While we’re waiting for the outcome of the Spanish election, I am setting the stage for a larger piece on the market reaction to a high frequency political event. There is a continuing rebuff to the global elites that only reside in their own echo chamber, much of it promoted by the established media. It’s amazing how the policy makers want to believe that the people cannot see behind the curtain. BREXIT was first and foremost a Dorothy/Wizard of Oz result.
Posts Tagged ‘Swiss Franc’
This is a week loaded with data. The U.S. retail sales numbers are reported tomorrow and it will take a tremendous increase in consumer purchases to put any pressure on the June FOMC meeting to raise rates. Currently, the market consensus is for a 0.4% increase in core sales and I would venture a guess that it will take an increase of more 1.0% to move the needle on any talk of June being on the table. There are several British inflation numbers released tomorrow morning but with the Brexit vote next Thursday and a Bank of England meeting this Thursday there will be no change in BOE policy. Wednesday of course brings the FED and again the retail sales number would have to be very robust to move the FOMC. It ain’t going to happen. Wednesday night and Thursday morning brings the Bank of Japan and the Swiss National Bank into focus. These two banks are more interesting as the recent strength in the Swiss franc and the Japanese yen provide some rationale for each of these banks to increase monetary stimulus to drive the respective currencies lower . However, both the BOJ and SNB will be careful not to roil the markets ahead of the BREXIT vote. Yet the Japanese seemed to be perturbed over the G-7 signaling its anger at the Japanese for its previous efforts to weaken the YEN. The Japanese authorities are not happy with the recent cut in Korean interest rates which have resulted in a weakened Korean won.
Since I’m 62 years old, my references of social icons goes back to a more simple time. Alfred E. Neuman of Mad Magazine fame would ask, “What, Me Worry?” The other side of the equation would be Arthur Fonzarelli from the television show, “Happy Days.” who would stutter before ever admitting that he was WRONG. The world’s central banks are a reflection of these two icons. It seems that Yellen, Draghi and Kuroda all suffer from both views. They have nothing to worry about and they certainly cannot admit to being wrong. The central banks are under attack from investors and traders for pursuing quantitative easing and negative yields even though the efficacy of such programs is certainly in doubt.
First quarter is winding down and after a great deal of volatility it is time to reflect on the markets. The SPOOS are virtually unchanged while the Nasdaq 100 is down 5%, the Nikkei is down 10% and the German Dax is down 8%. The global equity markets have been riding a wave of liquidity for a long while but with the aggressive QE programs from the ECB and BOJ the first quarter one would expect the German and Japanese stock markets to have been the star performers. Maybe more QE is losing its power to impact the markets? The DOLLAR INDEX is lower by 3.2%, which is also in contravention of conventional wisdom as QE is done to weaken one’s currency in an effort to aid the domestic economy. In examining the individual currencies the euro is +3%, Swiss franc +3%, yen +8%, Canadian dollar +5% and Aussie dollar +3%. Yes, the easing banks have seen their currencies strengthen against the DOLLAR.
You don’t have to be a weather man to know which way the wind is blowing, or so says Bob Dylan. As long as all things are emanating out of China it may be the time to dust off the sayings of Mao for as the talking heads are reminding us daily: “The East Wind Is Prevailing Over the West” in all things financial. THE PROBLEM FOR ME IS I DON’T ACCEPT THAT VIEW AND AM IN THE CAMP OF FORMER DALLAS FED PRESIDENT RICHARD FISHER that all roads lead to the FED and certainly the European Union for providing the tinder for a financial prairie fire. There has been so much volatility during the first six trading days of the year it is difficult to get a handle on what is algo-driven non-fundamental and what may be the commencement of a change in previous momentum trades. Today I will go through a list of POTENTIAL SPARKS TO IGNITE THE FLAMES OF A FINANCIAL FIRE so that we can be aware of what constitutes a genuine change in momentum:
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).
Six months ago the world woke up to learn that the Syriza Party had been elected in Greece. It was a dream for some and a nightmare for the European ruling elite. Yes, there is a ruling elite that is very similar to what C. Wright Mills wrote about America in the 1950s. This is not conspiratorial but rather a sociological commentary and the ruling elite is not beholden to an electorate but operates with a sense of noblesse oblige. The Brussels eurocrats are in the image of Plato’s Philospher King, only there are too many Kings all believing themselves to be the most capable ruler. For two years I have written about that the European leaders feared REFERENDA more than anything for direct democracy was an affront to the wisdom of the self-anointed elite. The European project was too important to be left to the capricious voters.
Today, the trial of former IMF Director Dominique Strauss-Kahn [DSK] began in Paris. The former IMF director is charged with “aggravated pimping in an organized group.” Well, if DSK is on trial for aggravated pimping, it seems that St.Louis Fed President James Bullard OUGHT to be indicted on a similar charge.
Today it was the Danish Central Bank that lowered its interest rates in order to prevent the markets from trying to break the Danish KRONER/EURO peg and lowered the overnight rate to NEGATIVE 0.20% from a NEGATIVE 0.005%. It was unusual that the Danish Bank lowered the rate on a Monday rather than the usual Thursday but some analysts of the Nordic banking system believe the Danes may act again this Thursday after the ECB reveals its QE program. NEGATIVE RATES ARE THE NEW NORMAL! Danish banking authorities maintain that the Danes are not under as much stress as the Swiss were because the reserves at the DCB are 13% below the peak of 2012, the height of the EU financial crisis.
I am reissuing a piece from December 21, 2014 as a reminder of just where the SNB has invested the assets bought by the massive printing of Swiss francs. The Swiss authorities have created a perpetual money machine that “coined” unlimited amounts of francs and exchanged them for other paper assets. The question remains: Who was willing to buy all those francs that the SNB kept selling into the market (and yet the EUR/CHF remained at the 1.20 floor/ceiling)?