Beware Potential Potholes Stemming From Growing Global Currency Wars

by: Soos Global Capital
This article is best read as a supplement to my article entitled “Why I’m Concerned About a Near Term Pullback in Stock Prices”, an article on related topics that was published last week. In that piece, I painted the backdrop under which markets are operating, namely, a heightened level of overall risk largely due to the market’s recent euphoria with QE (quantitative easing) as a panacea for the economic woes of the US.
In addition, I pointed out that risk levels have also been exacerbated by the growing global “currency wars” which appear to be brewing and fostering unilateral actions that create potential potholes in the path of investors who don’t accurately anticipate the next country’s move.
This week’s combination of economic data, earnings announcements and geopolitical events are taking place as the market already, late last week, started to fade the recent hype on “QEffectiveness”. But that notwithstanding, the overall media and market commentary still connects a Fed move, or even Fed-speak such as we got this past Friday from Chairman Bernanke, as equated with the formula:

QE=>lower rates=>economic growth=>hiring.

As I’ve stated in last week’s article, it’s the middle causal effect that appears questionable, specifically:

will lower rates spark a velocity in money that will propel the turbines of the economic machinery? Or, rather, is our un- and under-employment situation so awful, that even lower interest rates will not restore consumer confidence to the point where borrowing and spending feels good again? And related to this point, is the employment situation so bad that risks of hysteresis prevail which would in turn require that the tail winds necessary to propel US economic growth be that much stronger?

Some of the answers to these critical questions might be provided in this week’s economic data, though even that is rather of the ‘lite’ variety. I’d suggest a look at key data providers who share market consensus views on upcoming economic data releases, such as Their expectations are as follows:

Date ET Release For Actual Consensus Prior Revised From
Oct 18 09:00 Net Long-Term TIC Flows Aug NA NA $61.2B
Oct 18 09:15 Industrial Production Sep 0.1% 0.2% 0.2%
Oct 18 09:15 Capacity Utilization Sep 74.7% 74.8% 74.7%
Oct 18 10:00 NAHB Housing Market Index Oct 13 13 13
Oct 19 08:30 Housing Starts Sep 550K 575K 598K
Oct 19 08:30 Building Permits Sep 550K 565K 569K
Oct 20 07:00 MBA Mortgage Applications 10/15 NA NA 14.6%
Oct 20 10:30 Crude Inventories 10/16 NA NA -0.416M
Oct 20 14:00 Fed's Beige Book Oct
Oct 21 08:30 Initial Claims 10/16 450K 455K 462K
Oct 21 08:30 Continuing Claims 10/09 4450K 4400K 4399K
Oct 21 10:00 Leading Indicators Sep 0.3% 0.3% 0.3%
Oct 21 10:00 Philadelphia Fed Oct 1.5 1.4 -0.7
Regarding two key pieces of data that will be watched closely, even if they are to show improvement, which does not appear to be the consensus as per the chart above, they would still have a long way to go before they indicate that the US economy is running on all (or most) of its cylinders. Take note ():

The earnings parade will continue in full force throughout the week, with Citigroup (NYSE:C), Halliburton (NYSE:HAL) and Hasbro (NASDAQ:HAS) among those leading the way on Monday morning. The list of reporting companies is quite neatly displayed on Some of the names that I will be focusing on based on my view of their overall market importance and based on my current or anticipated holdings include the names above, in addition to Apple (NASDAQ:AAPL), IBM, Bank of America (NYSE:BAC), Johnson & Johnson (NYSE:JNJ), Yahoo! (YHOO), Abbott Labs (NYSE:ABT), Stanley Black & Decker (NYSE:SWK), Xilinx (NASDAQ:XLNX), Caterpillar (NYSE:CAT), Freeport-McMoRan Copper & Gold (NYSE:FCX), Nucor (NYSE:NUE), Amazon (NASDAQ:AMZN), Exelon (NYSE:EXC), and Schlumberger (NYSE:SLB). This list is by no means all inclusive. Nor is it meant to reflect an endorsement of any kind of ‘buy’, ‘sell’ or ‘hold’ strategy. I’d recommend a look at the link (or comparable site) to identify companies whose earnings announcements are most relevant to each investor’s unique portfolio, financial profile and risk tolerances.
“Devalue-to-deter-deflation Conflagration”: With all the noise that each and every earnings announcement could make throughout the week, perhaps the most important event, in my opinion, will be the G20 Finance Ministers meeting at the end of this week in South Korea, a session in which we’d hope to see some news with regard to the global “currency war”. Each morsel of information coming out of those meetings is likely to be instantaneously reflected in currency, stock and bond valuations. As I indicated in the October 10 article “Positioning for the Week Ahead”, at that time with regard to the Washington DC IMF/G20 meetings:

…G20/IMF meetings could cause considerable market movements depending on whether “political will” manifests itself in the form of a multi-lateral program for dealing with competitive devaluations or in the form of a free-for-all where open warfare is the effective modus operandi for now.

I believe that some form of globally integrated approach to deal with the “devalue-to-deter-deflation conflagration" needs to be forthcoming from the G20 leadership….hopefully at this week’s meeting rather than waiting for the G20 Summit in November in Seoul, South Korea.
The earnings parade has its international counterpart, with many eyes likely to be on releases from Nokia (NYSE:NOK), Novartis (NYSE:NVS), Credit Suisse (NYSE:CS) and others.
In the UK, the government will release its spending review on Wednesday where the markets will get a close up view of the massive budget adjustments that are planned, with roughly 75% expected to come from spending cuts and 25% from tax increases. The UK will also release the minutes of the Bank of England’s September meeting in which markets will be looking for any evidence that QE is or isn’t a possibility.
Germany will release two sets of data, on Tuesday the ZEW Economic Sentiment index, and on Friday, IFO business sentiment index.
China will release its new "5-year Plan" on Monday. Markets will likely be looking for any indication about the country’s anticipated economic growth rates. The previous plan had a 7.5% annual growth target, and market talk seems to be anticipating a slight downward goal of 7.0%. China will also release Q3 GDP and Inflation data this week.
On the Asian earnings front, one highlight will be BHP Billiton’s (NYSE:BHP) release of its Q3 production numbers on Wednesday. This follows Rio Tinto’s RTP) release last week that showed very strong iron ore production numbers as the company aimed to take advantage of iron ore’s soaring prices.
For some comments on specific positions of interest to us this week please see Portfolio Thoughts: Awaiting Pullbacks, Avoiding Banks, Accumulating Cash.
Disclosure: Long: C, MMM, PBR, TEF, VOD, TEVA, DE, CAT, ABT, SWK, XLNX, NUE, EXC, SLB, SPX, FXI, EWG. NOTE: All countries mentioned in this article are or could be owned via ETFs. Companies listed in the article could be owned by client accounts. All assets mentioned in the article could be traded at any time without notice.

Note: This article is meant to contain thought provoking views and is NOT investment advice. As always, please read IMPORTANT DISCLOSURE INFORMATION by hitting this link to the "Soos Global Capital's Company" section of the Profile page.

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