A global move from major central banks is going to cut the exchange rate of the overnight dollar rate by 50bps. This has provided a boost to the equity markets and risk currencies as well, but in the long run it doesn’t look like the fix of the European issue. Many European banks are relying on these overnight swaps for their day to day operations and while this is now a cheaper form of money to access, it will be hard to imagine this will solve the problems that prompted these banks to need the money in the first place.
Black Friday numbers are starting the week off on a positive note and has helped in the rally we are seeing around the world so far, but what will make or break for the week is yet to come. France and Germany are in talks to form some sort of fiscal union which has brought optimism to the markets (though the actual process is not going to be quick or easy if achievable at all) and there is a meeting of the European finance ministers as well. I believe that today is part of a nervous buying into good news, but the true direction of the market will be determined later in the week.
In the currency markets the dollar has been on the decline since the Asian open, mostly due to profit taking and perceived good news from Europe. Yield currencies are in vogue and I feel that they will work (as well as dividend stocks) should all the news coming out of Europe this week stays promising. Any bad news will most likely send the markets back in the directions of last week; I would watch European bond yields and headlines.
With the super committee unable to take advantage of the rare opportunity for congress to grant such powers to a small group the most important thing they can do now is continue to disappoint with inaction. With the automatic cuts now due to take effect the worst thing congress can do now is block the cuts. This would no doubt make the ratings agencies (not just the maverick S&P) rescind their re-affirmation of the US credit rating. Let’s (naively) hope congress is as bad at cutting cuts as they are at enacting them.
I am impressed, more surprised, with the Euro’s ability to hold up in the face of the actions in the bond market. Many European markets are painting a bleak picture of the future within the region and yet the currency has not touched close to the lows reached when the crisis was first brought to light Last summer. Barring any unexpected good news coming from Europe on the crisis I would expect to see the Euro drop to around 1.30 to the dollar in the short run, perhaps further if there is continued bickering over the role of the ECB. With the US near the debt deadline and the FOMC minutes on Tuesday, shorting the Euro should take a more diversified approach then purely the EUR/USD.
With the new of Greek PM Papandreou is expected to offer his resignation at a time that the Euro membership of the Greek Government is in question. This is proven to be a positive move in the markets with the ‘risk on’ trades moving up pre-market. The longer term direction of this news will be determined by the new decision making body in Greece. The need for Greece to go through with the decisions made by the EU right away will be vital to their ability to stay in the Euro.
Today’s markets are a clear example of the realization of the hurdles that are still involved in the resolution of the Euro crises. With the Greek Prime Minister calling for a referendum on the Euro deal, the entire plan is thrown into question. Germany and France have asked to talk to the Greek PM on Wednesday in regards to the actions taken. Volatility is spiking back up quickly and is likely to stay there as the realities of how fragile the Euro plans really are in implementation.