Trichet said today that the ECB purchasing of European sovereign debt was not quantitative easing. Our only respone is similar to Bill Clinton’s: fellatio is not sex.
Now that the Europeans have indulged in a massive liquidity injection, we want to look at the implications for the rest of the world. Trichet continues to maintain that the weekend agreement was not similar to the action of the FED, BOE, BOJ or the Swiss National Bank. Pardon Mr. Trichet, but the gold and currency markets vociferously disagree and we accept the COLLECTIVE WISDOM of the MARKET rather than the MARKET WISDOM of the COLLECTIVE.
Gold has traded to new highs as the EURO trades below last week’s close, which makes us wonder what the ECB and Eurocrats are going to do next. Besides gold being a recipientof this “non QE,” the equity markets have rallied as they sense that central banks will remain easier for longer than previously supposed, thus making equity markets the recipient of historically cheap money. We know that the S&Ps and other equity indexes ran into heavy resistance today but we must remember that they have still had a significant rally for the week. Will cheap money overcome the stronger DOLLAR and the rush for financial regulation and tax increases? That is the dilemma for the equity markets going forward. Keep your technicals up to date as we will probably trade support and resistance very frequently, as volatility has increased due to massive government intervention in the markets.
One country suffering under the European debt crisis is Japan. The MOF and BOJ appear to be on the same page in thinking that the YEN needs to be lower to help offset the deflationary winds that are again buffeting the Japanese economy. The YEN is again the recipient of the risk off-trade, and even more troublesome, the YEN has also received support as global investors look for alternative currencies to the EURO. Japan gets a vote of confidence from the global community because it is stable and the world’s third largest economy. We believe that the Japanese are again going to suffer from the bad policies of Europe. Back in 1987 when the LOUVRE ACCORD was put in place, the G7 nations agreed not to raise their rates even as economic growth increased, so as not push the DOLLAR lower and start a cycle of rapidly raising rates. It was followed until the Germans unexpectedly raised rates in early October 1987, which broke the agreement. The markets crashed as they worried about a race to higher rates but through the entire period Japan honored the ACCORD and wound up with an out-of-control bubble, which led to the eventual lost decades of the 1990s.
Japan is again going to bear the burden of Europe as the YEN goes higher relative to other currencies, threatening any recovery. The EUR/YEN cross has been the weather vane of global risk, but we believe that relationship broke down several months ago as the S&Ps-EUR/YEN diverged. The S&Ps rallied to their most recent highs while the YEN crosses did not get close to the previous highs. We don’t believe that the Japanese authorities can tolerate this recent YEN strength, so we will be on the watch to see what official action we will get from them. The sun rises in east but will all other things continue to rise there too?
Tags: BOE, BOJ, Dollar, ECB, Eur/Yen, Euro, Fed, MOF, SPS, Yen
Leave a Reply