In post-Memorial Day trading the BONDS had a large selloff as yields on long-term debt rose dramatically. The U.S. DOLLAR followed the rate increase and rose against all major currencies. Let’s reflect: Equities are impervious to rising long-term interest but the DOLLAR attracts foreign investors in search of a little more yield. The fact that the short-end of the curve is anchored by the FED, the result is that the 2/10 U.S. yield curve is steepening and actually made 52-week highs today as it rose to 186 basis points. The STEEPENING YIELD CURVE is aiding financial stocks. The 2/10 has increased to 184 from 145 basis points during the last three weeks, which has helped banks and other financials to pick up 40 EXTRA POINTS in yield by selling the short-end and buying the longer end. This is an interesting situation for usually steepening curves will put pressure on a currency.
Posts Tagged ‘Mark Carney’
Notes From Underground: The Markets Are Reacting to Rising Interst Rates, While Equities Continue to Roll On (And Fed Anticipates a Roll Off)May 28, 2013
The last two days has seen two of the world’s key central banks deliver fresh interest rate decisions and there was very little in way of surprises. In a salute to the philosopher Isiah Berlin, I have noted that Chairman Bernanke is a HEDGEHOG and President Draghi a FOX. A hedgehog is one who “views the world through a single defining idea.” The economy is slowing, unemployment is high, inflation is low, so it is appropriate for the FED to buy and continue buying Treasury debt. You say it is not having the desired effect? Buy more. In yesterday’s FOMC statement, the FED noted that ”… FISCAL POLICY IS RESTRAINING ECONOMIC GROWTH.” The meaning of this is that Washington is acting irresponsibly, thus the FED needs to possibly INCREASE its bond and mortgage-backed securities purchases. Whatever it is, QE IS THE ANSWER.
What ailed the markets yesterday seems to have moved to the back pages and the equity markets recovered most of their losses. Gold and silver staged very tepid rallies considering the massive selling that took place during the past week. The global equity markets are still comfortable with central bank policy and even a terrorist attack on U.S. soil cannot shake of confidence of investors seeing high profits, low inflation and no alternative to the returns on equity. It is an old theme but when a market continues to discount unfavorable data and news the power of momentum is in full bloom.
Today, ECB President Draghi spoke to the Frankfurt Chamber of Commerce and proclaimed that the DARKEST CLOUDS OVER THE EUROZONE HAVE PASSED. Yes, since the July 26 pronouncement that the ECB would do anything to preserve the euro and its financial system–and also there would be “no taboos” on what the ECB could utilize to save the euro. The markets have certainly quieted, as has been reflected in the Italian and Spanish debt markets, as well as the equity markets across the European Union. In my opinion Mr. Draghi should not put away his boots and umbrella as some clouds may have passed but the radar is citing other severe fronts. President Draghi added in the Reuters piece: “But there is simply no alternative to the path of reform. Despite the good progress so far showing that adjustment is happening, reform efforts need to be sustained …. Countries need competitiveness to sustain growth.”
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.
As the sun sets on the Greek drama, the most predicted outcome has indeed taken place as the IMF/EU and ECB/EFSF/ESM have come to an agreement about bringing the Greek debt load to a robust level of 124% debt-to-GDP ratio by 2020. There was no way the TROIKA was going to risk the entire EURO project on a mere 44 BILLION EURO payout to the Greek government. The game was played out to the 11th hour–oh those drama queens in Brussels–and although the OFFICIAL SECTOR did not take an official haircut, the core nations of the European financial system do stand to take a bath. IMF Director Lagarde was able to save face as the Greek debt levels will reach the previously promised levels of 120%. Madame Lagarde can now go to the IMF Board and report that all previously agreed to conditions have been ratified by the EU and await the signing of the memorandum of understanding with the Greek leadership. The IMF needed to get Greece out of the way so it can figure out the role it will play in the Spanish bailout and/or Italy.
***The Canadian situation became more muddled today with the release of its GDP. BOC Governor Mark Carney and FM Flaherty would love to raise rates in an effort to halt the rise of private debt, but today’s GDP showed a 0.1% decline in growth for the month. It is a real dilemma as the strong Canadian dollar is impacting some sectors of the economy and thus a rate increase to stem credit growth will have a strengthening impact. The GDP release blamed the slowing global economy for the downturn but it has not impacted domestic credit growth because of ultra-low rates. How will the Canadians solve this dilemma as it wants to slow the housing sector to help forestall private loans? This conundrum will test Carney’s position as a leading central banker. Let’s watch to see if it is possible to head off asset appreciation without causing system wide economic pain. Greenspan and Bernanke claim it is not possible. Governor Carney, here’s your chance to help set central banking on a better course.
Yesterday, the Bank Of Canada surprised no one as Governor Mark Carney held rates steady at 1%. The BOC statement also maintained last month’s idea that “over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2% inflation target.” The Canadian dollar rallied on the news as it seemed that the market thought the statement would be more dovish following Carney’s comments of October 15, but instead it was steady as it goes. Today, Governor Carney held a news conference and the headline put out by the news services was “Case For Raising Rates ‘Less Imminent,’” which of course led the programmed headline algos to sell the Canadian dollar because of the “dovish headline.” The press conference was so much more than that and really reiterated the BOC statement and reflected the dilemma that the Carney faces in trying to curb private credit growth in a low interest rate world. Nonetheless, the market currency markets kept the pressure on the LOONIE so a risk-off profile was maintained.
Notes From Underground: Tomorrow, the BOC Will Shine Some Light on Its Plans to Deal With Private Sector Debt GrowthOctober 22, 2012
The Bank of Canada has been the most responsible actor on the global financial scene for the last six years. The Canadian banking system for the most part avoided the credit splurge that led to a collapse bubble and came though the Great Recession relatively unscathed. The Canadian federal government has a debt-to-GDP level of 34% and a very comfortable trade situation. There is, however, a problem of private debt growing too fast as the BOC has maintained very low interest rates to combat the fear of global recession. BOC Governor Mark Carney is a very astute global economic observer and also serves as the Chairman of the Financial Stability Board, which is the macroprudential advisor of global banking. Mr. Carney would like to curb the borrowing of Canadian citizens but raising rates is a difficult proposition because of the current strength of the Canadian dollar.
The tweet heard ’round the world is as meaningless as most of the other rubbish that passes for political discourse in the Grand Republic. It seems that Jim Cramer had it right from the beginning for traders and investors. The only thing that matters is how the markets accept the jobs data and what will its impact be on asset prices going forward. The market is definitely in the mindset of weighing the data in a “more good is good and bad is bad” mode.