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Health Risk!
By Mike Conlon | March 22, 2010
Last night, the US Congress passed a historic bill that will change the way healthcare is provided in the US. Whether you are for or against this bill right now is immaterial; however the uncertainty surrounding its passage may keep markets fearful for some time. If there is one thing the markets hate, it is uncertainty.
From an economic standpoint, the question is whether or not this bill will reduce deficits as claimed. The US is teeter-tottering on the fence as exploding debt levels have placed undue stress on the US economy. With debt spiraling out of control and the employment situation looking weak, if this bill turns out to be another costly entitlement program, then the dollar and the US economy could be doomed.
As a result of these fears, we are seeing risk-aversion in the markets this morning. There is no other real news due out today.
In the currencies:
Aussie (AUD): The Aussie is lower as would be expected on a risk-aversion start to the trading day. This is a quiet week for the Aussie as there is no major news on tap. Expect the Aussie to trade on risk themes all week.
Kiwi (NZD): The Kiwi is also lower this morning and has been “overtaken” the Aussie on the risk ladder as Australia economy is more stable and likely to be closer to ending rate hikes as New Zealand is about to begin. This week we are going to get: the NZ Current Account balance which will give us an idea about debt levels; the consumer confidence figures which will reveal sentiment, and then GDP figures on Wednesday. If the market can shake off risk-aversion and the numbers come in better than expected, then we could see the Kiwi move higher this week.
Loonie (CAD): The Loonie is lower this morning as oil is lower in addition to risk-aversion due to world debt concerns—particularly in the US. In addition, interest rates in India were raised higher one month earlier than expected as commodity inflation may be starting to pick up. If growth begins to slow, then demand could retreat causing commodity prices to move lower. There is no major economic news due out for Canada this week so much like the Aussie, expect the Loonie to trade on risk themes this week.
Euro (EUR): The Euro is lower this morning against all but the commodity currencies, as Germany is remaining steadfast in its decision to not help Greece. The IMF is preparing itself to fill that role if need be. In the meantime, Greek bond yields have risen, effectively costing them more to service their debt. Chancellor Merkel told investors they shouldn’t expect the EU Summit to produce a bailout plan. There are some German economic figures on Wednesday, but expect them to take a backseat to Greece.
Pound (GBP): The Pound is mixed this morning, trading lower against the Dollar and Yen, but higher against the rest. Today the focus has shifted away from UK debt levels—and moved to US debt levels—as risk-aversion is taking place. Tomorrow the UK is reporting its CPI figures; if the number comes in higher than expected, then pressure could be added to the BOE regarding future rate hikes. This will bring the double-dip recession talk that we heard last week back into focus and could add to further risk-aversion. That is the counter-argument to the report from the UK CBI, which said that recovery in the UK is bound to be “slow and sluggish”.
Dollar (USD): The jury is still out on the Healthcare bill but there is plenty of other news to keep risk on the minds of investors. This week we get: home sales, consumer confidence, durable goods orders, and GDP figures (on Friday). If the economy is not growing, then the backlash against the healthcare reform (as opposed to concentrating on the economy) could be enormous which could send shockwaves through the market. This is a very crucial week for all of the US markets—so trade carefully.
Yen (JPY): The Yen is higher this morning, primarily because of the carry trades that are being unwound due to risk-aversion. On Thursday, Japanese CPI figures are due which are expected to be negative. If deflation picks ups, then it will be interesting to see the measures the BOJ will take.
Risk can take on many forms when it comes to financial markets. The fear of the unknown is always a determining factor when people make decisions when it comes to their money and investments. Right now, the greatest risk to the world financial marketplace is debt levels. We’ve heard about Greece, there is concern about the UK, and of course concern about the US.
While healthcare is definitely something that needed to be reformed, the more time investors will have to view the final versions of the bill which will determine whether or not this bill will reduce or add to the deficit. In the meantime, Bloomberg News is reporting that the bond market has voted that investing in Warren Buffet is SAFER than investing in US government and President Obama, based on bond yields. This could pose a serious threat if foreign lenders or ratings agencies deem the US to be untrustworthy with regards to getting debt levels under control.
And it all starts with the Healthcare bill. So be careful what you wish (vote) for!
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