As seen with the Durable goods numbers, there is little change to the equity markets since the announcement; this is mostly due to the fact that the debt talks are controlling the markets as of now. Expect a discount of any news, other that those pertaining to the debt talks, on the overall markets and currencies. While earnings season is in full swing, the overall market or sectors are not as affected by the earnings misses or hits. However stocks have performed relatively well despite the macro events which could be a cause for concern should things not get better soon as there will be a lot of catch up needed in some stocks and sectors to price in these events.
The Swiss Franc has had an impressive run on the Dollar and Euro as well as many other currencies. This is due mainly to the perfect storm of having Europe in a crisis and the US Dollar under pressure from the possibility of default. The demand for “other than normal” safe havens is pushing the Franc and even the Yen (another country with overwhelming debt) higher as massive amounts of money flood into these currencies. The thought of intervention by the Swiss bank has been thrown around in recent news but after the failed attempt last year to keep the currency from appreciating, it would have to be a compelling story to start down that road again. The hope of a Debt deal in Washington and the settling of the financial crisis in Europe (at least for now) will be closely watched by the bank for any alleviation of demand. It would be interesting to see what happens should the Japanese intervene in their currency. Will this pull up the price of the Dollar and Euro to all major currencies, including the Franc, or will it simply make one less stable place to park money in bad times.
Europe has finally agreed that a bailout of Greece should include private bond holders. This will create a selective default but will alleviate the IMF and EU countries who were trying to avoid private sector participation as not to have any banks take write downs. With the private sector taking a cut the bond market is starting to take shape of a normally functioning market, where the risk takers will experience the loss of a bad investment. With the terms of the bailout now in place and the future of the EU a little more certain (at least in the short term), all eyes will be focused on the US debt ceiling.
The Bank of Canada hinted towards raising rates in the near future to help stem inflation and the threat of the housing market entering into bubble territory. This seems warranted as the growth rate of the country has only been revised down slightly compared to the US, and the high prices of oil contribute to the boom. The combination of a rising currency and rising stock market make a great haven for foreign investors as well. A lot of these tailwinds could start to wane however and there might be a sharp revision to the countries rosy growth prospects. Much of the country is dependent on the oil revenues that are generated from the oil sands as well as other exports such as timber to China for their construction demand. Should any of these measures decline, as well as any of the domestic prospects make a turn, Canada could see itself more in line with the rest of the global economies growth prospects. I believe that any trading in the CAD should take the price of Oil into account before a decision is made in either direction.
News of the Fed discussing QE3 and being split over whether policy should be accommodative or tightening has caused the markets to react in their old ways again. Gold is up, the dollar is down, and stocks had an ill fated rally yesterday and have gone up sharply today so far. It is still not very clear if the talk of a third round of stimulus is close by or if it was just the discussion of the idea and what would need to take place for it to be a viable option. I hope that the language is just a reassurance to the public that they are going to still be available should any issues with the recovery start to surface. Should this not be a mere confidence boost to the market place and in fact a future action, I would expect the same assets classes to rise and fall as they did from the start of QE2.
The threat of contagion in the Euro zone is starting to make the US look at its own financial issues and how is will have to tackle the debt ceiling debate. This is going to create a further drag in the directions that we have seen as of late. With risk assets falling and oil taking a hit from poor economic data, there will be more of a flight to the dollar and other safe haven assets such as JPY and CHF denominated assets. I would look for opportunities in this environment but would be careful as to the timing of the additions of risk. Missing some upside to see how the overall shifts in the marketplace take hold will not be a bad idea.
It is interesting to see how the EURO has performed during the recent euro zone scare compared to the last one. While there are many factors that could contribute to the surprising strength of the EURO during this near default of Greece debt, Chinese demand for diversification out of US dollar denominated assets could be one of them. This could help explain, at least in part, the relative strength of the EURO to the dollar as China’s sovereign wealth fund starts to shed US assets for European ones at discount prices.
One concern about this scenario going forward would be China’s desire to stem the growth of the country as well as the countries desire to narrow the surplus that they currently have. This could dry up the money that the Europeans are hoping and relying on from coming into fruition at the pace they have once expected. Additionally any rise in interest rates in the US as well as a feasible deficit reduction plan for treasury debt could make US assets more attractive compared to the amount of risk that is being taken in the EU.