Big Week, Big Decisions
(this is a live blogging entry, see updates below, all times are GMT)
Well, in case you had not noticed this is a rather big week in the markets so allow me to jump the bandwagon of market participants in dire need of some action after past's weeks calm before the tempest. I will consequently be featuring Alpha.Sources' first live blogging event which will take place in this post. Of course, I am rather busy this week too so I am not sure how much live blogging I will actually do, but do stay tuned anyway ... I might surprise you.
Speaking of surprises, the RBA initiated the central bank action by saying 'f'ck off, we can take it' to all actual and soon-to-be QE wielding central banks out there.
The Reserve Bank of Australia unexpectedly increased its benchmark interest rate on concern stronger growth will cause inflation to accelerate, driving the nation’s currency toward parity with the U.S. dollar. Governor Glenn Stevens raised the overnight cash rate target a quarter point to 4.75 percent in Sydney, saying the economy has “relatively modest amounts of spare capacity” and citing risk of “inflation rising again over the medium term.” It was the RBA’s first move in six months.
The move signals Stevens wants to avoid a repeat of 2007, when he held off raising rates for months as slowing inflation masked a buildup in price pressures. Growth in Australia, which skirted a recession during the crisis, may strengthen as energy companies such as BG Group Plc add construction jobs.
Now, on the basis of the economic dynamics in Australia I can see why this makes sense but in a global economy where the Fed, the Boj and soon, I think, the ECB are in full QE mode it takes a brave soul to go the other way and actually offer yield for all that leveraged carry that is about to flow Stevens' way.
Tuesday 08.22 AM - When Uncoordinated becomes Coordinated?
I thought that I would go a little further on the Bloomberg datastream; yesterday's piece by Scott Lanman and Simon Kennedy about the 33 hours of reckoning in which most major central banks will put their spin on the current situation in an uncoordinated fashion.
Federal Reserve Chairman Ben S. Bernanke’s push to jump-start the U.S. economy this week may weaken the dollar, forcing at least one other central bank to add its own stimulus to offset a rising exchange rate. Bernanke is set to embark on an unprecedented second round of unconventional monetary easing, one result of which may be a cheaper dollar that boosts U.S. growth by helping American exports. A related consequence: stronger currencies abroad, threatening European and Japanese expansion.
With the major central banks all announcing decisions within 33 hours this week, fallout from the Fed could cause Bank of Japan Governor Masaaki Shirakawa to do more for his economy and Bank of England Governor Mervyn King to leave the door open to more aid. Even as European Central Bank President Jean-Claude Trichet holds the line against inflation, he may eventually change course if the euro surges, while emerging markets are already acting to restrain currencies.
Now, one cannot help but feel that although this looks decidedly uncoordinated it has never been more coordinated. One of my friends yesterday linked this to the decision to enter Iraq. Now, I am not going to say whether I thought this was a good idea or not, but fact of the matter was that the US always had the means to do it themselves (with the coalition of the willing of course) and as talk got cheap in the UN, they simply went ahead and let the rest continue talking. You may not like this, you may even call it detrimental to world order, but this is what the US did. In a similar fashion the US economy now needs a weak USD and they need it in order to export because this is a fundamental prerequisite for a recovery in the US. So... Bernanke is going to make sure he gets and then it is thoroughly over to you Trichet.
Elsewhere, Karl Denninger has a good re-cap of Pritchard's latest Eurozone piece which I think raises a number of very interesting issues in the context of when the heck the Eurozone will wake up to the fact that not all bondholders can be made good here.
Tuesday 16.15 PM - Revisiting and old, but still valid, theme
Back from work (and a haircut, litterally!) I see that AUD/USD is flirting with the big "ONE" and so it should on the back of such contrarian and decisively hawkish (or bravely foolish?) messages from the RBA. Meanwhile, I thought that Team Macro Man's latest entry deserves a wider circulation since it latches on to the big structural theme of, with a lack of a better word, QE leakage which is basically finance speak for the huge global externality that arises from QE at the Fed, the BOE and the BOJ.
But the increasing meme of Asian inflation which was added to by the Reserve Bank of India citing food prices for its own hike overnight and the possibility of QE-leakage is all adding to our previously mentioned fears of asset bubbles in Emerging Markets.
TMM totally get the QE-leakage story in terms of capital flows into Emerging Markets, but the idea that EM rates markets will be bulletproof in the face of an inflation scare seems baloney to them. The flip side of the QE-leakage story is that inflation is fueled by attempted FX intervention and domestic money supply expansion. The RBI's, and the PBoC's, recent rate hikes merely signal further moves in this respect. It seems to us that the trade here is to pay rates in EM vs being long the currencies, rather than just sitting long of both the currency and the bonds on the "search for yield" argument. It's all looking a bit too much like 2006 in EM for TMM.
In a nutshell, either you understand just how significant this is or you don't. If it is the latter, you should not be in the financial services business (period!).
If we focus exclusively on the singularity of the Fed's QE one externality is indeed asset bubbles in EMs (and in Australia etc) and another is that as the USD goes down and as Asian currencies are not appreciating to reflect the inflows (i.e. reserve accumulation) so must Europe and Japan bear the brunt of the correction. And this indeed brings us back to 2006 with the talk of rebalancing occurring along the US v Europe/Japan axis. Sorry, but it won't happen like this.
As for them mid terms, it is still early day in the US and we are just gearing up. It looks as if the Loonie, erm sorry, Tea Party holds the upper hand and that Mr Obama will take a beating. But we will see. Here is the Economist with an analysis that still looks good I think.
Wednesday 20.30 PM - As expected (and more?)
As it turns out this is not the best of weeks for live blogging here at Alpha.Sources since I am away from my computer a lot this week. Anyways, the Fed has delivered (sort of) and the butcher's bill stands a 600 billion worth of treasuries according to the latest news in off the tapes.
The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation. Policy makers, who said new purchases will be about $75 billion a month, “will adjust the program as needed to best foster maximum employment and price stability,” the Fed’s Open Market Committee said in a statement in Washington. The central bank retained its pledge to keep interest rates low for an “extended period.”
So far, it is having the expected effect with yields taking a dive and the SP500 flirting with 1200. On the currency front the AUD/USD is holding water above parity and the EUR/USD is steadily grinding above 1.41. So the markets got what they wanted, now let us see how much longer we can keep this rally going.
Thursday 18.30 PM - See no Evil, hear no Evil
Perhaps I should just let rewamp this live blogging entry and insert two charts of the USD and SP500 going ever downwards and upwards respectively. As such, the market continued to be QE2 mode today;
Stocks surged, sending the MSCI World Index to a two-year high, and commodities rallied after the Federal Reserve announced plans for more bond purchases and earnings beat analyst estimates. The dollar sank and two- and five-year Treasury yields touched record lows.
Indeed, the SP500 raced above 1200 to reach 1215ish and the USD hit fresh new lows. So, all is good then, but one still wonders whether this isn't a case of see no evil, hear no evil. Oh and if you a real cynic, Phillip Davis should be your port of call.
There is a scene from Doctor Strangelove where Major Kong, the bomb commander, is so focused on completing his mission that he loses sight of the bigger picture but he doesn’t regret his actions – he goes down in a blaze of glory that ultimately dooms the world, but his sense of personal triumph at achieving his wrong-headed goal is the punctuation for the film. Watch this scene and think of Bernanke, tinkering with this or that but so focused on "fixing" the economy with the one tool at his disposal that he ends up destroying it instead.
See no Evil?
Friday 20.20 PM - The End
Today, I learned that a peripheral, but good, acquaintance of mine has sadly passed away this week. My thoughts go out to his friends and family. In that vein I shall not say a lot more this week about markets and economics.
I would simply note that with employment numbers and, indeed, consumer credit numbers coming in much better than expected, we are getting set for a push towards 1250 on the SP500 and 1400 in Gold. Note though that the EUR/USD got a beating today reflecting the problems in the Eurozone at large. Perhaps, and ironically so, it is the USD which will soon hold Old Maid once again despite valiant efforts by the Fed to pass the buck.
See you next week.