Highlights
|
 |
G7 - all sizzle no steak |
|
China GDP shocks the world |
|
Risky assets get the green light |
|
Dow Jones flexes its muscle |
 |
Commentary
Brian Dolan, Director of Research
Not to beat a dead horse, but the G-7 meeting last weekend was the highlight that provided no highlights. In this new era of low volatility, put on as much risk as possible and then fund it as cheaply as possible, even a meeting of the top government financial experts provided nothing that the markets could sink their teeth into. And maybe in the final analysis, it is that very fact that provides the most insight. For if the G-7 had communicated that it would be intolerant of Euro strength above a certain level versus the yen, the market would fixate on that price and force the hand of the various central bankers. For those traders around during the 1980's, it was the bank of England who rudely discovered that if you draw a line in the sand, one that you are prepared to defend, you (the central banker) are artificially defining a currency rate that does not meet fundamental analysis. Markets are both efficient and inefficient, but always prone to debate what a central bank should and should not do. Are the finance ministers learning from past mistakes? We will leave that supposition up to the faithful.
Mid week the global equity markets knees were buckled by the shocking fact that China is growing at the astounding rate of 11.1% yoy. While the global markets were all poised for a 10% plus figure, the extra 1% actually created some dynamic equity and Foreign Exchange moves. Equity markets dropped precipitously based on the assumption that higher growth in Asia spells higher interest rates in Asia, and higher interest rates spells a reduction in interest rate differentials, which is the bogeyman as far as carry traders are concerned. Aud and Kiwi both dropped over 100 points in sympathy as risk trades were reversed.
If there is one confounding observation while all this is going on it is that the Dow Jones Industrial average, for all intensive purposes is bullet proof. Immune to shocks of all kinds overseas or not, lower growth prospects here at home, the onset of further U.S. housing depressions and the continuing political issues which include waging a war in the middle east, to the opening salvo of picking a new President. Yes, the core CPI (Consumer price Index) was reported softer than expected but even for an author as jaded as this one, it appears that there is some "cooking of the books going on". It might come to pass that we review the beginning of the second quarter and wonder why were did not take some risk off the table with all that is going on. But for right now that review would be one of pure hindsight. Perched just under 13,000 the Dow is trading it appears to be fundamentally undervalued, waiting for more leveraged buying to keep the boat afloat.
On Sunday the FX is market is going to be surprised by the news that an election for the next President of France was held. While the chances of an actual winner are unlikely, this due to the spoiler effect of the far-right's Jean-Marie Le Pen ( successful in 2002), there is still a reasonable chance that Socialist Segolene Royal might emerge victorious. If Royal were to outright defeat frontrunner Nicolas Sarkozy, the FX and equity markets would swoon. Royals socialistic policy's would include a higher minimum wage, a lower workweek (give us a break) and a tough time ahead for big business in France. This during a time when big business is continually gaining ground on a global basis. If you're out of work in France right now, and there are a lot of you, then Royal is your woman, but if you are right leaning at all, there is currently only one candidate to consider.
Looking toward next week the Bank of Canada will release its decision on interest rate policy. The market is pricing in a no move from the current 4.25% stance, but since interest rates have been the market theme of the past several years, pay attention to any hint of a rate rise. "United States Lite" is becoming the favorite spot for the global community to park funds. FX, equity and otherwise. German IFO will be interesting as Germany is currently leaving its EC neighbors in the dust economically. A Solid IFO will confirm this trend is still vital.
Several key figures are due to be released throughout the calendar, but nothing is compelling enough to review in any depth right now. Kiwi is making multi year highs and we would look for this theme to continue. The backlash left in the wake of the Chinese GDP caused Aud and its younger brother to get hit. But looking from a macro perspective, this appears to be little more than a blip. We are continuing to press the ideas that thematic trades are still being validated daily. Commodity currencies will continue their uptrend. Yen will continue to be the funding product of choice even if the Japanese nudge rates higher. The Euro and GBP will end the second quarter of 2007 higher than they began.
Interested in more real-time Forex market analysis and research? Register for a free 30-day practice account.
|
