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Global Slowdown Threatens Markets!
By Mike Conlon | May 14, 2010
In this era of globalization, the reliance on the inter-connectivity of markets has induced what is known as the “butterfly effect”. That is, when something happens in one area of the world, it has the potential to pervade and send shock waves throughout the rest of the world. And this is where we are today.
You may be asking yourself, “How can the debt problems of an economically tiny nation thousands of miles away influence your day-to-day decisions?” Well, Greece is basically a microcosm for the world economic system in that if one part fails, it causes a chain-reaction (contagion) which causes other failures. Once failures occur, confidence is shaken and fear pervades the marketplace.
Have you seen the price of gold lately? Gold is a safe-haven asset that is known to store value and hedge against inflation. Gold is currently in $1240 range and has been in high demand since the Euro debt crisis has picked up steam.
At the forefront of the Euro debt crisis is the structural issues surrounding the viability of the Euro has a single currency. Many are starting to believe that this experiment has failed. Earlier this morning, the Euro tested 1.24 vs. USD.
However, luckily for the markets, the US retails sales figures came in better than expected, showing signs that the US consumer couldn’t care less what is happening abroad. Will a US-led recovery save the global marketplace? Only time will tell.
In the forex market:
Aussie (AUD): The Aussie is lower this morning on risk-aversion, but has bounced back from its lows of the morning. While the economic story in Australia is a good one, the Aussie will continue to be ruled by risk themes in the market and not its fundamentals.
Loonie (CAD): The Loonie is lower this morning as it has been trading as a proxy for oil prices for some time. Oil is now trading at a 73 handle, and Euro zone and UK austerity measures are predicting a slowdown which dampen demand for oil. This could have a negative effect on the Canadian economy, but for now the market is still betting that they will hike rates at the June meeting.
Kiwi (NZD): The Kiwi is an interesting story this morning as I’m reading the economic data that came out earlier this morning and I can’t figure out why the seemingly disappointing data and risk aversion in the market aren’t affecting the Kiwi in a negative way. Retail sales figures rose at the slowest pace in almost a year, and housing prices fell which is weakening the case for a mid-year rate hike. Nevertheless, the Kiwi is higher against all currencies but Dollar and Yen, being only slightly down against the former. My only guess is that it is getting a bid because of higher gold prices, but that is a tenuous guess at best.
Euro (EUR): Yes the Euro is lower again this morning, reaching a one-year low of near 1.24 vs. USD. It has rebounded some, buoyed by the correlative effects of dollar weakness due to US stock futures gains, though the gains off of the lows seem to have been short-lived.
Pound (GBP): The Pound is lower this morning again as well, as belt-tightening in the UK is predicting a continued accommodative monetary policy as I outlined yesterday.
Dollar (USD): The Dollar is higher on the flight-to-safety trade and retail sales did come in better than expected (.4% vs. .2% expectation). However, the market may be skeptical that a US consumer-based rally may not be enough to keep the global economy afloat.
Yen (JPY): Yen is strong due to risk aversion and the un-wind of carry trades as the AUD/JPY pair is the biggest loser this morning. Asian stock markets were down big overnight.
Heading into this weekend, there is a lot of fear in the marketplace. Investors are not comfortable holding risk assets as there is no telling what may happen over the weekend. The general attitude is better to be safe than sorry.
Now that the talk of a Euro breakup is heating up, this is adding fuel to the fire as that potential event could be catastrophic for the markets. Equity futures here in the US look pretty ugly, and I’m not certain that there is anything which is going to change that. The confidence survey due out at 9:55 EST is the stock markets only hope today, and that is a long-shot.
So my advice is to do what the market tells you. If the market is showing fear and risk-aversion, then you dear reader should as well.
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