This Sunday begins the Jewish Holiday of Rosh Hashanah, which brings on a very solemn 10-day period of deep introspection as God judges the entire world for the coming year. So a very happy, healthy and prosperous year for all readers of Notes From Underground. Following the Monday and Tuesday’s days of reflection we come to the financial market’s judgement day, the Fed’s decision on interest rates. Let’s be as patient in reacting as the FED has been in raising interest rates. Will the FED act to raise rates and disregard all its fears of market turmoil? The FED has a poor history of making firm decisions in the face of creating violent market reactions. The Bernanke Fed failed miserably in an attempt to end QE, cowering in the face of the “taper tantrum.”
So many pundits have offered advice on what the Fed OUGHT to do–and rendered Chair Yellen speechless–for we have heard from every Governor and regional Fed President but not from Yellen. Today the airwaves were filled with Professor Larry Summers and his stance on the need for the FED to wait until there is a genuine threat of rising inflation expectations. CNBC had fund manager David Tepper on for an hour and in the pursuit of access journalism actually allowed the head of Appaloosa Finance to be heard. Mr. Tepper was not overly bullish the global equity markets and voiced concerns about the rise of wages in the U.S. as being a negative for American equities. This is a point I have discussed with Rick Santelli many times over the last two years so it was refreshing to hear Tepper raise the point to a greater level.
In fact, I wrote a blog more than two years ago about Janet Yellen not being a friend of Wall Street and equities because she would prefer rising wages to higher corporate profits–the ultimate stand for Janet in her role as a moral philosopher. (I do not disagree with the moral stance I just don’t want a FED Chair taking that as an open position). But David Tepper raised a more significant issue, which had to do with the ECB‘s QE PROGRAM. Tepper wanted to know how the Germans will react when the ECB runs out of German sovereign debt to buy and has to fulfill its QE program with greater amounts of Portuguese, Spanish, Italian and other sub-par bonds. (I would have included the French also but Squawk Box was running out of time.) The issue of a back-door bailout of the European periphery is going to be a serious issue for Europe and it was interesting to see Tepper raise it. That’s a true global macro trader.
While on the topic of Europe, the present situation of immigrant absorption is going to result in the revelation of deep fissures within the European Union. Germany has gained the moral high ground as it seeks to allow 800,000 immigrants into Germany this year, equal to one percent of its population. But what is good for Germany is not necessarily deemed a virtue for other European nations. The Eastern Europeans are balking at the economic and cultural costs of taking in a huge pool of Islamic immigrants for whatever reason.
The French have been charitable but with the French economy languishing under the burden of low growth and high unemployment President Hollande will have to be careful as any massive inflow of foreigners will play well for the xenophobic policies of Marie Le Pen. Spain and Italy have also voiced concerns about negative political fallout from being charitable during times of economic stress. Even Chancellor Merkel is getting pushback from members of her sister party, the Christian Social Union. Germany is in the best economic shape to absorb the political refugees but the outcome of this situation is far from settled.
***Back to the currency markets. In the Financial Times today there was an article titled, “Switzerland Keeps Fingers Crossed for Increase.” The article suggested that the Swiss wished the FED would raise rates so as “… to reduce the pressure and offer an eventual escape from the untested world of sub-zero borrowing costs.” SNB Chairman Thomas Jordan hints that normalization of U.S. rates would provide “… a light at the end of the tunnel.” This article is preposterous for the issue for the Swiss is not the DOLLAR but of course the ECB’s QE policy and its effect on the euro. If the FED raises rates and the U.S. dollar does not rally, the SNB is going to have an enormous problem on its hands.
In the present day-to-day regime of volatility the EURO/CHF cross has acted counter to market logic as the euro has actually gained against the SWISS FRANC and sits well above the 200-day moving average, 1.0734 (the cross is currently trading at 1.0979). This may be because of the SNB‘s intervention in the market and purchasing EUROs while the SNB‘s balance sheet grew by $9 billion last month. Regardless, the Swiss may be hoping for an event that will cause more pain than pleasure. The Japanese may be in the same mind-set as the Swiss in hoping that a Fed rate rise will put downward pressure on the YEN and ease pressure on the BOJ to undertake increased bond purchases. I believe that the Japanese were warned against further monetary easing at the G-20 meeting. The Chinese may have voiced their displeasure about YEN weakness versus the YUAN.
In Tuesday’s FT, Diana Choyleva, chief economist at Lombard Street Research, wrote an op-ed piece titled, “Positives of China’s Policy changes Make US Stocks A Buy on Dips.” Choyleva notes that the key economy to watch in regards to the Chinese efforts of weakening the YUAN is Japan. In regards to Abenomics, Choyleva notes that it is turning into a disaster.
“It has done little to stimulate domestic demand and the BOJ will be under political pressure to launch yet another round of QE. This would open a new front in the currency war and make it difficult for China and the U.S. not to respond.”
I think Kuroda and Shirakawa received this message load and clear at the G-20 meeting in Ankara. The first economic stimulus from the Japanese this week was about corporate tax cuts. Fiscal policy will become more important for the Abe team as the world wants less QE and the resulting currency depreciation.
If the FED raises rates, the YEN may weaken but it is not a sure thing because the FED has been warning of such for many months and the global currencies are all within their recent lows. The YEN is hovering at its 200-day moving average of 120.70, but it is already 13 percent lower from last September. The EUR/YEN cross is also at its 200-day moving average of 135.95 so the markets are positioned for a counter technical move off what may be deemed as a FED one and done. Many are offering opinions about the FED‘s possible actions but the markets are posed for all sorts of technical reactions.
***A quick reminder on the technical position of the global equity markets. In a piece prior to the August 24 selloff I warned that the world’s stock markets were finally all below their 200-day moving averages on a weekly closing basis. I noted that the synchronicity of that with a distribution market top in the SPOOS was the reverse of what stock markets looked like as all global markets made lows the first week of March 2009. The technical picture remains weak on a global basis which suggests all rallies, which be viewed with suspicion.
***Zero Hedge ran an article that India may consider the issuing of gold-backed bonds. Tip of the cap to Eric who sent me this the other day from the Indian financial news. Foreigners will not be allowed to partake in this monetization plan but it does open up the concept of others following the lead of India. Maybe Lagarde at the IMF could learn how to monetize its giant hoard of the barbarous relic. Even Italy and France could monetize their gold and relieve pressure from the ECB.