Thursday's reports were a disappointment for the big money-market boys. For the fund managers and traders, expectations of an injection of loose money via quantitative easing is one delightful fantasy, and the recent dreams that the Fed, the ECB as well as the Bank of China would all expand the money supply, made that a trifecta. As good money managers and advisers, it is then their job - no, their duty - to get a cut of the billions being dispersed by the central banks to stimulate the economy. With their take, they can then shop and spend, giving us the multiplier that Lord Keynes predicted.
Anticipating the flow of money is the job of the professional traders. A changed perception about the future value of an investment or an asset class is important, almost as important as anticipating money flow from the crowd. In a fashion, the professionals are front-running where they think the money will flow, but this gets tricky: if you get to far ahead of the crowd, they may find new leaders.
With an imminent injection of ECB liquidity looming, equity markets in Italy and Spain both advanced sharply this past week. This was in response to Spanish Premier Mariano Rajoy's comments that an agreement had been reached and there would be help from the ECB to reduce the heavy interest-burden the market was inflicting on Spain. It again appears that Rajoy naively assumed Spain's bail out would have preferential terms to the mini bail outs in Greece, Ireland and Portugal, or at least bail out terms would be revealed prior to soliciting the bail out.
For much of Europe, August is holiday time. While German Chancellor Merkel is hiking in the Alps, Spain and Italy are left dangling. Rajoy's People's Party was elected in November with 44.6% of the vote, but his support is fading. A recent poll said if a vote were held now, he would get only 36.6% of the vote. With such a small percentage favoring the incumbent, adverse circumstances could result in a new government.
Friction is building between Italy and Germany. Yesterday Reuters reported:
"Italian Prime Minister Mario Monti has taken the gloves off in his fight to save Italy from disaster in the euro zone debt crisis, daring to stand up to European paymaster Germany in a way unthinkable a few months back.
His change of attitude is driven by increasing Italian exasperation with repeated delays in formulating an effective response to a crisis on bond markets that has put Spain and Italy in the front line against an existential threat to the euro and perhaps the whole European Union.
Monti is trying to pressure German Chancellor Angela Merkel into agreeing to a European shield against high borrowing costs that are crippling Madrid and Rome and that he believes threaten the very survival of the euro if they lose access to markets."
The protracted dispute between the debtor and the creditor countries within the euro is not a situation where a quick and massive injection of liquidity can be expected. Turning to the US, we think it is doubtful the Fed will drastically change existing policies for both economic and political reasons.
Last week at the Fed news conference, they deferred making a decision about further stimulative programs, as they awaited further input. The news released yesterday is not conducive to prompting Fed action.
US Initial Jobless claims were 361K, better than the 370K anticipated. Next, the US Trade Balance was a negative $42.9B, again much better than the $47.5B forecast. A large part of this was lower imported energy prices through June, which have since gone up. Nevertheless this reduction may have a positive effect on the 2nd quarter GDP. (A reduced trade deficit increases the GDP). Finally, the US Wholesale Inventories declined 0.2%, which means business is continuing and inventories will need to be replaced.
The numbers show the economy is continuing to grow at a modest pace. These reports are not likely to make the Fed take decisive actions. Further, with the presidential election heating up, and bombs being hurled by both sides, Fed members may want to keep a low profile.
The effectiveness of QE 2 is disputed, but with the failure of employment to grow more rapidly, the administration may blame the Fed for the economic malaise. The Fed is also under assault from the right, with the House of Representatives demand the Fed submit to an audit. How long would it take to "mark to market" the Fed's multi-trillion dollar balance sheet?
The final central bank the market hopes will give them a lift is China. With the flow of weak data from China, we can anticipate some stimulant, but will it be enough. This morning it was reported by Zarathustra in alsosprachanalyst.com that:
"All major macro data from China over the last 2 days have been disappointing.
The third quarter started on a surprisingly weak note for China despite all the talks (and hope) on stimulus and monetary policy easing.
The macro data pretty much confirm our view that economic growth did not reach a bottom in the second quarter as the consensus used to believe.
If anything, the economy seems to be worsening somewhat again."
Equity markets, energy and other commodities, as well as the euro, have enjoyed a nice early August rally, hoping the ECB and the Fed are both going to emerge with a bullish injection of funds. The Chinese economy too, they hope, will give the market a boost. Are the hopes and summertime dreams already priced in the markets?
For the euro versus the USD, it looks to us like the trade at 1.2440 may represent a swing high. We have chased out some euro shorts. Probably a little negative news will take the pair down to the 1.20 area.
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