Tuesday, 23 July 2013

Global Leaders Assure Markets Need Not Worry

Ralph Shell, Excel Analyst

Excel Markets Forex Demo Account Trading Contest
Recently, Fed Chairman mused that the current expansion of the potential money supply by $85B per month might be tapered lower in the future as the economy recovery continues.  Markets reacted violently to this threat.  Reduction of the Fed's  monetary stimulus reverberated globally.  Equities stopped going up, and the debt rates soared higher.

Bernanke, aware of the global reaction to his vision of the Fed's future stimulus, had to backtrack: there would be no tapering until there was convincing evidence, until the recovery had passed stall speed.  Tuesday, the US Richmond Manufacturing Index (M/M) was announced.  Instead of the positive 9, a negative 11 was reported.  This major underestimate  of the recovery might make those formerly fearful that Bernanke would taper, feel better.  Hopefully, for them, more bad news will come later in the week. 

At the weekend G20 meeting, China also volunteered their actions would help to stimulate their economy.  They said they would ease lending rules that were constraining bank loans.  And in Beijing, Premier Li Keqiang said growth would not be allowed to fall below 7%.

China has been trying to navigate a soft landing after years of a building boom, financed by cheap money.  Confronted with the possibility of expanding bankruptcies, it looks like the Chinese are again going to be turning on the stimulants.  Among those mentioned are the traditional centrally planned investments like roads and bridges. 

There are doubts they will work.  The Telegraph reported:

"Mr Li’s implicit argument is that kicking the can down the road buys time to push through the market reforms needed as China abandons its obsolete, top-down, investment-driven, 1980s catch-up model, and switches instead to a grown-up economy.

No doubt Mr Li genuinely hopes to push though these reforms, but he is up against an army of vested interests, and half the Standing Committee.

As the IMF’s Article IV report makes clear, very few reforms have actually happened. Investment is still 48pc of GDP. The savings rate is still rising. China still has the most deformed economy of any major country in modern history."

The only conclusion we can make is the future growth rate will be 7%.  Believe it or not.

Yes, and conditions improved in Portugal over the weekend where austerity is working true to form.  The unemployment is headed toward 20%, the economy is contracting and the debt to GDP percentage is rising.

No problem, though, because President Anibal Cavaco Silva has the answers.  He said:

"I think in the current context of national emergency, calling elections is not a solution for the problems Portugal is facing," .......I think the best solution is to keep the current government in power.......

As the national salvation compromise was impossible to achieve, I consider that the best alternative solution is for the present government to remain in its functions, with reinforced guarantees of cohesion and solidity of the coalition, until the end of its term (in 2015)," Cavaco Silva said. "It is important to show our European partners that Portugal is a governable country."

Perhaps this speech will help the politicians in Portugal keep their jobs a little longer - but what about the nearly 20% that are unemployed in Portugal?  Perhaps the promise of free bailout money from the EU keeps them appeased, but best remember the Cyprus bailout money was not so cheap.  In such a write down, they take money from whoever has it.  It might be better  to give the people a vote than to show reverence to their European partners.

 Click EURUSD Weekly Forex Chart to Enlarge

In the meantime, markets are responding to glib-talking bankers and politicians, but a problem postponed is not a problem solved.  It looks like this might be the cause of some of the EURUSD (FXE UUP, UDN) strength (Tuesday, 23 July) combined with the weaker US numbers.  Though the recent COT Report shows there is a big spec short position in the euro, how far can this propel the Euro?

 Click EURUSD Daily Forex Chart to Enlarge

Still, should we get some more bear US numbers this could cause a further euro rally.  If it happens, we wish to be a seller of the EURUSD around the 1.33 handle.  As always, mind you money.
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