problems actually get fixed and not put off for another day.
So I am going to continue trading in the short-term as the risk in the markets feels too great to initiate longer-term trades.