The unemployment was right on the market forecasts, except that the unemployment rate rose to 7.9%. In this world of central bank activism, tepid economic performance is what the global equity markets desire right now as deleveraging continues to plague the world’s developed economies. The moderate unemployment numbers–with some upward revisions to the two previous months job growth–allowed the U.S. S&P and DOW JONES equity indices to rally to five-year highs. Those who continue to argue that the PE ratio is high are missing the point: How do you value any asset class in a zero interest rate environment? Again, a global financial system awash in liquidity is an anomalous situation in which it is more than difficult to measure valuations based on historical levels. The FED wanted investors to enhance their risk profiles and that is certainly being accomplished.
Posts Tagged ‘British pound’
The tale of the first quarter tape is in and evidenced by the large gains of the equity markets, global investors have benefited from the sea of liquidity provided by the CENTRAL BANKS OF THE DEVELOPED WORLD. Global stock markets have been calmed by the massive liquidity injections provided by the BOJ, ECB, FED and BOE.The German DAX closed the quarter up more than 15%. The long dormant NIKKEI was up almost 20% powered, by the new inflation mandate of the BOJ/MOF; and, of course, the S&Ps were up almost 12%, while the tech-ladened NASDAQ climbed more than 20%.
Thursday, DECEMBER 8 will it be a day that lives in INFAMY. The Bank of England will be the first mover tomorrow morning as the BOE announces its interest rate policy at 6:00 CST. It is expected that Mervyn King will direct the MPC board to keep rates steady and to keep the QE program at its present 275 BILLION POUNDS. At 6:45 CST the ECB will announce what it plans to do amidst the turmoil. Most analysts expect a 25 basis cut as Mario Draghi undoes the second inane rate increase promoted by Trichet. The more important factor will be if the ECB announces some type of ECB large-scale asset program in an effort to mirror the FED and BOE.
The weather outside was frightful, but it was nothing compared to the frostbite that all the DOLLAR bulls were subjected to as analyst after analyst laid out their bullish DOLLAR scenario. U.S. assets are very attractive so the foreign buyers are going to be pouring money into the U.S equity markets and all sorts of other investment venues. Today was a perfect example as CNOOC announced it was taking a small stake in Chesapeake Energy projects in Colorado and Wyoming. Foreign companies are searching for U.S. assets as are the sovereign wealth funds, but the inflow of cash into what could be perceived to be strategic assets is much smaller than it ought to be because of the fear of CFIUS.
Money that would be coming to the U.S. economy is fearful that many possible deals will be blocked under the guise of national interest as we saw in 2005 with the CNOOC -UNOCAL deal and then again with Huawei-Palm. Dollar bulls have not gotten the burst that they have hoped for because of “regulatory” interference. It seems to have gone unnoticed but the President’s SOTU address made no mention of reining in the CFIUS group and its nefarious effect on the use of foreign capital to aid U.S. competitiveness. It will be interesting to see if the oversight committee that is under the authority of the TREASURY DEPARTMENT moves to block CNOOC‘s small stake in Chesapeake’s energy projects.
If Treasury continues to block certain foreign acquisitions, lobal investments will find other opportunities in more welcoming environments. DOLLAR bulls need all the help they can get for it is hard to be bullish while the FED is actively maintaining QE2. Every fundamental bit of positive news in the U.S. still has to overcome a historically steep curve and its implications.
Tonight we will hear from the RESERVE BANK of AUSTRALIA on its interest rate decision. The consensus is for no change in rates, leaving it at 4.75 percent. As always, the Bank’s statement will be an interesting read as Governor Stevens provides the markets with his view on the global economy. Also, we will wait to see if the bank discusses the economic impact of the flooding in Australia and hopefully removes some of the present uncertainty that is overhanging the market.
One of the most interesting moves today was the strong rally in the BRITISH POUND. Readers of NOTES FROM UNDERGROUND know that I don’t believe in fighting market action. After reading Mervyn King’s speech again today, I find it difficult to see how the market thinks the BOE is going to raise rates. I’m struggling to ascertain if POUND strength is indicative of overall DOLLAR weakness as the market is searching for all alternatives. If the previous weakness in the POUND is correcting due to rising exports? Or, is the market providing us with a selling opportunity as it tests some level of resistance? I’m not a technician so I advise for all those as skeptical of the POUND to do your work and find the trade that provides the lowest level of risk. If the POUND is rallying on the back of expected rate increases, I must have read a different Mervyn King speech, for I fail to see the possibility of a rate rise in the near term. And, the fact that the 10-YEAR GILT is near its recent lows just does not provide a bullish backdrop for the POUND.
The U.S. 10-YEAR NOTE has added 70 basis points since Jackson Hole and yet the DOLLAR is 7 percent to 8 percent lower, the argument of a rise in long rates supporting a currency doesn’t hold. Again, let the market be your guide and be prepared in your work.