Mr. Obama Moves The Market
By TheLFB Trade Team | Published on April 1st, 2009
Overall: The reason for the strong sell-off in the last 30 minutes of trading on Wall Street yesterday was made apparent a bit later when the financial press reported that President Obama said that a quick, negotiated bankruptcy is the most likely way for General Motors to restructure and that he was prepared to let Chrysler go bankrupt and be sold off piecemeal. That sent S&P futures sharply lower (off 7 points initially) and prices on the currencies towards the bottom of trader’s computer screens. The trend continued until reports on U.S. pending home sales and manufacturing indicated better-than-expected results.
Signed contracts for existing homes increased by 2.1% in February (Expected 0.2%, Previous -7.7%) according to the National Association of Realtors and the ISM’s index of manufacturing (Actual 36.3, Expected 35.8, Previous 35.8) implied that the steep declines in the sector were abating. Stocks basically rose right from the open and were reaching their highest levels of the day to 14:30 EDT.
The Euro (Eur/Usd) declined about 70 pips to near the 20-day simple moving average as S&P futures declined. Rising U.S. stocks could not however help the single currency in N.Y.as traders speculated that the ECB will make a 50 basis point reduction of its main policy rate to 1.00% and could also announce it will turn to purchasing corporate debt (a form of quantitative easing) as a means to provide additional liquidity into the system.
The unemployment rate in the Euro-area continues to rise. The latest release, for the month of February, shows that the unemployment rate reached 8.5%, more than was expected. The unemployment rate for the month of January was also revised higher, to 8.3%. About 13.486 million persons were unemployed in the Euro-area, up by 319K from one month earlier. The PMI release shows the euro-area manufacturing side of the economy has contracted for ten consecutive months. The release number of 33.9 is slightly smaller than analysts’ expectations of 34.0.
The Pound (Gbp/Usd) tested the low of Tuesday’s trade during the Asian session as S&P futures declined. However, the pair reversed direction and recovered the lost ground during the European trading hours, and the trend continued into N.Y. as stocks advanced. The pound has risen almost 1% against the dollar in the past month after the BoE announced the unprecedented step of printing money to buy government and corporate debt as part of its quantitative easing policy.
The U.K. Manufacturing PMI unexpectedly rose in March, after posting the second weakest read in its recent history, in February. Despite the better than expected read, weaker global demand still outweighs any benefit from sterling’s fall against major currencies, and domestic conditions were especially poor due to the crises affecting car making, construction and retail.
The Aussie (Aud/Usd) traded mixed during the overnight session, near the neutral pivot point (0.6885), after falling 50 pips in the early Asian session. Clear resistance was established in N.Y. at the .6959 level.
Retail sales in Australia have decreased by 2.0 percent in February which is higher than analysts’ forecasts of a -0.5 percent decrease. This is the largest decline seen in the retail sales report in the past 12 months. Over half of the Australian economy is related to consumer spending. The building approvals from Australia rose a seasonally adjusted 7.8 percent, month over month, in February. This is the first increase seen in the index since June 2008
The Cad (Usd/Cad) advanced 100 pips during the Asian session as S&P futures declined, but shed most of the gains during the European trading hours as crude declined in Globex trading. The pair reversed course in N.Y. after the weekly crude inventory report showed stockpiles built by 2.5M (Expected 3.1M, Previous 3.3M), with clear support established at 1.2620.
The Swissy (Usd/Chf) retraced a big part the declines seen in the last day of trading during the overnight session and the trend continued in N.Y. as stocks advanced. Resistance was met at 1.1506 by mid-day.
The Purchasing Managers Index shows the industrial sector contracted in Switzerland for the seventh consecutive month. The PMI number was released at 32.6, as expected. The Swiss PMI confirms that the economy is taking a similar path as the Euro-area and the U.S. economies, which are in recession. The index sits at multi-year lows, showing that inflationary pressures are almost zero.
The Yen (Usd/Yen) started the Asian session in volatile fashion, but soon lost most of its momentum as S&P futures declined. The pair was very up and down in N.Y. as it did battle near the 50% retracement of the August 15, 2008 decline.
The Tankan business confidence survey, which includes some of the largest companies in Japan, has fallen to a new low of -58. This is a sign that the country may be in for an extended recession as companies cut jobs and limit spending. Japans exports plummeted in February by 49.4 percent as consumers worldwide curb spending.
Dollar Index Unmoved By Equity Markets
The markets on Wednesday have put in a strange phase of forex trade and are not in sync with the equity market optimism that has sent Wall Street dramatically higher in morning trade. The moves that have the dollar holding ground on a day of fundamentals, that would generally have seen it getting sold, may be attributable to the Treasury markets absorbing the impact of the Federal Reserve’s open market operations. The result has seen the yen tread water, the euro and swissy lose ground, and aussie, cad, and cable push near-term resistance; none of which have the momentum to actually break through and hold.
“The euro may be holding things back in regard to ease of the market being able to break the dollar lower, and that may be due to positioning ahead of the ECB rate decision due on Thursday” said TheLFB-Forex.com Trade Team members, “The expectation is for a 50 basis point cut in rates, something that built dramatically over the last week in response to jawboning from ECB officials who have reversed completely their public outlook on rates not moving after their March meeting. The euro makes up 60% of the dollar index and as such the short positions being built into on Eur/Usd may be impeding the other pairs ability to break near-term resistance”.
It is unusual to see triple digit Dow Jones gains and not to see a reaction in forex valuations, but today the push-me pull-you moves in the equity/Treasury/euro markets have contained things. Market participants may now be looking for break-outs of the daily ranges as the Nymex oil markets close at 14:30 EDT, and also looking for price action in the Asian markets overnight.
“The Australian Trade Balance numbers are released overnight, and that sets up Thursday’s U.K. House Price Index, the start of the G20 meeting, and then the 07:45 EDT ECB rate decision” the Trade Team said. “Friday gets wrapped up in the Non-farm payroll circus that is coming to town, with ring-master Mr. Bernanke speaking to the masses soon after. Things may get to trend after the upcoming week of data, and the signals are there that the status quo may not last too much longer, and with the Fed’s determination to de-value the Usd it may be that the dollar index tests support at the 80.00 area”.
“A dollar index move to support would equate to an average of 400 pips of gains on each of the major pairs, something that right now looks unlikely to easily happen; but we have to always respect the market’s ability to move at the most unlikely and unexpected of times. We have been banking short-term moves so as not to get caught on the bigger break-out that looks as though is not whether it comes, just when. Nobody really needs to get in front of the Fed at this point in time, not when they have all guns blazing”.
Price Points: Cable Long 1.4450. Euro Long 1.3250, or Short 1.3190. Swissy Long 1.1520, or Short 1.1450. Aussie Long from 0.6970. We have no bias on cad or yen at the moment.
Financial Sector: Greenspan Debates
The long-held view of former Fed Chairman Allan Greenspan regarding the Fed’s inability to deflate an asset bubble has always been open to debate, and no more so than since the bursting of this latest one. The problem is that the economic system’s procyclical tendencies where not directly under the control of the Fed, mainly because the Central Bank exerts its greatest influence on the shorter end of the yield curve.
“There has never been an instance, of which I’m aware, that leaning against the wind was successfully done,” Greenspan, 83, said in a Feb. 27 telephone interview.
Procyclicality has to do with the ability of financial institutions to lower the cost and expand the amount of credit available as the economy is overheating, the exact opposite of what a Central Bank would like to see happen. In this last instance, the explosive growth of securitization had the effect of lowering long-term interest rates as asset prices were bubbling, a situation which was, according to Mr. Greenspan, out of the Fed’s control.
One reason the Fed lacked the ability to control the situation was because regulators did not have the authority to require banks to take increased reserves (in percentage terms) against the loans they were writing beyond what the normal requirements were. Forcing banks to hold a higher percentage of capital in reserve would have naturally had the effect of making less cash available. For example, the Basel II requirement is only an 8% reserve against loans and there are no provisions in the agreement to raise the percentage as the portfolio of loans increases.
“It has always bothered me that our capital requirements are so low,” Greenspan said. “We do not have an adequate cushion.”
But it wasn’t only the large commercial banks which were providing the capital this decade. Mark Gertler, a New York University economics professor who has collaborated on research with Fed Chairman Ben Bernanke, points out that leaving investment banks essentially unregulated even as they held mortgages and issued short-term liabilities like commercial banks was a big part of the problem. Once the ability to roll-over short-term debt ended as housing prices started to decline, the game was essentially over.
“The first-order cause of this crisis was the regulatory system was way out of whack,” Gertler said. “It’s not the case that you can get at this alone with interest-rate policy; it really requires smart regulatory policy.”
If you really want to trace the cause of the crisis, one needs to look at the massive current account imbalances which built up this decade as huge exporters such as OPEC and the Chinese sold their goods to voracious U.S. consumers. A current account surplus is a form of national savings, because it represents that the population of the surplus country isn’t consuming anywhere near what consumers in the current account deficit nation are.
This “savings glut” was a key for the asset bubble in the U.S. and elsewhere as China parked their enormous holdings of foreign reserves, which were and are held mostly in dollars, back into the U.S. in the form of Treasury purchases. Their holdings in U.S. debt helped to keep long-term interest rates low and flooded the market with cash, exactly at the time that demand for credit was soaring.
In essence, the supply-demand equation was skewed. The price of money (interest rates) declined and the availability (supply) of it went up as demand increased. This is procyclicality in action.
The situation we have now in the recession is the exact opposite; counter cyclicality. The supply of credit has decreased and the cost of credit (at least until the Fed really got into the situation) increased as demand waned.
Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com
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