Of all the potential market movers in this typically event-packed first week of the month, the biggest is arguably the one you won't hear anything about. So we've listed it first.
1. ONGOING EU DRAMA: DAILY VOLATILITY BUT CRISES PROHIBITED BY OBAMA
Remember, sometimes the biggest market movers exercise power by suppressing rather than causing great volatility.
As noted in our weekly review , the EU's continued aid to Greece despite numerous reasons not to do so seems to confirm last week's Reuter's report that the EU is essentially under orders from Washington not to allow any default threats until after the US November elections.
That means no matter how dire the headlines, nothing too unpleasant is likely to happen in the EU until after these elections. Given the potentially enormous costs to the EU and its leaders by continuing to fund Greece, never mind far larger economies like Spain, we assume the expected reward from Washington outweighs these costs, including:
- Additional funds lost in bad loans to Greece
- Additional funds at risk of loss from purchases of Spain, Italy and other GIIPS bonds even when these nations refuse to accept conditions which might give lenders hope of being repaid
- Moral hazard from funding nations that fail to make progress in cutting debt or making other reforms, which complicates getting other GIIPS to cooperate with existing bailout plans
- Risks to the long term reputations of EU leaders who are complicit in this Obama reelection plan if history shows they did nothing but dig themselves into a deeper hole
- Raising the risk of facing a far less sympathetic Romney administration in the event of Republican victory
Whatever the anticipated payoff from Washington, it must be considerable. US taxpayers beware. Again, if Romney wins, whatever anticipated favors will not only be off the table, but also EU leaders will need to pay up again to pacify a Romney administration with a grudge against them (albeit limited by the knowledge that bad news in the EU is bad news for the US).
In sum, Spain, Greece, et. al. could well provide scary headlines but are unlikely to be in real danger for the coming weeks.
As we've mentioned earlier, the biggest market mover may be this "keep quiet" order that prevents volatility that might otherwise have occurred.
Note however, that there's no guarantee that US and EU leaders can really control events or market sentiment even in the short term. In Spain's Catalonia region (which is a net revenue contributor to Madrid), there's 90% support for secession. At minimum they want an equal level of budgetary autonomy as that granted the Basque region. If granted, that alone creates an additional hole in Madrid's budget. However if Madrid yields, there are two other net revenue contributor regions that will likely want the same deal, further destabilizing Spain economically and politically. No wonder Spain's military is sounding restive about the need to subdue these movements.
So EU headlines retain the potential to override anything else that's happening, even the traditionally influential US jobs reports this week.
Moreover, even if quiet can be kept through November, EU default risks are likely to come roaring to the forefront again, so any calm in the EU is strictly for use by short term traders.
We find it hard to believe that the few remaining funding nations (Germany, Holland, Finland) will indefinitely accept endless bailouts or potential dilution of the EUR through unlimited money printing, or that the debtor nations will submit to years of increasing austerity and contraction. Even if the costs of exiting the EUR are high, someone's voters are likely to hit a breaking point and cause some degree of EZ breakup.
2. REVERSAL OF LAST THURSDAY RALLY BASED ON SPAIN BUDGET
Spain's budget announcement Thursday was initially greeted with enthusiasm as it appeared to demonstrate Spain's commitment to cutting its budget deficit and qualifying for a bailout that would remove default risk for the near future.
However by Friday many analysts were already noting that the budget was based on unrealistically optimistic assumptions about Spain's GDP declining by only 0.5% in 2013. For example
- BofA Merrill Lynch forecasts -1.7 % GDP
- SocGen expects -2.2 %
- Citi predicts-3.2 %
If these predictions gain wider acceptance, which is likely given Spain's history of dubious reporting standards, then disappointed markets could sell off on renewed anxiety that the ongoing game of chicken between Spain and the EU could resume, and Spain and possibly the EU, could collapse soon due to lack of bailout.
These could potentially be THE big market mover this week. Whether they are depends solely on whether they get wider acceptance.
Remember, the above Reuters report about Washington's "no October defaults" request is not widely accepted at this time, although the EU's continued cash aid to Greece regardless of Greek noncompliance, despite the significant costs noted above, certainly suggests that the Reuters report is valid.
3. US MONTHLY JOBS REPORTS: UNLIKELY TO CHANGE PICTURE OF STAGNANT US ECONOMY
If Europe stays quiet next week, these and the related reports (ISM Mfg and services PMIs, ADP NFP) that feed speculation about the final BLS reports Friday could move markets in general and almost certainly will move the USD, and thus also the EUR and most other major pairs, because the USD is the most common counterpart for most major and second tier currencies.
Speculation about the potential failure of the Federal Reserve and QE infinity will likely increase if job growth again falls below 100k as it did last month. The leading indicators available thus far for non-farm payrolls are equivocal. Consumers are bit more optimistic, but jobless claims have are rising and weaker manufacturing conditions are reported in many regions. For example on Friday manufacturing activity in the Chicago region dropped to its lowest level since September 2009, shrinking for the first time in 3 years. While there was some minor improvement in jobless claims last week, the 4-week moving average continued higher. Without that improvement in jobless claims, that moving average would be higher still. The NFP figure is expected to be around last month's levels-not great at all, in line with the generally stagnant US growth picture, which was further supported by last week's mixed data.
4-9. NUMEROUS CENTRAL BANK EVENTS: MAY BE INFLUENTIAL IF ABOVE ITEMS QUIET
Five major central banks will make potentially market moving appearances this week.
Four of them will be making monetary policy announcements: the Reserve Bank of Australia, European Central Bank, Bank of England and Bank of Japan. After having just announced additional monetary stimulus in September, no additional action is expected from the ECB and the BoJ. However markets have retreated after these announcements in a classic "sell the news" move (after having bought on the rumor of anticipated new easing over the prior weeks), so it will be interesting to hear what they say.
Here's what to listen for:
If the ECB and the BoJ focus on damage control and talk about how it takes time for the stimulus to filter down to the economy, investors will interpret this to mean that they aren't ready to do more, and that could hurt risk appetite.
However if they continue to show concern and stress that they haven't run out of options and their powers are unlimited, then their attitude of being ready to do more in should lift risk asset markets in general. While news of additional stimulus usually hurts a currency, it might ironically help the EUR because:
- It's a risk currency and so benefits from risk appetite.
- It's very survival is at risk.
- The EUR stimulus hasn't started, the Fed's has: For all the talk about the ECB's being unlimited, that program can't begin until Spain actually asks for a bailout, which it may not do for a while yet. Meanwhile the Fed is already actively easing and in theory diluting the value of the USD. Thus more easing for the EUR is unlikely to hurt it much versus the USD.
The Bank of England is moving towards increasing their own asset purchase program but we don't expect them to do anything in October. The same holds for the Reserve Bank of Australia, as neither have enough reason to rush into monetary easing.
However if Spain is downgraded by Moody's and that move sets off widespread volatility in the financial markets, then these banks might move faster in hopes of calming markets.
Also, Fed Chairman Bernanke speaks and there will also be a release of FOMC meeting minutes.
10. EARLY SPECULATION ON Q3 EARNINGS SEASON
Earnings season officially kicks off with basic metals bellwether Alcoa's October 9th earnings release, but that may not stop early speculation, especially given the negative tone of early guidance over the past month from other global sector leaders like Fedex (air shipping), or Caterpillar (heavy construction equipment).
11. US PRESIDENTIAL DEBATES
On Wednesday there will be the first of 3 scheduled debates between Obama and Romney. Obama currently leads in the polls. This might be market moving if Romney is seen as the winner and poll results show a tightening race, which means more political uncertainty on one hand, but on the other is an improvement for Romney, who is seen as more market-friendly, and more likely to resolve fiscal cliff issues if he brings Republican control of Congress.
12. OTHER ECONOMIC CALENDAR EVENTS
Here are just the most important ones that weren't mentioned above. For further details consult any good economic calendar like those of :
Top events to watch:
- Sunday: Japan Tankan large mfg index Q3
- Monday: US ISM mfg PMI survey
- EZ PPI for August
- Wednesday: EZ retail sales, US ISM non-mfg PMI survey, ADP NFP report
- Thursday: US FOMC meeting minutes release
CONCLUSIONS: 6 THINGS TO CONSIDER IN THE NEW ERA OF WIDESPREAD MONEY PRINTING
Despite the uncertainty, the most pressing investor dilemma is becoming more obvious than ever. Consider:
- In the past four weeks, we've had 4 of the top central banks opt for massive new money printing schemes.
- The BoE is likely to join them in the coming months, meaning that the 4 most widely held of the major currencies (the USD, EUR, JPY, and GBP) are now seeing dramatic expansion in supply. Historically this eventually leads to loss of purchasing power (aka inflation) and is a stealth tax on anyone whose assets are denominated in these currencies.
- Any near term solution for keeping the EU solvent is almost certain to involve even more money printing.
- The likely near term solution to the US fiscal cliff (cuts in spending and tax hikes due to hit at the end of the year) will be to simply defer it, meaning the US prints even more money needed to buy its own bonds to fund a still growing deficit.
- Devaluation Breeds Devaluation: As these currencies lose value, other export based economies will feel forced to devalue their own currencies in order to keep their exports competitive. The Swiss, Japanese, and now Chinese are actively intervening to lower their currencies. Expect others to follow.
- As we noted last week, the Fed appears willing to tolerate 3% inflation - a 30% per decade hit to your purchasing power and wealth. In other words, just to stay where you are, you'll need to increase your income and asset value by 30% every 10 years. With 10 year US notes yielding around 1% and incomes stagnant? Good luck with that.
For those with most of their assets denominated in one of the above currencies, or one of the export economy currencies likely to join the race to the bottom of currency values, there's no choice but to diversify your currency exposure. At minimum you reduce the loss of wealth from declines in your local currency. Ideally, you get assets denominated in stronger ones and benefit from their appreciation.
Everyone's Big Currency Dilemma: Can't Live With Forex, Can't Live Without It
While forex markets may seem like the obvious address, the usual forex trading methods are often too risky and demanding for most people. Much of the mainstream financial media rejects forex altogether for this reason.
So on one hand everyone needs to diversify currency exposure, but on the other the most commonly known forex trading methods aren't right for most people. Per CFTC reports, about 70% of traders aren't profitable.
It doesn't have to be that way. Forex is far too valuable a baby to toss out with the bathwater of ignorance, of the wrong information about currency markets and ways to trade them.
You Don't Even Need To Be A Trader
Here's one brief example of a relatively simple, low risk approach for long term investors who are not interested in trading currencies. If you have cash you don't need in the coming years, seek solid Canadian, Australian, and Norwegian dividend paying stocks. They'll provide not only steady income but do so in currencies likely to hold their value or appreciate versus most other major currencies. Unlike other nations with solid balance sheets (like Switzerland) they aren't actively trying to drive their currencies lower. I get into this topic in greater depth in the book.
Of course plenty of advisors recommend foreign dividend stocks. However few ever consider the critical currency component, which can turn a winner into a loser or vice versa. The book will show you simple ways for identifying the currencies to which you want some exposure, and how to find the right related stocks, bonds, or other asset types.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.