In day one of the world held hostage, the FED‘s QE2 program proved a great success. The dollar declined. Commodities soared. Metals shined. The equity markets took its newfound wealth effect in full stride. And the Treasury market rallied. Even though the 30-year bond is not a major component of the FED‘s purchasing program, it too rallied strongly as the sub 2.5 percent yield on the 10-year note sent investors further down the curve looking for a little more yield. The FED got all the bang out of the “wealth effect” that it could as investors around the world have realized that their “cash was nothing but trash”–exactly the outcome the FED is looking to achieve.
Many of the G-20 nations were critical of the U.S. action and we will look to see what type of aftershocks this QE policy will create. The Brazilians were very critical and it was announced that LULA will attend the G-20 with the newly elected Brazilian President Dilma Rousseff, a very unusual action. Many Asian nations were also upset and as we wrote yesterday, the G-20 will turn into a bashing session against the U.S. ECB President Trichet seemed to be the only player without harsh words for the FED. At a news conference after the ECB rate meeting, Trichet said he didn’t believe that the U.S. was trying to weaken the DOLLAR. While at the same time his compatriot Sarkozy was setting up meetings with Chinese leader HU on the issue of creating an orderly global monetary system. So much dissension in so little time.
The weak DOLLAR is not only causing stress in the EMERGING economies but the peripherals in Europe are beginning to feel the pain. Ireland is under great strain as its economy is suffering from the austerity budget implemented last year. IRISH BONDS went out to record-high differentials against German bunds as investors are nervous about a default or a restructuring. LCH.CLEARNET, a large European BOND clearing house, told members that they may have to provide a 15 percent haircut on Irish debt as they are worried about a government action that affects Irish debt. The Irish budget has led to a classic negative feedback loop as a slowing economy send the budget deficit higher as tax revenues shrink as unemployment rises. In an accurate assessment of the Irish situation, David Begg from the Irish Congress of Trade Unions is quoted in tomorrow’s Financial Times:
“We have tried austerity and it just hasn’t worked. … There have been three deflationary budgets that have taken 14.5 billion euros out of the economy and the result is clear: unemployment has almost tripled, the deficit is actually bigger than when we started and the cost of borrowing is at record levels. How could that be interpreted as anything other than failure?”
This, my dear readers, is the paradigm of a NEGATIVE FEEDBACK LOOP and YET THE DOLLAR GOT SLAMED HARD TODAY. How much more are the U.S. global partners going to accept? If the intention of the U.S. administration is to cause enough global pain to force China to restructure its economy this game will be a mess my the time it concludes. All the news reports have the anger directed at the U.S. as a major currency manipulator, so there is a lot more acrimony to come at the G-20.
TOMORROW is unemployment data day in the U.S. and Canada. Now that the FED has preempted the data with the FOMC meeting this week, I find this release to be a non-event unless the number comes in more than 300,000. The market is looking for non-farm payrolls of 80,000+ and most of that from the private sector with little to no hope from government. Hours worked is thought to be steady at 34.2 and average hourly earnings to increase 0.2 percent. It would take a huge increase to move the DOLLAR. I say that because with the FED locked in at low rates for a long period, if economic growth were to truly pick up the U.S. may be deemed to be an investment locale as holders of those depreciating sought an outlet for their TRASH. Strong foreign currencies do make for cheap U.S. assets, but I stress that growth would have to pick up significantly.
Canada also reports and their numbers will be more interesting as it will reflect global growth similar to the Aussie numbers. The market is looking for a rate of 8.0 percent and job growth of 15 ,0000. The September data from Canada was tepid so it will be interesting to see if the economy picked up the pace. The impact of the depreciating U.S. DOLLAR has ignited a commodity boom that plays well to the strength of the Canadians. So at the end of it all the news is all HUEY LEWIS with Ben Bernanke singing lead. We have gone from Maestro to lead singer in a rock ‘n’ roll band.
Tags: Bond, Brazil, China, Commodities, Dollar, ECB, equity, Fed, FOMC, G-20, Hu Jintao, Irish, LCH.Clearnet, Lula, metals, Nonfarm Payroll, QE2, Rousseff, Sarkozy, Treasuries, Trichet, unemployment
November 5, 2010 at 4:09 am |
Execellent post!
November 5, 2010 at 5:29 am |
thank you Arthur–
November 6, 2010 at 6:59 am |
Dear Yra,
Is it possible that QE 2.0 will have the exact opposite effect on the USD that everybody’s looking for, i.e., the value of the USD will rise? I’ve been trying to figure out could work but have yet to create a working theory. I always return to the yen and how it strengthened in the face of quantitative easing.
November 6, 2010 at 6:39 pm |
Scott–good points here .As I alluded to in the notes piece the Dollar coud strengthen if the jobs data improved quickly as foreign owners of depreciated dollars would seek to put their assets back to work in the U.S.;many assets in the U.S. are cheap and especially for those whose curriencies have appreciated agains the dollar.Foreigners are way under invested in the U.S. equities as they have found other avenues for their wealth.Japan is a difficult story as a tremendous amount of yen was invested all over the world and as the Japanese economy turned down much money was brought home to support corporate balance sheets and household spending.The Japanese had a huge pool of savings to rely upon which cushioned the effects of the depression–also Japanese bonds were the best safe haven as inflation based returns were very high as prices went negative.Because of the huge pool of savings the BOJ was forced to protect the savings of Japanese citizenry—in the U.S. the problem as I have continually stressed is just the opposite.We are a debt laden society and inflation solves a great many problems and that is a huge difference
November 7, 2010 at 12:15 pm |
Yra,
I’m relatively new to trading, two years or so playing the most difficult game in the world. I first read about you in a book that profiled various traders, Inside the house of money.
Thanks for all the insight, I am learning quite a bit by keeping up with your perspectives on global macro flows.