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Collinson FX Market Commentary- November 23, 2012 - Surge in Equities

by Collinson FX on 24 Nov 2012
Cheminees Poujoulat - 2012 Vendee Globe Vincent Curutchet / DPPI / Vendée Globe ©

Collinson FX market Commentary: November 22, 2012

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A surge in equity markets to close a contracted holiday week. US equities rallied strongly with risk appetite in an extremely low volume trading week. Confidence filled markets with a ceasefire in the middle east and US Politicians away eating Turkeys.

To read anything into this rally would be ambitious as all of the underlying problems remain and thin markets are notoriously deceptive.

EU Leaders met in Brussels to confirm the Budget for the next 7 years with predictable results. There was no agreement as poorer nations (who contribute the least and benefit the most) demand increased spending and larger (Northern members) demand adjustment to the economic conditions and reflect the austerity invoked in individual economies. So what was the solution? None, defer decisions and procrastinate while walzing the World stage.

The EUR rallied with markets to trade 1.2970 and the GBP 1.6030. US markets continued a week-long rally with high hopes of a resolution to the Fiscal Cliff negotiations. Semantics have provided false hopes as there will be no grand bi-partisan solution. Tough decisions surrounding expenditure will be postponed indefinitely and tax increases will be imposed immediately. This is a recipe for disaster.

This week will see hostilities resume in Europe and the US with the Middle East likely to simmer. A plethora of economic data globally will give daily direction amidst Geo-Political determination.


Collinson FX market Commentary: November 22, 2012

A ceasefire has been proclaimed in the Middle-East but this may be in deferment to the US with the arrival of Secretary Clinton.

The break in hostilities will be no more than a tentative arrangement while Hamas restore their missile capability and the Israelis look to a more permanent solution. Unfortunately the cowardly terrorists advancing the war will not be satisfied until the Jewish state is destroyed so no solution can be proclaimed.

This did boost equity markets despite the EU crises being reinvigorated. EU FInance Ministers failed to reach agreement on the Greek bailout after the IMF called upon the Germans to fund further bailouts and existing loans turn toxic. The crises continues to spiral out of control and quarterisation may now be too late. Greece should have been cut and now becomes a millstone around the viability of the EC. German Chancellor Merkel advocated the EFSF as the funding mechanism but pockets are deep with arms on the short side.

In the US, the Fiscal Cliff issue remained stalled with the absence of the President to drive the negotiations. Consumer Sentiment dipped but the Manufacturing PMI rose to 52.4 from 51.3.

The EUR regained 1.2800 but this will be tenuous at best. Risk aversion remains and demand driven commodity prices undermine the strength of the AUD which slipped to 1.0350 and the KIWI down to 0.8125. Fragility of the middle east is reflected in US and European markets which remain highly vulnerable


Collinson FX market Commentary: November 21, 2012

The big news economically was Moody's downgrade of France. This has been telegraphed but does have an impact as France is a leading nation within the EC and is relied upon as a foundation and support for lesser nations.

President Hollande has a tax and spend economic philosophy so this will further test ratings levels as indebtedness grows and the economy deteriorates. The EUR trades just below 1.2800 and the GBP 1.5900 and developments in the US could drive future direction. Bernanke spoke with a somewhat upbeat view on the US economy. He noted the improvement in Housing and Consumer Expenditure and Sentiment. He predicted a 'good year' for 2013 if Congress and the President get their act together. His prognosis of the Fiscal Cliff was recession and one which the Fed could not combat.

He endorsed QE Infinity but did not advocate further Monetary easing. The upbeat Bernanke has left one big 'if'! There will be a deal to avoid the Fiscal Cliff but the worst case scenario may well be accomplished. Some taxes may not rise but there will certainly be tax rises and expenditure cuts will be tempered to avoid popular entitlement cuts.

The root of the deficit and debt is entitlements and Democratic spending which will not be addressed.

Debt now has gone beyond 100% of GDP which was the crises point assumed in Europe. The news is not great but the spotlight has been removed with the President touring Asia and Thanksgiving providing the relief of a long holiday weekend. Negotiations will resume in earnest next week and that will be a testing time for equity markets.

Commodities drifted and took the AUD back to 1.0365 and the KIWI down to 0.8150.


Collinson FX market Commentary: November 20, 2012

US markets rallied strongly in to the new week after finishing strongly on the close Friday. The market uptick eliminated much of last weeks losses after the President expressed confidence over negotiations with congress regarding the Fiscal Cliff.

European Finance Ministers agreed to release the next bail-out tranche for Greece with the proviso they fulfil their obligations under the austerity agreement. Risk appetite soared with the EUR regaining 1.2800 and the GBP 1.5900. Greece will not comply so they will continue to support the failed member nation to ensure the single currency does not collapse. Deferment is preferable to destruction! In the US, Housing data supported the positive sentiment with Existing Home Sales rising 2.1% and the NAHB Housing Market Index moving up to 46, both beating expectations.

The positive spin from Washington was more the absence of the President, that enabled the markets to rally in the lead up to the Thanksgiving long weekend. Obama tours Asia and thus deflecting from the fiscal negotiations allowing a rally to ensue. The Middle-East crises continues to evolve and has the potential to spin out of control. The threats to markets are considerable and diverse, from the EU debt crises to the Fiscal Cliff in the US but a trigger could be the Israel conflict spiralling out of control across a destabilised Middle East.

Commodities rallied as economic confidence rose with the AUD breaking above 1.0400 again and the KIWI approaching 0.8200.

This tinder box, globally, is highly volatile so markets will remain very nervous.

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