It seems that we have covered the major themes ad nauseam–European debt, U.S. fiscal cliff, Japanese lethargy in confronting an overvalued currency, Chinese slowdown–and the list goes on and on. Today, the IMF let loose a report that detailed the need for Europe to deleverage its banks to the tune of a possible 4.5 TRILLION EUROS. This is not the aid and comfort that a financially stressed European economy needed. The pains of austerity will be minimal compared to the massive selloff of what ever assets will be dumped on the market. Government retrenchment coupled with private sector rebalancing will undoubtedly lead to a new thrust downward in the adverse feedback loop. The significance of the yield curves will be a critical indicator as the quarter begins to reveal all of the potential hazards with which the global financial system has to contend.
Going forward, look for:
- The IMF to be looking for a more active role in dealing with the European financial sector;
- Tonight, the Brazilian Central Bank lowered its lending rate to a record low of 7.25%. The leadership of President Dimla Rousseff has shown that is serious about creating a domestic-based manufacturing sector. She not only called the FED’s QE policy a currency war, but has shown a willingness to fight its self-described currency war with full financial force. The Brazilian interest rate cuts and tax on foreign deposits have led to a 15% depreciation of the REAL versus the DOLLAR. The problems of a growth-constrained world will continue to place pressure on the emerging markets to control against currency appreciation.
- The U.S. fiscal cliff is awaiting a LAME DUCK Congress. The political machinations of confronting the “CLIFF” will continue to plague the markets as today we got a peek as Senator Schumer muddied the waters of negotiation by ruling out lowering the tax rates while dispensing with many loopholes. A New York Senator worried about losing the tax deductions of high state and city income taxes. The battle of fiscal cliff will begin and markets will be rattled as the vested interests attempt to protect their most favored tax deduction status.
Enjoy the calm for winds of financial storms are just beginning to gain force.