An International Monetary Fund report today cut the global economic growth rate to 3.3%, the slowest since 2009. Unless measures are taken by the U.S. and Europe, they say the chances are "alarmingly high" that the slowdown will gain momentum. With unemployment in Europe at 11.4%, further contraction in the European GDP is expected.
This IMF report precedes a meeting of all 188 members in Tokyo later this week, so there will certainly be more reports from this group.
There was also a meeting of European foreign ministers in Luxembourg today, where they were trying to make the rules for a single bank examiner system in the eurozone. Little progress is expected on this project, but a combination of French and German support for a tax on stocks, bonds, and financial derivatives is making progress. Strong opposition does exist from the UK, Sweden and the Netherlands, but as many as nine countries may proceed without the dissenters.
Opponents of the financial transaction tax fear this will be a severe impediment to capital formation and trade. There are also fears this would also tax the forex trade, where the margins are extremely slim.
The largest meeting today is in Athens, between German Chancellor Merkel and Greek PM Samaras. There, about 6,000 police officers are confronting the largest group of rioters assembled in months. The unemployed -- 25% of the working population -- do have lots of idle time.
The timing of Merkel's visit is curious. Currently, the "troika" has been talking to the Greeks, trying to determine if they have complied with the austerity plans. The next tranche of the €130B bail out -- €31.5B -- is due by November, or Greece may become insolvent. Perhaps Merkel's trip is to prop up the perceived solidarity with the Greeks and their membership in the euro, but the mob in Athens is not getting the message, nor does it seem to be helping the euro.
Tomorrow is another busy day of meetings for the leaders of Italy, Spain and France. Equities and risk markets are unnerved with today's events. The pound and the euro have also felt the pressure.
Since August, we have been perplexed about the strength of the pound. Versus the USD, the pound appreciated from 1.55 to 1.63, and the open interest in the futures increased, becoming larger than the always popular aussie. In the latest COT report, we noted the long spec position in the pound futures exceeded 55K contracts. Since much of the build in the OI had occurred in the 1.61/1.63 area, we guessed there might be some selling under 1.60.
Today, we have taken out the 1.60 area and some initial stops. Part of the attraction for the pound is that it is not the euro. Money from Europe, as well as Russia and the Middle East, has been moving to London. With Hollande's new 75% tax on the big earners, there may be some movement from France to London as well.
The UK also grants big investors the right to live in Britain. For the past 20 years, if you invested £1M in gilts or British stocks, you were able to move to Britain. For the period ending in June of this year, over 400 investors took advantage of this feature. This capital inflow probably serves to partially offset Britain's negative trade balances.
On balance, however, we prefer to be a seller of the pound. The British austerity plan of higher taxes and lower expenditures is negative for growth. If we get a rebound back in the 1.6050/.6100 (UUP), (FXB), (GBPUSD) area we want to try the short side of the pound. As always, manage your risk.