The last two afternoons in the NY stock market was extremely volatile. The DJ had gone lower by about 200 points to only close with a -33 point close. The market was attentive to Bernanke's conference with Congress and apparently saw indications of low probability for a December rate cut.
However, what we now have is a very hawkish ECB leaning on the side of inflation control and a FED that is leaning on boosting economic growth. Furthermore, there is a better chance of the ECB increasing rates than the FED lowering them. This could prove incredibly bullish for the Euro. 1.50 is definitely not out of the question (and more!!)
Friday, November 09, 2007
Thursday, November 08, 2007
Bernanke is speaking to Congress...
Bernanke states that the FED is anticipating moderate but positive economic growth for the following quarters...
Seems to be a fairly positive assessment of the economy. Hoping to see a bottoming out of the housing market by spring 2008
Concerns are being expressed for home owners, and desire for agencies to help homeowners keep their homes
"Market outside of housing has been remarkedly resilient."
See my review of the FOMC statement here
"For the first the trade sector has been positive to U.S economic growth." This statement was made in reference to higher U.S. exports (driven by USD weakness). See the post,
Seems to be a fairly positive assessment of the economy. Hoping to see a bottoming out of the housing market by spring 2008
Concerns are being expressed for home owners, and desire for agencies to help homeowners keep their homes
"Market outside of housing has been remarkedly resilient."
See my review of the FOMC statement here
"For the first the trade sector has been positive to U.S economic growth." This statement was made in reference to higher U.S. exports (driven by USD weakness). See the post,
Just One Reason Why The Economy Will Remain Strong
ECB keeps interest rates steady at 4.00%
As was widely expected the ECB kept interest rates at 4.00%.
Muted reaction on the EUR/USD, currently steady at 1.4655.
Close attention will be paid to Trichet's statement! A hawkish statement could drive the euro higher, investors will be looking out for this.
The webcast could be watched from the ECB website at 8:30am EST, here
Followup: Trichet cites sustained economic growth... strong increase in inflation indicator... expects inflation to be above 2% in following months before moderating in late 2008... positive sign from labor markets... upwards risk to price stability... [crisis led to] large monetary shift to safe, liquid monetary assets ... ready to counter upside risks to price stability
EUR/USD at 8:47pm EST: 1.4660. Market is not surprised
Muted reaction on the EUR/USD, currently steady at 1.4655.
Close attention will be paid to Trichet's statement! A hawkish statement could drive the euro higher, investors will be looking out for this.
The webcast could be watched from the ECB website at 8:30am EST, here
Followup: Trichet cites sustained economic growth... strong increase in inflation indicator... expects inflation to be above 2% in following months before moderating in late 2008... positive sign from labor markets... upwards risk to price stability... [crisis led to] large monetary shift to safe, liquid monetary assets ... ready to counter upside risks to price stability
EUR/USD at 8:47pm EST: 1.4660. Market is not surprised
Bank of England keeps rate at 5.75%
No change...
ECB interest rate decision to be released within the hour
At 7:05am EST... GBP/USD = 2.1074
British pound was drifting lower to 2.1018 minutes before the announcement and spiked up 60 pips on the release.
This decision was widely anticipated by the market but perhaps some traders were looking for cut indications because it possibly suffers the most impact from the housing and credit crisis, after the U.S.
Follow up: Bloomberg just reports that some doubt was creeping in regarding rates because not yet clear if further losses would be acknowledged from crisis. For the most, however, this decision was expected.
ECB interest rate decision to be released within the hour
At 7:05am EST... GBP/USD = 2.1074
British pound was drifting lower to 2.1018 minutes before the announcement and spiked up 60 pips on the release.
This decision was widely anticipated by the market but perhaps some traders were looking for cut indications because it possibly suffers the most impact from the housing and credit crisis, after the U.S.
Follow up: Bloomberg just reports that some doubt was creeping in regarding rates because not yet clear if further losses would be acknowledged from crisis. For the most, however, this decision was expected.
Wednesday, November 07, 2007
USD drops to new lows
The USD drops to new lows on news that China will diversify its currency reserves. A Chinese official stated that it preferred stronger currencies over weaker currencies. China has a huge amount of U.S Treasury Bonds. If it starts selling them, it will add greater pressure to dollar weakness.
A great article by Kathy Lien of DailyFx explains why the EUR/USD is unstoppable and heading towards 1.50.
As explained, Australian and Sweden increased interest rates. This means that other central banks are willing to increase rates in this economic situation. Only the FED is lowering rates and this change in interest rate differentials is clearly the catalyst for USD weakness. Today's move to 1.4730 most likely reflects anticipation for a hawkish ECB. Most expect ECB to keep rates steady. However, the statement will probably favor the control of inflation. This would mean that the ECB along with other central banks will test the limits of their economies before loosening rates. The FED does not have this luxury because of the credit crisis and can not further restrict liquidity.
In a strange twist, raising interest rates might not have a strong impact on economic growth because it will help Europe offset higher crude oil prices!
A great article by Kathy Lien of DailyFx explains why the EUR/USD is unstoppable and heading towards 1.50.
As explained, Australian and Sweden increased interest rates. This means that other central banks are willing to increase rates in this economic situation. Only the FED is lowering rates and this change in interest rate differentials is clearly the catalyst for USD weakness. Today's move to 1.4730 most likely reflects anticipation for a hawkish ECB. Most expect ECB to keep rates steady. However, the statement will probably favor the control of inflation. This would mean that the ECB along with other central banks will test the limits of their economies before loosening rates. The FED does not have this luxury because of the credit crisis and can not further restrict liquidity.
In a strange twist, raising interest rates might not have a strong impact on economic growth because it will help Europe offset higher crude oil prices!
Tuesday, November 06, 2007
Incredible Price Levels
If we take a step back and look at the general picture we must realize that we are at price levels that could have seemed unimaginable a few months ago. Investors must also realize that this could mean that we are in a dangerous predicament.
On the one hand, according to the popular phrase "the trend is your friend," we would be encouraged to jump in and take some long positions...
Crude oil...$97.00 (all-time high)
Gold ounce...$825
Euro/Dollar...1.4570 (all-time high)
Chinese stock market... near 6,000 and unstoppable.
We must start considering how much of the valuation is based on speculation and how much is based on fundamentals. While it may be correct to join the trend in the long-run we must be careful of possible bubbles forming and that many markets could be overvalued in the short-term.
On the one hand, according to the popular phrase "the trend is your friend," we would be encouraged to jump in and take some long positions...
Crude oil...$97.00 (all-time high)
Gold ounce...$825
Euro/Dollar...1.4570 (all-time high)
Chinese stock market... near 6,000 and unstoppable.
We must start considering how much of the valuation is based on speculation and how much is based on fundamentals. While it may be correct to join the trend in the long-run we must be careful of possible bubbles forming and that many markets could be overvalued in the short-term.
Monday, November 05, 2007
Speech by Governor Frederic S. Mishkin, Financial Instability and Monetary Policy
Below are the concluding remarks of the speech...
"As I have argued here, under the mandate it has been given by the Congress, the Federal Reserve has a responsibility to take monetary policy actions to minimize the damage that financial instability can do to the economy. I hope I was clear in communicating to you that policies to achieve this goal are designed to help Main Street and not to bail out Wall Street. Pursuing such policies does help financial markets recover from episodes of financial instability, and so it can help lift asset prices. But this does not mean that market participants who have been overly optimistic about their assessment of risk don't pay a high price for their mistakes. They have, and that is exactly what should happen in a well-functioning economy--which, after all, is what the Federal Reserve is seeking to promote."
In the following paragraph, Mr. Mishkin describes the characteristics of high-risk investments like what happened with the mortgage subprimes...
"Adverse selection arises when investments that are most likely to produce an undesirable (adverse) outcome are the most likely to be financed (selected). For example, investors who intend to take on large amounts of risk are the most likely to be willing to seek out loans because they know that they are unlikely to pay them back. Moral hazard arises because a borrower has incentives to invest in high-risk projects, in which the borrower does well if the project succeeds but the lender bears most of the loss if the project fails."
It is worth mentioning that Mishkin emphasizes that the FED works to restore financial stability and is not promoting a bail out of Wall Street. It also differentiates this instability from economic risk but that the first could filter through to the latter.
This is an interesting speech and I recommend reading it.
"As I have argued here, under the mandate it has been given by the Congress, the Federal Reserve has a responsibility to take monetary policy actions to minimize the damage that financial instability can do to the economy. I hope I was clear in communicating to you that policies to achieve this goal are designed to help Main Street and not to bail out Wall Street. Pursuing such policies does help financial markets recover from episodes of financial instability, and so it can help lift asset prices. But this does not mean that market participants who have been overly optimistic about their assessment of risk don't pay a high price for their mistakes. They have, and that is exactly what should happen in a well-functioning economy--which, after all, is what the Federal Reserve is seeking to promote."
In the following paragraph, Mr. Mishkin describes the characteristics of high-risk investments like what happened with the mortgage subprimes...
"Adverse selection arises when investments that are most likely to produce an undesirable (adverse) outcome are the most likely to be financed (selected). For example, investors who intend to take on large amounts of risk are the most likely to be willing to seek out loans because they know that they are unlikely to pay them back. Moral hazard arises because a borrower has incentives to invest in high-risk projects, in which the borrower does well if the project succeeds but the lender bears most of the loss if the project fails."
It is worth mentioning that Mishkin emphasizes that the FED works to restore financial stability and is not promoting a bail out of Wall Street. It also differentiates this instability from economic risk but that the first could filter through to the latter.
This is an interesting speech and I recommend reading it.
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