The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
Posts Tagged ‘BOE’
Notes From Underground: Friday Is the All-Important U.S. Employment Data, But Why Was European Employment Glossed Over?March 7, 2013
The February jobs data has been compiled and is now ready for public consumption. The consensus is for 165,000 (revised upward from 160,000) nonfarm payroll jobs being added and the rate to hold steady at 7.9%. This may be a difficult number to trade because the equity markets have already sloughed off so much negative news to keep the rally in tact–Italian elections, sequestration and economic malaise throughout Europe. The weekly jobless claims numbers have surprised on the downside during the last few weeks so a 200,000 NFP number would not be a surprise. It will be more important to watch average hourly earnings and the length of the work week–earnings are expected to be up by 0.2% per hour.
Tomorrow the Bank of England (BOE) and European Central Bank will grace us with their interest rate announcements. The BOE is expected to hold overnight rates at 0.5% and to keep the QE program at its present level of 375 billion pounds. The current weakness in the British pound will keep Governor Mervyn King from tampering with present policy, and, with a new Governor of the BOE in July, it makes no sense to expend any type of easing before the change of leadership unless some new crisis emerges. Current BOE policies and renewed weakness in the British economy have driven the EUR/GBP rate to 15-month highs, thus putting the pound in the middle of the “currency wars.”
Today, French President Francois Hollande called for a managed currency rate for the EURO. It seems that the French are now concerned that the euro is too strong for its fragile economy. The problem is that as long as ECB President Mario Draghi is happy with a stronger euro the French are in a difficult situation. I have argued that a “strong” euro placates the German hard money crowd. All of the ECB‘s monetary policies have stabilized the break-up risk of the EU while not subverting the currency’s value. Mario Draghi can tell the Germans that his policies are being supported by the market and thus keep Bundesbank President Weidmann at bay. While the BOJ, BOE and the FED have had to actively enact QUANTITATIVE EASING, the ECB has actually seen its intervention contract as money has been paid back and collateral returned. (See last week’s repayment of the LTRO funds.) While the YEN, POUND and DOLLAR have been sold by the market, the EURO has attained star status.
First and foremost: Notes From Underground has become a global community and the outpouring of support and condolences to my family has been phenomenal. Again, my heartfelt thanks to all who expressed such wonderful thoughts.
Much has transpired since last Sunday as the Swiss franc and the Japanese yen have continued their recent weakness as intervention with the intention of forcing the YEN and FRANC lower have been very successful. Also, as usual, I will poke at this weeks circus in Davos, Switzerland. From my perspective, the entire conclave of insider trading–as the rich and business elites gather to discuss ways to save the world–in the last 20 years are a direct result of the political and economic movers and shakers exchanging ideas in the Swiss Alps. Yes, we go from crisis to crisis.
Thursday brings the announcements from two of the major rate setters in Europe: the Bank of England and the European Central Bank. First the BOE will announce at 6:00 a.m. CST and consensus says the bank will keep rates steady at 0.50% and the QE program at 375 billion pounds. Though the U.K. economy is soft, Governor Mervyn King will maintain a steady path so to keep his options available in case the global economy begins a new downturn. The present BOE head is retiring July 1 so it would be prudent to let his successor have as many tools to work with in a new regime.
Mario Monti upset the Italian credit markets as he announced his early resignation over the weekend. In an apparent fit of rage after Silvio Berlusconi (aka Captain Viagra) pulled his political support from the sitting prime minister, Mario Monti headed off to the opera in Milan and apparently he was the fat lady that sang. It was a Wagner Opera that Mr. Monti saw so it seems that the political drama playing out in Rome is going to be a long, drawn out affair. I believe that the present Italian PM played a political gambit by announcing his early resignation in an effort to reveal the markets lack of support for the return of Berlusconi. As the Italian bond markets sold off and yields on 10- and TWO-YEAR NOTES increased by more than 25 basis points. It seems that there is little support from the financial markets for a return to the buffoonery of a Berlusconi-led government.
Due to the availability of virility enhancers, the Italian political arena is plagued by billionaires who still believe they remain relevant. The ability to sustain an erection does not make you politically astute. Today’s effort by Silvio Berlusconi to undermine the Monti government led to a selloff in the Italian debt markets which caused 10-year rates to rise 13 basis points. Mr. Berlusconi didn’t want to bring the present government down but merely wanted to exhibit his relevance to the Italian political establishment. What the Greek debt problems couldn’t do, a 76-year-old man with a bottle of Viagra was able to accomplish. Elections are going to be held soon and the Monti coalition will be called to account. Now with all the problems confronting the peripheral governments the attempts of a disgraced former prime minister to prove his manhood is just an exhibition of the absurd. Pay no attention to the man with unnatural bulge in his ego.
The world awaits a resolution from the fog of U.S. budget battles. The negotiating table was left in a further haze by Secretary Geithner’s comments. In no uncertain terms, the point man for the Obama administration made it “clear” that the White House will let the economy go over the proverbial cliff if tax rates are not increased on the nation’s wealthiest two percent. It is not a good negotiating tactic to back your opponent into a corner from which there is no escape. Immediately after the Geithner comments to CNBC’S Steve Liesman, legislative Republicans responded in a very negative fashion. If the negotiations are mere theater then let the economy feel the brunt of mandated austerity and the STOCK MARKET BE DAMNED. Best economic and budgetary policy cannot be made solely for the sake of saving the equity markets. Bad fiscal policy destroys wealth and jobs anyway so it may be better to push an economic downturn to finally get everybody focused on a genuine long-term reform.
The weekend news was rather sparse as the Greeks got their trust fund check from the overlords in Brussels. The Greeks need to be leery of Eurocrats bearing gifts. The Sunday news shows in the U.S. highlighted the vast chasm between Speaker Boehner and Secretary Geithner. There was finger-pointing all around about as to which group was holding up the negotiations as to affect genuine compromise and a resolution to the fiscal cliff. As the rhetoric heats up, the S&Ps and global stock indices all closed higher on the week, showing that the price action speaks louder than words. The market has fears that failure to resolve the fiscal crisis will result in a new U.S. recession and will also undermine the global economic recovery, but yet the COPPER closed above the 200-day moving average for the first time in many weeks. Other industrial metals also performed well last week making me wonder if all the fiscal cliff rhetoric is missing some larger picture. We will watch to see if the COPPER can sustain its recent strength or whether we are in the midst of a short covering rally.