Markets still wondering when the taper will begin… (Adens: See story inside)
September 23, 2013 · by Chris Gaffney
Good day. The weather was absolutely perfect this weekend, with sunny daytime temps in the mid 70s and chilly evenings. I got to spend a lot of the weekend outside enjoying this glorious weather, and had what can only be described as an absolutely wonderful weekend! But it is back to work this morning, and the markets are starting out the week with an upward bias.
‘Septaper’ is now in the rear view mirror, but the markets continue to fixate on the FOMC’s bond buying and if/when they will start to pull back from their bond buying. St. Louis Fed Head James Bullard came out Friday and said that a ‘small’ reduction in the Fed’s bond buying is possible as early as October. New York Fed President William Dudley, Atlanta Fed President Dennis Lockhart and Dallas Fed President Richard Fisher are all scheduled to speak today; so expect the ‘taper talk’ to continue to dominate markets today. I have listened to what the Fed heads have been saying all along, and still think the bond buying will continue at the current level until the end of the year. I have read and listened to countless ‘experts’ who were surprised by the FOMC’s decision not to reduce their bond buying; with many on the financial cable news channels claiming they were ‘misled’ by the Fed heads.
But were we misled? Chairman Bernanke and all of his compatriots at the Fed continually said the bond buying would be reduced once the economic data showed the US economy was improving. As Chuck has continually pointed out here in the Daily Pfennig, the US data has not shown that we are in the midst of a strong recovery. The labor markets continue to limp along, and the ‘reported’ inflation numbers do not show rising prices are a worry. With this backdrop, the Fed just did not have enough economic ammunition to justify a reduction in their bond purchases. I agree that they could have clarified this a bit after all of the experts on the cable news shows were pretty much guaranteeing a ‘Septaper’; you could argue that we were all misled by their silence, but they have stuck to their original plan and will only taper when it is time!
The big news out of Europe this morning is the resounding win of Angela Merkel in Sunday’s German elections. This strong showing by Merkel is seen as a ringing endorsement for her efforts to make sure the euro survives. Euro-bashers have been warning that Merkel’s efforts to keep the common currency alive would lead to big losses for both her and her conservative party, but instead the German Chancellor rode to an easy victory this weekend. The euro rose along with European stocks which hit a five year high last week after the FOMC announcement. But these gains may be short lived as Chancellor Merkel still needs to find a coalition partner to finalize the new government.
The euro was also supported by data which showed both German and French private sector purchasing manager surveys were stronger than expected.
The pound sterling rose against the US$ on early European trading as more investors are now expecting the BOE will tighten monetary policy before we get a similar action here in the US. Firmer than expected economic data in the UK has led investors to start buying the pound on expectations that BOE Governor Mark Carney will move rates higher before the ECB or US FOMC begins their tightening cycle. The new BOE Governor pledged to hold rates low until late 2016 during the forward guidance he gave in early August, but recent data suggests he may have to move sooner than that.
The other big news moving the currency markets this morning was the release of data in China which showed the factory sector grew at its fastest pace in six months in September. The data confirms that the world’s second largest economy is continuing to gain momentum in their recovery from the recent slowdown. The HSBC Purchasing Managers’ Index (PMI) climbed to 51.2 this month from a reading of 50.1 in August. This latest piece of data confirms that the Chinese economy will be able to achieve their 7.5% GDP target as the Chinese economy continues to recover from the recent slowdown. Exports were higher in September, but even more encouraging was that domestic demand also showed strength with new orders rising to a five month high. The Chinese economy continues to evolve away from one solely dependent on exports to a more balanced economy with strong domestic demand.
Good news out of China supported all of the emerging markets, with the Brazilian real, Mexican peso, and Indian rupee all trading higher vs. the US$. India’s currency was supported by a surprise hike in interest rates by the Reserve Bank of India (RBI) Friday morning. The RBI hikde rates 25 Basis Points (1/4%), concerned with rising inflation that was getting a boost from the drop in the rupee. Mexico’s peso ticked higher in spite of the devastating storms which killed over 100 people last week. Mexico’s congress announced that they would revise their proposed 2014 budget in the wake of the storms. The government had already announced government spending on infrastructure projects would cause a budget deficit this year and the next, but these deficits will probably be wider than originally planned following the storm which put much of Acapulco’s airport under water. Mexico’s economy has been strengthening over the past few years, but tourism is a major contributor to the economy, so these storms which hit both coasts will certainly have an impact on the overall economy.
The commodity currency of Australia climbed higher on the positive PMI report out of China. The Aussie dollar snapped a two day decline versus the dollar on the good news for China’s manufacturing sector. China is Australia’s largest trading partner and an increase in the Chinese manufacturing should lead to more demand for raw materials coming out of Australia. The stronger Chinese economy also decreases the odds that Australia’s central bank will cut rates further this year. Chances of another rate cut in 2013 by the RBA have been reduced from 62 percent to 41 percent in the latest Bloomberg poll. The kiwi also pushed higher, closing in on recent highs after the Chinese PMI data was announced. New Zealand’s currency was up over 3% vs. the US$ last week, rising after the FOMC delayed tapering their bond purchases. In contrast to the US fed, the Reserve Bank of New Zealand could actually look to raise rates sometime next year in order to counteract a rising housing market. Property inflation could force New Zealand’s central bank to raise rates which would be very supportive of the kiwi.
The precious metals are off a bit this morning after a fairly volatile last week. Several of the major banks look for Gold to extend losses as the US economy improves. Citigroup and Morgan Stanley both put out reports that suggested last week’s rally in the precious metals caused by the ‘surprise’ decision by the FOMC would be short lived. Citigroup thinks gold will fall below $1,250 by the end of the year, and Morgan Stanley expects gold to average $1,200 to $1,350 in the coming year. I still like the long term prospects of the precious metals, but I guess that is exactly what makes a market – investors who have differing opinions!
Then there was this. Chuck supplied me with a great story for this morning’s TTWT section. He sent me a note Friday asking me to share the following with everyone, as he felt the news was important.
So here is Chuck with today’s TTWT: This is HUGE! I don’t know why the markets aren’t going bananas on this news… But apparently, China announced a couple of weeks ago that they are in the Oil business, and will sell Oil to anyone using renminbi / yuan instead of dollars… Here’s a snippet of a story sent to me… “On Sept. 11, Pastor Lindsey Williams, former minister to the global oil companies during the building of the Alaskan pipeline, announced the most significant event to affect the U.S. dollar since its inception as a currency. For the first time since the 1970?s, when Henry Kissinger forged a trade agreement with the Royal house of Saud to sell oil using only U.S. dollars, China announced its intention to bypass the dollar for global oil customers and began selling the commodity using their own currency. Lindsey Williams: “The most significant day in the history of the American dollar, since its inception, happened on Thursday, Sept. 6. On that day, something took place that is going to affect your life, your family, your dinner table more than you can possibly imagine.” “On Thursday, Sept. 6… just a few days ago, China made the official announcement. China said on that day, our banking system is ready, all of our communication systems are ready, all of the transfer systems are ready, and as of that day, Thursday, Sept. 6, any nation in the world that wishes from this point on, to buy, sell, or trade crude oil, can do using the Chinese currency, not the American dollar.” Ok… Chuck again, I bet you’re asking where is China going to get the Oil to sell to these countries? Ahhh grasshopper… Let’s not forget about the trade agreement that China signed with Russia last year… Russia has told China that they’ll send them as much Oil as they need… OMG! I checked on SNOPES to see if this was a hoax… I could not find anything reporting it hoax… I found a report on this on Reuters… Dan Collins over at Financialsense.com said this about the story: “OPEC has confirmed on April 4th of this year that they expect China to surpass the United States as the world’s largest oil importer in 2014. This shift in global oil flows is being driven by the twin pillars of a booming Chinese economy and America’s newfound booming domestic oil and gas supply. This shift in the oil trade carries with it massive geopolitical implications that will reshape the world as we know it.” Chris again. I agree with Chuck that this is a big story, and another signal that the leaders of China continue to work toward their goal of making the Chinese Renminbi the next global reserve currency.
To recap. The markets continue to focus on when the Fed will start reducing their bond buying, and the dollar continued to slide. Merkel and her conservative party rode to a big victory in German elections, but will still need to find a partner to form a coalition to run the government. The election victory by Merkel was seen as a confirmation of her efforts to keep the euro alive and is good news for the future of the common currency. A positive PMI report in China gave the emerging markets even more momentum in their recent rally, and also led to a positive move in the Aussie and New Zealand dollars. The precious metals are down a bit this morning after a very volatile week. And Chuck shared what is an older news story, but one which should have a major impact in the markets over the next few years.
Currencies today 9/23/13. American Style: A$ .9426, kiwi .8378, C$ .9706, euro 1.3513, sterling 1.6053, Swiss $1.0964. European Style: rand 9.8286, krone 5.9099, SEK 6.3654, forint 221.12, zloty 3.1267, koruna 19.1757, RUB 31.905, yen 98.94, sing 1.2517, HKD 7.7534, INR 62.48, China 6.1475, pesos 12.8277, BRL 2.2105, Dollar Index 80.415, Oil $104.84, 10-year 2.75%, Silver $21.65, Platinum $1,423.10, Palladium $716.22, and Gold. $1,321.39.
That’s it for today… As I mentioned in the opening paragraph, it was a ‘chamber of commerce’ weekend here in St. Louis with absolutely gorgeous weather. I got to spend a good share of my weekend enjoying the weather as I attended a picnic on Saturday afternoon and went to a nice Barbeque at my mother-in-laws house yesterday afternoon. My son Brendan turned 18 on Saturday (boy just typing that makes me fell old!), so we had a nice family dinner at our favorite steakhouse Friday night. Happy Birthday Brendan!! I’m really proud of the man you have grown into!
We spent Saturday morning here at work getting the September issue of the Evolving Economies MarketSafe CD issued. Those that missed the funding deadline for this first issue have another chance to get invested in these 4 emerging economies without any downside risk as the funding deadline for our second issue of the Evolving Economies MarketSafe CD is October 9th. The Cards had a chance to pull further ahead in the pennant race last night but couldn’t pull out a win. And the Rams lost big time down in Dallas, UGH!! The sun is starting to peak over the horizon, so I better get this out the door and get to work. I hope everyone has a Marvelous Monday and a wonderful start to your week. Thanks for reading the Pfennig!
Chris Gaffney, CFA
SVP & Director of Sales
EverBank World Markets
8300 Eager Road, Ste. 700,
St. Louis, MO. 63144
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