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Stocks Appear Topped Out As Currencies Rise And Dollar And Treasuries Fall Lower As Fears Of US Government Shutdown Grows

Financial Market Report for April 6, 2011

1) … Stock charts suggest that the stock market has topped out on rising world currencies and fears of a US Government shutdown
The failure of seigniorage is emerging again as the operative means of turning stocks and junk bonds, and US Treasuries all lower. The world is passing from the Age of Leverage, Freedom and Prosperity … and into the Age of Deleveraging, State Capitalism And Austerity.
Transportation, IYT,

Dow Industrial, DIA


Emerging Market Small Cap, EWX

Gold Mining Stocks, GDX. The chart of gold mining shares relative to the 30 Year US Government Bond, $HUI:$USB,  communicates that risk capital has expanded all it can to produce gold based upon the current level of US Sovereign Debt … $HUI;$USB.

Russell 2000 Growth, IWO,

Morgan Stanley Cyclical Index, $CYC,

Junk bonds, JNK,

World Shares, ACWI,

Biotechnology, XBI,

Nasdaq Biotechnology, IBB

Consumer Discretionary, VCR,

Retail, XRT,

Small Cap Pure Value, RZV,

Small Cap Financial, RWJ,

30 Year US Government Bond, EDV,  

The chart of World Shares Relative to World Government Bonds communicates that seigniorage of the neoliberal Milton Friedman Free To Choose global economic, political and investment ecosystem failed February 22, 2010.

Vivien Lou Chen of Bloomberg reports on the failure of seigniorage, that is the exhaustion of Quantitative Easing:  “The Federal Reserve’s ‘highly accommodative’ monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1% soon.  ‘Once again there are signs that the world is building new economic imbalances and inflationary impulses,’ Hoenig, the central bank’s longest-serving policy maker and the lone dissenter at Fed meetings last year, said… ‘The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth

Financials moved higher as world currencies rose today which sent the US Dollar plummeting.   

European Financial, EUFN, +1.9%, Banks, KBE, +1.6, Financials, XLF, +1.0, Emerging Market Financials, Financials, +XLF, 1.0

Brazilian Real, BNZ, 1.4
Australian Dollar, FXA, 1.1
South African Rand, SZR, 0.9
Euro, FXE, 0.8
Swiss Franc, FXF, 0.7
Commodity Currencies, CCX, 0.5
Emerging Market Currencies, CEW, 0.5
Swiss Franc, FXS,0.4
Canadian Dollar, FXC, 0.4
Indian Rupe, ICN. 04.
British Pound, FXB. 0.2
Mexico Peso, FXM, 0.1

Chart of Commodity Currencies, CCX, 0.5

Base Metal Commodities, DBB,

Brazilian Real, BZF, -0.9
Japanese Yen, FXY, -0.7

Gold, GLD, 0.2
Silver, SLV, 0.7

Brazilian Small Caps, BRF, -2.1%

US Dollar. $USD, -0.5% to close at 75.54

Perhaps one might enjoy my chart site … The Seigniorage Of Quantitave Easing Has Failed .... A Bear Market Is Underway

2) … Today’s News Courtesy of Gary Between The Hedges and Bloomberg

Euro Rallies Before ECB Meeting; Dollar Declines to Record Against Aussie. The euro advanced to its highest level against the dollar in more than 14 months on speculation the European Central Bank will increase borrowing costs further after raising its target lending rate tomorrow. The greenback dropped to a record against the Australian dollar and the lowest level versus the Canadian currency in more than three years on the view the Federal Reserve will trail other central banks in boosting interest rates. The yen tumbled against all of its major counterparts on bets the Bank of Japan will expand economic stimulus as the nation recovers from its worst earthquake on record. “It’s a combination of the market expecting the ECB to hike tomorrow and the generally positive environment for risky assets,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York.

Portugal Finance Minister Calls for European Assistance, Negocios Reports. Portugal needs to ask the European Union for financial assistance, Portuguese newspaper Jornal de Negocios reported on its website, citing Finance Minister Fernando Teixeira dos Santos. “It’s necessary to resort to financing mechanisms available in the European framework in the appropriate terms for the current political situation,” Teixeira dos Santos said in a response to questions from the newspaper, Negocios reported today on its website. The comments mark the first time that the government has said it would need to seek aid.

Cuomo Repeats Threat to Dismiss 10,000 N.Y. State Workers. Governor Andrew Cuomo, who produced New York’s first on-time budget in five years last week, is standing by his threat to fire almost 10,000 workers unless they agree to provide the state with $450 million of savings. Labor contracts that increased state workers’ pay almost 14 percent over four years expired March 31, 10 days after formal negotiations with unions began. Cuomo has said he spoke with labor leaders about his goals before talks started. “Negotiations are ongoing and obviously if we don’t reach an agreement, we would need to proceed with layoffs,” said Joshua Vlasto, a spokesman for Cuomo, in a telephone interview today. Cuomo, a 53-year-old Democrat, reached agreement with top lawmakers March 27 to close a $10 billion gap in the $132.5 billion budget

3) … In other recent news

Anabela Reis of Bloomberg:  Portugal reported a budget deficit of 8.6% of gross domestic product last year, missing a government target of 7.3% and causing a jump in borrowing costs that increases the risk of a bailout.  The agency also revised the 2009 budget gap to 10% from 9.3%

Kellie Geressy-Nilsen and Lynn Cowan of Dow Jones:  “Wall Street borrowing ballooned during the first quarter and equity issuance ran at a high seasonal level in a sign corporations are feeling more comfortable with the economic recovery.   Borrowers tapped the high-grade market in near record numbers during the first quarter, with nearly $275 billion of U.S. marketed investment-grade bonds sold during the period. And stock issuance during the quarter ran higher than normal, with companies raising $77.1 billion, the largest first-quarter amount since 2000, according to Dealogic.

Darrell Preston and Aaron Kuriloff report on municipal debt used for sports and entertainment leagues:  “Harris County-Houston Sports Authority bonds that financed venues for the Houston Texans and two other sports teams have fallen as much as 34% amid speculation the agency may default on bond payments.

Stephen Moore of the Wall Street Journal reports on state and municipal government employment:  “If you want to understand better why so many states—from New York to Wisconsin to California are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million).  This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.  It gets worse.  More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined.  We have moved decisively from a nation of makers to a nation of takers.”

Jason Webb and Lilian Karunungan of Bloomberg report on emerging market bonds:  “Emerging-market borrowers completed the busiest ever start to a year, selling $195 billion of bonds on international markets to secure funding while interest rates in the U.S. and Europe stay at all-time lows.  Governments from Turkey to Hungary and companies including Banco do Brasil SA boosted offerings above last year’s record for a first quarter by $23 billion.“

Doug Noland of Prudent bear editorializes on QE2 at the beginning of Quater #2, 2011: “Examining recent corporate debt issuance, stock prices, M&A, and global risk asset prices generally, there is a case to be made for a sustainable expansion cycle.  On the other side of the ledger, moribund housing and mortgage Credit, along with vulnerabilities in municipal finance, point to ongoing system Credit stagnation.  Total bank Credit contracted during the quarter, and most likely total mortgage debt posted little or no growth.  And in the midst of booming debt issuance, it is worth nothing that, at $46.4bn, first quarter muni debt sales were only about half the year ago level and the lowest amount since Q1 2000 (Thomson Reuters).

It’s been my view that the power of QE2 was not so much with the $600bn.  It was, instead, that the Fed was right there guaranteeing more than ample marketplace liquidity at the first sign of market tumult.  It was the markets’ perception of “Systemic Too Big to Fail” – confirmed, just as the markets expected.  And why not speculate on risk assets, assured that central bankers would be quick to bolster the markets at the first sign of trouble?  Why not, especially appreciating that Fed interventions would both add liquidity and pressure the dollar – bolstering a powerful Monetary Process now deeply entrenched in traders’ psyche.  Why not just ignore risk and speculate, emboldened by the reality that systemic fragilities ensure a potent punchbowl filled to the brim.  QE2 was one more in an ongoing series of mistakes by our central bank.

As we begin the second quarter, it’s increasingly difficult for the Fed to ignore mounting inflationary pressures.  Commenting on tame “core” CPI is not going to resonate.  Yet, as a committee, they surely will disregard inflation and cling closely (as Mr. Dudley did this morning) to their “full employment” mandate.

Still, some Federal Reserve Presidents and governors are growing uncomfortable with a prolonged loose policy stance.  There will be louder talk of the inevitability of rate increases – and some will push for the unwind of QE2.  I doubt the market will be all that intimidated by the prospect of a few little Greenspan-style “baby-steps” commencing sometime near year-end.  It will, however, be a different story if this idea of the Fed liquidating QE2 holdings gains momentum.  Especially after the QE2-induced inflation of global risk assets – and with massive Treasury issuance as far as the eye can see – the marketplace will become only more sensitive to potential liquidity issues going forward.  QE2 makes it quite difficult for the Fed to now reverse course and attempt to normalize market liquidity and market perceptions.

I’ll assume the Fed will attempt to pull back on liquidity operations, while at the same time working to ensure the marketplace that its liquidity backstop support remains very much in place.  And we’ll soon have the vantage point of press briefings in which to view this juggling act.  From reading and listening to comments from some prominent (“hawkish”) members of the Fed, it seems that they are clearly more focused on inflation risk and much less wedded to a liquidity backstop function than Team Bernanke/Dudley.  Today was the first day of what will be an intriguing quarter for our central bank.”