Sinking euro and rising dollar turn commodities retreat into a rout

Just what commodities and commodity stocks didn’t need today: A drop in the euro has produced a stronger dollar, which is, in turn, pressing commodity prices lower. Much lower. Gold fell by $50 an ounce today. Oil broke below $100 a barrel for the first time since March. Silver fell by another 10%.

The drop in the euro is a result of the European Central Bank’s decision not to raise interest rates at today’s meeting but instead to instead wait until at least June.

A delay until June shouldn’t have come as a surprise to anyone since I think bank President Jean-Claude Trichet signaled that June was the likely next stop on the interest rate train when the European Central Bank raised its benchmark interest rate to 1.25% on April 7.

That was the first interest rate increase from the European Central Bank since 2008. And the markets saw it as the first of a series of increases to fight inflation that hit 2.8% in April, well above the bank’s target of close to but below 2%.

On that conviction, markets bid up the euro against the U.S. dollar. The Federal Reserve seems unlikely to raise U.S. interest rates until late in 2011 at the earliest and that meant euro interest rates would be climbing while U.S. rates were sitting still for six months or more. And that increased the attractiveness of the euro against the dollar.

Today’s lack of action by the European Central Bank disappointed not only those who had read the bank’s April move as a promise of another increase in May, but also worried those who are counting on the bank to move strongly against inflation even if with a delay. In today’s statement Trichet didn’t use the phrase “strong vigilance” that has come to be the bank’s signal of an impending rate increase. Instead he said only that the bank will monitor inflation risks “very closely.” Some investors have concluded from that the bank doesn’t intend to raise rates in June either but will instead wait for July.

That worries the financial markets since it might indicate that the bank is so concerned about the debt crisis in Greece, Ireland, and Portugal that it is willing to tolerate more inflation in order not to further stress those economies. With no end to the economic difficulties in sight that possibility suggests that the European Central Bank might be less than its usual inflation-fighting self for the foreseeable future.

I don’t know how the central bank disproves that worry except by raising interest rates in June or July. Until then, the euro is going to have quite a few days like today. Which, of course, would be good for the dollar and not so good for commodities.

Why should Standard & Poor’s have all the fun?

On April 19 S&P shook global financial markets by putting U.S. government debt on negative credit watch. If the United States doesn’t get its budget act together, S&P warned, it would take away the country’s AAA credit rating.

But why stop there? What about Japan? Does a country with a gross public debt of 229% of GDP deserve an AA- rating? The United Kingdom at AAA? Brazil? Colombia? Germany? How do they stack up?

It’s time to become your own credit rating company and to fill in the gaps left by yesterday’s headlines.

Yep, you should make up your own list of good credits and bad credits so that you can figure out how to allocate your portfolio. Downgrades and upgrades are going to come faster than an avalanche moves downhill. And you’d like to be on the right side of those moves.

Seem too hard? Well, it would be a daunting task if your ratings had to include the detail that S&P, or Moody’s or Fitch Ratings do. But for your portfolio purposes, you don’t really care about the differences between AA+ (Belgium according to S&P) and AA (Spain). Actually you don’t are much about this kind of static rating at all. What you want to know if what direction a county’s debt rating is head in—and for that what I call Jim’s Bucket List is a more than good enough place to start.

It’s certainly enough so that you figure out what currencies you’d like to be holding in your stock portfolio 10 years from now. (Think the U.S. dollar is going to hold its value over that period?)

My system requires just four big buckets. Let’s start with the top bucket. Read more

Financial markets punish dollar and not Treasuries–so far

So why is it that U.S. bond prices aren’t sinking and why is it that U.S. bond yields aren’t sinking?

Can’t be that overseas investors found last week’s near shutdown of the U.S. government a reassuring sign of Washington’s fiscal responsibility.

Yields on U.S. bonds are lower now than when the government was running a budget surplus a decade ago—and when the amount of U.S. government debt outstanding was much, much lower. Marketable debt outstanding has climbed to $9.13 trillion from $4.34 trillion in the middle of 2007.

But the yield on the benchmark 10-year Treasury is just 3.49% as I post this on April 12. The average yield from 1998 through 2001, according to Bloomberg, was 5.48%.

And overseas investors aren’t fleeing the U.S. Treasury market. Foreign central banks bought 60% of the $66 billion in 10-year notes sold this year, up from 42% in 2010, according to the U.S. Treasury. Foreign investors as a whole owned $4.45 trillion in Treasuries as of January 2011, up from $3.7 trillion in January 2010.

The market certainly doesn’t seem to be worried about the chances of a U.S. default. Credit-default swaps on U.S. Treasuries—a kind of insurance against a bond issuer defaulting—stand at 0.415 percentage points. That’s a drop from the 2011 high of 0.515 on January 27.

I can think of two explanations for this—and, no, neither of them depends on overseas investors thinking U.S. politicians are any better at economics than they actually are. Read more

The world has a fair deal of experience in dealing with small countries that can’t pay their bills. And the world is gaining more experience by the minute. Greece can’t pay its bills? Put together a funding package that comes at the price of domestic austerity and higher taxes. Ireland can’t pay its bills? (Or actually its banks’ bills?) Put together a funding package at the price of domestic austerity and higher taxes. And when the small countries can’t pay their bills again in a couple of years, go through the process over and then over again until creditors finally agree to take a haircut on their loans.

But what about a huge country, one that is at the center of the world’s economic and financial system, one that can be described as the world’s greatest power, one that controls the world’s supply of the global currency of exchange? What do you do with such a country that can pay its bills but shows no inclination to do so? And instead brazenly asks for more credit?

The world doesn’t have a lot of experience working its way through problems like that. But I think that’s the kind of problem that now confronts the world. The deal between the Obama White House and Congressional Republicans to extend the Bush administration’s tax cuts for another two years at the cost of adding another $1 trillion to U.S. debt says to the world that we have no intention of paying our bills. And pugnaciously adds, So what ya gonna do about it?

I’ve actually been able to find just one example in Western history that sheds any light on situation that the United States and the world finds itself facing. Read more

Dollar rallies while the euro stumbles: Which is good for some stocks

The U.S. dollar keeps running higher as the euro stumbles.

With financial markets unconvinced that the Irish bailout will put an end to a euro debt crisis that’s ready to engulf Portugal and Spain, the U.S. Dollar Index (DXY) pushed above 81 this morning for the first time since September 21. (The U.S. Dollar Index tracks the dollar against a basket of currencies that includes the euro, yen pound, Canadian dollar, Swiss Franc, and Swedish krona.) The dollar index had moved above 86 in June after beginning the year near 74.

The euro, on the other hand, has moved below support and has in fact dropped below its 200-day moving average as investors drove the yields for bonds in Spain, Portugal, Belgium, Italy, and Hungry—as well a Ireland—up this morning. The British pound has also dropped below its technical support at its 200-day moving average on news that the country will contribute to the Irish bailout, even though the United Kingdom does not belong to the euro block. That served just to remind the financial markets of the big exposure of U.K. banks to the Irish crisis. I’m sure it didn’t help either that the U.K. government lowered its forecast for GDP growth for 2011.

There’s plenty of U.S. news this week to confirm—or reverse–these currency trends. Read more