The Federal Reserve’s decision not to begin tapering off its monthly $85 billion in purchases of Treasuries and mortgage-backed securities sent the dollar even lower against most global currencies. Today, September 19, the Dollar Index fell to a seven-month low. The dollar fell against the currencies of most U.S. trading partners—except Japan. And it looks like the dollar will stay under pressure for at least the next few sessions.
The big question is how long this trend lasts. If you think it will run for a while, then you want to join in on the rally in emerging market stocks that has accompanied the rally in emerging market currencies such as the rupee and real. If you think the run is getting a little over-extended—the euro is, after all at levels against the dollar that have marked resistance in the past BUT and it has recently broken above resistance at $1.345 to close today above $1.35—then this is a time to take some profits.
A lot will depend, in my opinion, on how big a scare Washington politics throws into global financial markets. I can’t imagine overseas investors rushing to move into dollars in the face of rhetoric threatening a government shutdown and a default on U.S. debt. I’d say current trends could hold for a couple of weeks yet, but I wouldn’t be rushing to add new positions that depend on dollar weakness right here
The one currency that is running against the weak dollar tide is the Japanese yen. The yen initially climbed on the Fed’s no taper decision—rising to 97.75 on the news—but then fell all the way back to 99 yen to the dollar and finished today at 99.42. (Remember that since the yen is quoted in yen to the dollar, a higher number is a sign of a weak yen and a smaller number means the yen is getting stronger.) The thinking seems to be that the recent Japanese trade deficit will push the Bank of Japan to further weaken the yen in order to boost Japanese exports. I continue to think that the yen will finish 2013 at weaker levels than current trading and that leads me to continue to hold positions in Japanese stocks such as Toyota Motor (TM) and Mitsubishi UFJ Financial Group (MTU). Both stocks are members of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of both Mitsubishi UFJ Financial and Toyota Motor as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
Yes, Virginia, there is potentially market-moving news from someplace other than Washington D.C.
German voters go to the polls on September 22.
If this were a U.S.-style Presidential election Chancellor Angela Merkel would win in a walk. Her personal approval rating stands at 65%. And her Christian Democratic Union party leads its biggest and nearest rival by 15 percentage points.
But this is a parliamentary election. And while Merkel will easily win reelection to her seat and while the CDU (plus its Bavarian sister party the Christian Social Union) is likely to take at least 40% of the vote, there’s a good chance that Merkel won’t win enough seats to form anything other than a coalition government. With the Free Democratic Party, a partner in Merkel’s current coalition government, looking unlikely to win the 5% of the national vote that’s required to gain any seats in the Bundestag, the shape of that coalition could get pretty strange with the most likely odd-bed follows being Merkel’s CDU and the opposition Social Democratic Party.
Whether that coalition—or any coalition–will be able muster the consensus needed to meet EuroZone challenges is likely to get a quick test too. Greece, despite progress toward producing a primary budget surplus (that is a budget surplus not counting interest on the national debt) looks like it’s going to need either a small bridge loan or a big bridge loan and debt reduction in late 2013 or early 2014. Portugal looms as an even bigger problem with the country needing to raise $15.8 billion euros ($21.4 billion.) It’s almost impossible for the country to raise that much in the bond markets meaning that Portugal will almost certainty need a second full bailout program at the end of 2013 or in early 2014.
Quite a set of challenges for a Chancellor who has run a campaign sort-of-promising, wink-wink that German taxpayers won’t have to pony up big money for more bailouts in 2013 or 2014 or 2015
And the bailouts aren’t the only challenge in the EuroZone that Merkel will face post-election and maybe not even the biggest. Read more
Friday’s market action on the very weak U.S. jobs number—just 88,000 jobs created in March—put worries about U.S. economic growth on center stage.
At least in the short term.
What with earnings season highlighting companies’ growth for the first quarter and projected growth for the second quarter, and what with the Commerce Department set to release retail sales figures for March on April 12, I think it will be easy for the market to get caught up in growth worries and for the bulk of investors to start behaving as if growth were the most important issue facing the market.
Don’t go with the crowd. Recent numbers casting doubt on U.S. growth rates shouldn’t be ignored, but they haven’t changed the basic forces driving global financial markets.
This is still the central banks’ game. And currencies—the relative price of the dollar, the euro, and the yen—are still the most important mechanism for transmitting messages from the central bank to the markets.
If I’m right and this remains the central banks’ game, I’m looking for a strengthening dollar (and a weakening yen and euro) to continue to put downward pressure on the price of oil, copper and other commodities—and to continue the rout in gold.
U.S. economic growth does figure into this equation since weaker than expected U.S. growth will temper the boost that the dollar might otherwise deliver to Japanese and U.S. equities. Decent growth in the U.S. economy is likely to give the current rally more room to run.
But growth is really a sidebar to the main story.
Which isn’t to say that the story hasn’t changed at all. Read more
Yesterday,, March 14, Germany left the EuroZone.
Oh, nothing official. And I’m not holding my breath waiting for any objective confirmation such as the re-introduction of the Deutschmark. But the new German budget marks the beginning of the eventual effective end of the EuroZone and the euro.
What exactly happened that’s so momentous? How can a single national budget make such a difference?
The German budget for 2014, announced by German Finance Minister Wolfgang Schauble Wednesday, March 13, on the eve of the March 14-15 European summit, includes another 5 billion euros in spending cuts. Total net new borrowing for 2014 will drop to 6.4 billion euro, a 40-year low. And it puts the German budget on a path to balance in 2015. That’s a year earlier than required by the German constitution.
If fiscal prudence is your goal, then this budget deserves the praise heaped upon it by Philipp Rosler, Germany’s Economy Minister, who said: “With all modesty, this is a result of historic proportions. The lesson from the sovereign debt crisis is that solid finances are essential. Thanks to this approach Germany is in the vanguard in Europe. Our success with a policy of growth-oriented consolidation is the envy of the world.”
The problem—aside from the smugness of those comments–is that fiscal prudence isn’t the most pressing goal in the biggest economies—next to Germany—in Europe. Read more
What will Mario Draghi do? The head of the European Central Bank has been notably silent in the aftermath of the Italian election debacle even as other EuroZone financial figures have threatened that Italy must keep its austerity bargain or else. (It’s not quite clear what “or else” might be in the this case. It’s one thing to threaten to kick Greece out of the euro and quite another to threaten a key EuroZone economy and the world’s third largest government bond market.)
Fortunately, Draghi does have some important ammunition left to him for this crisis—if he needs it and if he can get the Germans to agree (before their own key election in the fall.) At its last meeting on February 7, the European Central Bank decided not to cut its benchmark short-term interest rate below the current 0.75% rate.
That gives Draghi and the ECB the option of cutting interest rates by 25 basis points to 0.5%–if the bank wants to send a message of hope and reassurance to all those voters in Italy—and in Spain, Portugal, and France—that are clamoring for some efforts at economic growth instead of nothing but budget cuts, higher taxes, and increased unemployment.
The central bank doesn’t meet again until March 7, which gives Draghi plenty of time to assess exactly how bad things will get in Italy and in the financial markets. Read more