WARNING: Put on your life lines, foul weather gear and be ready for the boom to come flying about (thanks Whitewave). There are violent winds blowing in the financial seas as equity markets are giving warning that something is amiss. The 200-day moving averages for the DAX, CAC, Nikkei and SPOOS succumbed to selling pressure in synchronized fashion. The Dow Transportation Index looks atrocious, especially when viewed in terms of the steep drop in energy prices. Lower fuel costs are historically a boon to trains, planes and automobiles and most especially trucks. Lower fuel costs lead to increased profits for freight haulers (h/t American Limey and Professor Waspi).
The large mining companies are under duress as their previous buying spree has left Glencore, BHP and FCX laden with debt as raw material prices are cascading lower. The credit default swaps of mining firms are pricing in a very negative credit event. It is a reminder that as real estate is location, location, location, financial markets are debt, debt, debt. The U.S. corporate balance sheets have replaced equity with debt as CEOs and CFOs have engineered P/E ratios by borrowing money for stock buybacks. The FED cries for more inflation, as does the ECB and BOJ and others but the global economic decline is creating more slack in the world economy placing increased pressure on wages and profits.
Tomorrow the Bank of England and the Swiss National Bank will announce their interest rate policies. The BOE will hold the line on rates at 0.50% as the continued strength of the POUND versus the EURO will hold Governor Carney’s concern on inflation well below 2 percent. The British POUND has recently lost 3 percent to the EURO but for the YEAR THE POUND HAS GAINED 8 PERCENT ON THE EUR/GBP CROSS. The Brits’ largest trading partner is the EU, therefore Carney will remain cautious.
Consensus also indicates the SNB will hold the line on its deposit rate at NEGATIVE 75 basis points. The Swiss recently revealed that their foreign reserves had increased another 11 billion francs as the SNB has been INTERVENING in the currency markets to keep the FRANC from appreciating against the EURO. In the 11 months since the SNB devastated the currency markets by removing the 1.20 EURO PEG, the FRANC has been trading in a very tight range of 3 percent versus the EURO. But it has taken more EURO purchases by the SNB to keep the Swiss franc from appreciating and being a further drag on the Swiss economy.
IT WOULD NOT SURPRISE ME IF THE SNB LOWERED ITS LIBOR RATE TO NEGATIVE ONE PERCENT OR MORE OR ELSE PUT A SURCHARGE ON FOREIGN ACCOUNTS TO TRY TO DISSUADE HOT MONEY FROM USING SWITZERLAND AS A SAFE HAVEN. While Draghi supposedly disappointed the markets on Thursday, it may be a good time for the Swiss to surprise the markets. Last year, December 18, the SNB announced negative rates of a range of 25 to 75 basis points in an attempt to preserve the PEG. Could they provide another surprise tomorrow?
***This afternoon, the Reserve Bank of New Zealand lowered its Official Cash Rate by a quarter of a point to 2.5%. Most importantly, Governor Graeme Wheeler noted that “the rise in the exchange rate is unhelpful. Further depreciation would be appropriate in order to support sustainable growth.” This is more proof that central banks are targeting currency levels in maintaining a “silent” currency war. The problem for the RBNZ was that the market had fully expected a cut in the OCR so the market result was that the KIWI rallied 2 percent versus the U.S. DOLLAR and more than 1 percent versus its main trading partner, Australia. Look to hear more talk from Governor Wheeler in an effort to stem any sustained rally in the KIWI, especially as New Zealand’s dairy exports have experienced downward price pressures and a decline in foreign demand.
***Question to ponder for political economists and global macro traders: Is U.K. Prime Minister David Cameron joining the French against ISIS in an effort to have the French support British efforts to gain some ground in Cameron’s politicking to lessen the EU laws on funding for immigrants? Cameron has promised U.K. citizens a referendum on the EU and with an OUT vote a possibility, Cameron is trying to shore-up support for a British IN.
The British elite want the benefits of the COMMON MARKET and the political prestige of the EU and have never wanted a referendum for fear of a popular backlash accounts the insanity of Brussels laws and regulations. A BREXIT is a genuine possible outcome so Cameron is willing to BOMB ISIS FOR THE QUID PRO QUO OF FRANCE AIDING BRITISH EFFORTS TO LESSEN SOME OF THE SEVERE EUROPEAN LAWS THAT THE BRITISH DETEST.When in doubt, enter foreign intrigues. Political Science 101.
***Another question to ponder: Will NATO risk war with PUTIN to aid Turkey and its enigmatic leader Erdogan? If the answer is NO, then NATO as an multi-party alliance will be over in 2016 and Putin will have had his revenge on the organization for meddling in the politics of Russia’s near abroad. The Ukraine will be sacrificed as maybe the Baltic States. The Turkish shoot-down of a Russian Jet will be the greatest Christmas gift that Erdogan could have given Vladimir Putin. Just putting out things that the world will face in 2016. Volatility lurks where equity fear to price it in. There will be more to follow over the next few weeks in Notes From Underground where 2+2=5 is also a beautiful thing. (Thank you Fyodor Dostoyevsky.)