Global equity markets were battered for another day as investor fears continued to outweigh any desire to add risk to portfolios. All U.S. data releases were better than expected and even auto sales proved to be a million more units above consensus on an annualized basis. The equity markets did try to rally but the attempt was short-lived and by market’s end the selloff was greater than 2.5%. Commodities were soft and the DOLLAR continued to rally on its haven status. The BOND market saw the impact of the “TWIST” as it is now October and the SOMA (SYSTEM OPEN MARKET ACCOUNT) began its work on affecting TREASURY DURATION.
Thirty-year bonds continued their flattening versus the 10s and certainly against the entire curve. This move in the 30-YEAR is making the pricing of all risk very difficult and more importantly has led to a massive flattening of the curve. The 2/10 curve has approached the 150 basis-point level, which is historically a healthy curve. However, with the banks under duress, the curve flattening is certainly hurting the earnings of the banks. The FED may well have outsmarted themselves, especially if the lower yields on the long end do nothing to alleviate the problems in the housing market. Europe continues to plague the credit markets and is causing investors to harness their animal spirits and seek safety. Ben Bernanke, what do you say about the “PORTFOLIO BALANCE CHANNEL” now?!?
Quick Hitter #1: Tonight we get the interest rate announcement from the RBA. Market consensus is calling for the Aussies to hold rates at 4.75% but NOTES FROM UNDERGROUND BELIEVES THE AUSSIES WILL CUT. The Aussie central bank is one of the better indicators of the global economy and with all the fears of a coming slowdown they will look to get ahead of recessionary fears. And the Aussies have room to do it as they were the first central bank to begin raising rates. RBA Governor Stevens is a very astute observer of the China economy and its impact on commodity prices.
The resulting collapse in copper and steel prices is indicative of China demand slowing, which will give the RBA cover to cut rates. If the rate cut comes, have your support levels in place as the recent rapid decline in the Aussie may provide a short-term buying opportunity. The AUSSIE CROSSES may be the better place to participate as the AUSSIE DOLLAR has weakened on the CROSSES so be prepared for movement that is not U.S.-DOLLAR-based. The announcement comes at 10:30 CST.A lso giving cover to the RBA is that another aggressive anti-inflation central bank, the Bank of Israel, which cut rates by 25 basis points last week.
Quick Hitter #2: Later in the week the BOE and the ECB will reveal their interest rate intentions. It is too difficult to judge the ECB as it is an extension of Trichet’s EGO so the bank ought to cut rates. (Although I doubt Trichet is capable of such an act of humility.) The BOE will be more interesting in that Mervyn King has recently been raising fears about a severe global slowdown on the horizon. The BOE may not cut rates from its present 50 basis points but it would not surprise me if the BOE moved to increase its QE BOND BUYING TO 250 BILLION POUNDS FROM ITS PRESENT 200 BILLION POUND CEILING. The Monetary Policy Committee (MPC) has room to be aggressive for the POUND has been relatively stable to strong against everything but the DOLLAR and YEN, so as John Mayall would say, THEY HAVE ROOM TO MOVE.
Quick Hitter #3: Building upon yesterday’s blog, Professor Rogoff has a piece in tomorrow’s Financial Times, “2012 Portends Even Greater Turmoil and Instability.” Kenneth Rogoff adds more weight to the DEPRESSION discussion as he looks at the U.S. Presidential election and its impact upon economic stimulus. Also, Professor Rogoff points out that France, Germany and other nations will also be heading into elections, and, thus, looking to stimulate their economies for the benefit of election outcomes. “ORDINARILY, A PROSPECTIVE CLUMPING OF ELECTIONS MIGHT PORTEND A CLASSIC POLITICAL BUDGET CYCLE.”
This is the nature of Nixon’s famous line, “We are all Keynesians now.” Nixon was the master of pump priming in a “timely” fashion and all following presidents have utilized his playbook. The problem is that the markets are in an Austrian deleveraging cycle, leaving policy makers dazed and confused. Mr. Bernanke, your turn.