Overview: US stocks closed modestly higher yesterday, Asia fell in the final hours to close mostly down, and European bourses are lower on a combination of cautious remarks from Bernanke yesterday on the US economy and both Spain and Belgium being placed on negative credit watch over the past 24 hours.
These bearish news items have drowned out overall positive economic reports yesterday including better than expected German ZEW sentiment and US retail, PPI, and inventory data that feed the ‘slow but steady’ recovery thesis.
Moody’s says Spain’s Aa1 bond rating under review for downgrade, though notes it doesn’t believe Spain’s solvency is under threat, no need for EFSF bailout fund. News sinks EUR, boosting USD. The problem is, as we’ve seen with Greece and Ireland, once confidence gets shaken yields can climb dramatically and place countries in trouble within a month. The big question, after similar warnings on Belgium from S&P, how much bond buying is the ECB prepared to do? Perhaps more importantly, how much troubled EU bond buying do bond markets THINK the ECB is prepared to do?
By leaving its current bond buying policy unchanged, the FED allowed markets to continue to believe that the anticipated stimulus from coming tax cuts could ultimately reduce FED bond purchases. That allowed T-bonds to continue to slide and push rates higher. Those are bad for stocks, good for the USD. US data of late has also been overall supportive of the US Dollar, including Tuesday’s solid consumer spending (confirming Monday’s better than expected UoM consumer confidence) and rise in producer prices (PPI).
Wednesday’s economic data contains another series of key releases that could confirm the upbeat theme for US data, including; November CPI, industrial production, Empire State manufacturing, home builders, and TIC data. Should the net result of these releases come in on the better side of expectation, we could continue to see additional broad based USD buying on a rising expectation of US recovery and thus interest rate increases that make the USD more attractive.
STOCKS: US Up: US stocks lost most of their earlier gains in the final hours yesterday to close with only modest gains, after another spike in US Treasuries yields after the FED left its bond buying program unchanged. That killed hopes for a halt to rising bond yields, which hurt stock prices.
Rising bond yields mean rising borrowing costs which hurt corporate earnings and are very bad for rate sensitive sectors like real estate, banking, and other industries that depend on cheap credit in order to prosper.
As we noted yesterday, many were hoping the Fed would talk up bonds in order to drive down rising bond rates. Instead, by leaving bond buying unchanged, markets believed we’d have continued rising bond rates that bring rising mortgage and other borrowing costs that are bad for earnings in general and potentially disastrous for the real estate sector and thus banking too, which gets hurt in 2 ways by rising bond yields.
Processing new mortgages are a key source of bank revenues, and applications a have already fallen badly with rising bond rates over the past month (see our weekly market movers article).
Rising rates also raise the foreclosure rate as a massive wave of mortgages are resetting to new and increasingly higher rates in 2010-11. The last time this magnitude of resets to higher rates hit, we got the subprime crisis, which ultimately was the catalyst for the current global economic downturn.
For a worst case scenario view of how this might play out read: 10 Signs That Confidence In U.S. Treasuries Is Dying And Financial Armageddon Approaches
US Bonds: Down- 10 Year Treasury Notes fell again Tuesday, raising the 10-year yield from 3.28% to 3.4550%, as the Fed announced no change to its bond buying program, dousing hopes for additional support for falling bond prices as noted above. Bond prices have been falling early November. For an explanation of why that’s been happening and why it is likely to continue, see our special report just out : Why Bond Yields Rising And Ramifications For Forex Stocks Commodities: A Quick Review
Asia Stock Outlook: Down – Most indices reversed course in the final hours and closed lower. Both Shanghai (-0.54%) the Hang Seng (-1.95%) were down, though the Nikkei had only a fractional (-0.09%) loss
European Stock Outlook: Down – European indices opened lower and remain so after a lower Asian close, cautious remarks from the US Fed Chairman Bernanke about the US economy, and the Moody’s placing Spain on negative credit watch a day after S&P announced a similar move regarding Belgium.
Ramifications for Forex: Clear bias to safety FX. USD, CHF strongest over the past 24 hours, USD, CHF, JPY strongest thus far Wednesday.
DISCLOSURE & DISCLAIMER: AUTHOR SHORT EUR FOR PERSONAL PORTFOLIO, THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY AND NOT TO BE CONSTRUED AS SPECIFIC TRADING ADVICE. RESPONSIBILITY FOR TRADE DECISIONS IS SOLELY WITH THE READER