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Suspend Your Disbelief!
By Mike Conlon | July 26, 2010
One of the things I mentioned on Friday with regard to the European bank stress tests is that they had to be believable. The results came in on Friday and by and large were viewed as positive by the market. There was some interesting volatility in the forex market, as the news trickled in and was digested.
But the question remains, can we really believe those results? Only 7 of the 91 banks tested need to raise more capital, and none of the banks were deemed likely to fail. This has left many questioning the methods used to test, and the assumptions made to show banking strength.
So what this all really comes down to is whether or not confidence has been restored to the marketplace. Officials have been trumpeting the results and are attempting to move forward from the tests, claiming the exercise a success. Only time will tell if this is the case.
On our side of the pond in the US, we have a similar crisis of confidence taking place. Investors are clearly not enamored with the prospects of the US economy, yet officials here will tell you otherwise. The 10-year Treasury note is currently under 3%, so the talking heads will tell you that it is a “success” that we are able to issue debt with such low rates of interest.
Treasury Secretary Geithner has told us that it is confidence in the US economy that allows this to happen; however, I think otherwise. The fact of the matter is that the US is “the only game in town” at this point, with so many other economies depending on US economic strength or having issues of their own. This is another case of the US winning the “least ugly” prize in the global economic beauty pageant.
How much longer this charade will continue is anyone’s guess; but the little time we have been afforded by European weakness is bound to expire with every passing day that we don’t fix the economic ills that plague the US. But one thing is sure; the Dollar is weaker this morning as everyone has caught on to the ruse.
In the forex market:
Aussie (AUD): The Aussie is lower this morning as PPI figures came in much lower than expected. The PPI gained .3% vs. an expectation of .8%. The true tell-tale will be Wednesday’s CPI figure, which if higher than expected would show the need for further rate hikes going forward. Should the number come in closer to the PPI data, then the chance of further rate hikes would be greatly reduced, which could put pressure on the Aussie.
Kiwi (NZD): The Kiwi is mixed this morning trading higher against the other risk currencies on interest rate differential speculation and US dollar weakness, but lower vs. Yen and Euro. Wednesday evening will bring the RBNZ rate policy meeting and at this point the expectation is for a 25bp hike.
Loonie (CAD): The Loonie is also mixed as oil is lower to 78.25, but still near recent highs. Dollar weakness is not the dragging the Loonie lower as might be expected and Canadian bankruptcies fell 9.2% showing that the economy may be on better footing.
Euro (EUR): The Euro is also mixed as the market is trying to decide what to make of the stress tests. Obvious US dollar weakness has contributed to its strength and should the market decide to move past the stress tests, then CPI and employment figures later this week will come back into focus.
Pound (GBP): The Pound is higher across the board in a continuation of last week’s gains despite the fact that housing price figures fell for the first time in nearly 15 months. This is the sort of news the BOE is hoping for, as rising inflation could equal rate hikes in an uncertain economic climate curtailed by fiscal austerity.
Dollar (USD): The Dollar is lower across the board. Some of it risk appetite, some of it due to lousy economic policy. There isn’t much that could happen here in the US to make me positive on the Dollar, so watch risk around the globe as that may be the only driver of dollar strength as a safe-haven asset.
Yen (JPY): The Yen started out the morning higher but is giving back some gains as risk appetite may be gaining traction. Part of this is Dollar weakness, the part being tacit acceptance of the Euro bank stress tests. Later this week Japan will report CPI data which is expected to show continued deflation. The question will be whether or not deflation is slowing or what, if anything, the BOJ and government intend to do about it.
Part of financial market participation requires a suspension of disbelief and an acceptance that things may not always be as they seem. I tell my mentor clients all of the time: the purpose of investing in markets is to make money, not to always be right.
So while I may disagree with the way things are going or with the “truth” as it is reported, I am always willing to put my personal feelings aside and to join in with market to reach my end goal: making money. It doesn’t make sense to fight the market as “the market can stay irrational longer than you can stay solvent”.
This was one of the first mantras drilled into my head as I began my trading career, and now more than ever do I realize its truth. I hope you do as well.
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