Disappointment that the European Central Bank didn’t cut its 1.5% benchmark interest rate at today’s meeting has given way to the realization that the moves the bank did make today clear the decks for a rate cut perhaps as early as the bank’s November 3 meeting.

It’s not like the European Central Bank did nothing today. Jean-Claude Trichet, fronting his last press conference as bank president, reported that the European Central Bank would extend the duration of its loans to banks from the current six months to a long as 13 months. And that the bank will continue to lend banks as much money as they need through its regular refinancing operations until at least July 2012. Not quite the U.S. Federal Reserve’s guarantee to keep rates at their current near 0% level until at least the middle of 2013, but still a big step that will give bank’s greater confidence in bank policy over the next nine months.

Just as important was what the bank didn’t do. Read more

Cheap gas tomorrow and cheap gas yesterday but no gas at any price today.

Turns out there are worse things than $4 a gallon gasoline.

For instance, there’s driving up to the pump and discovering that there is no gas for sale. Energy shortages are happening across a big swath of the developing world. And it’s occurring not just with gasoline but also with diesel fuel and even electricity.

The reason is very simple: Governments from Russia or China to India to Indonesia to Brazil have pressured or required oil refineries (and other energy companies) to keep consumer prices low even though the costs that they’re paying for oil (and coal) are rising. That’s turned these companies from oil refineries into red ink machines. Not surprisingly they’re reacting to these economics by cutting production– if you lose money on every sale, you’re going to cut volume. Or by exporting gasoline to countries that pay market prices for their petroleum products. And that has resulted in massive shortages of everything from gasoline to diesel fuel to electricity.

The shortages have become large enough to potentially cut economic growth in the economies that the world increasingly counts on for growth—just as central banks are raising interest rates in these economies to slow growth in an effort to fight inflation.

I’d argue that despite all the worry on Wall Street about how higher U.S. energy prices will hurt the U.S. economic recovery, the biggest danger to economic growth from higher oil prices is in those developing economies that are now caught trying to control prices without squashing supply.

Russia, the world’s biggest oil producer, is a good example of how a developing economy can get caught between a rock and a hard place by rising energy prices  Read more

Plotting the bottom for emerging market stocks

So where’s the bottom in emerging markets stocks? Or if picking the absolute bottom is too hard (and it is most of the time) when is enough risk out of these stocks to justify some serious bargain hunting?

Emerging market stocks have had the “emerging” beaten out of them in the last month. Brazil’s Bovespa index is down 7.8% from the April 5 local high to the close on May 6. India’s Sensex 30 index is down 6% from its April 4 local high to the close on May 6. China’s Shanghai Composite index is down 6.3% from its local high on April 18 to the close on May 6.

But this recent drop is just an accelerated version of the decline that most of these markets have suffered since they peaked back in the first half of November. From those November highs the Bovespa is down 10.4%; the Sensex is down 11.2%, and the Shanghai Composite is down 9.0%.

Since the beginning of the year I’ve been saying that the U.S. market will be the best performing stock market in the world in the first half of 2011. And it has been with the Standard & Poor’s 500 index up 5.3% even after the carnage of the last week.

But I’ve also been saying that investors should rotate into emerging market stocks, beginning slowly in May or so, because they would outperform in the second half. On current performance you’re entitled to ask “Oh, yeah? When?”

In the last few weeks I’ve been writing that “May or so” should definitely emphasize the “or so.” Today’s post is my attempt to explain why the timetable for rotating into emerging markets has slipped but remains fundamentally intact. And to give you some concrete guidelines for planning your rotation into emerging market stocks.

First, a quick summary of everything that was going to fall into place to make emerging markets outperform. Read more

Climbing German inflation assures more interest rate increases for the Eurozone and a appreciating euro

If you were wondering if the European Central Bank was likely to go soft on inflation and put its interest rate increases on hold, wonder no more.

According to numbers released today, April 28, Germany’s annual inflation rate climbed to 2.6% in April. That’s up from 2.3% in March and marks the fastest pace for German inflation in more than two years.

The European Central Bank isn’t about to let inflation climb this fast in the core economy of the European Monetary Union and the one politically most sensitive to inflation. April inflation data for the Eurozone as a whole will be released tomorrow, April 29. It’s expected that the numbers will show inflation steady at last month’s 2.9% annual rate. That’s well above the central bank’s inflation target of close to but not above 2%.

Now the only question is when the bank next raises its benchmark interest rate. Read more

The only open question, as far as the financial markets were concerned, in yesterday’s 12:30 ET announcement from the Federal Reserve was whether or not the Federal Reserve’s Open Market committee would change what’s known as the “extended period” language.

The committee said it would keep interest rates at their current extraordinarily low levels for an extended period—keeping the language the same and promising markets that they can count on the Fed to keep its benchmark short-term rates at 0% to 0.25% at least until the fall and probably until the end of 2011 or into 2012.

With that guarantee, traders were off to the races. The dollar, which held initially after the Fed’s press release, resumed its slide. Gold and silver both closed up in New York on the day. And continuing a very profitable strategy called the currency carry trade got the green light across Wall Street.

In this strategy traders borrow in countries with low interest rates and then use that money to buy in markets with higher yields. The trade is dangerous only if there’s a chance that the country where traders have borrowed will do something—like raise interest rates—that will raise the value of the currencies that they have borrowed. That would increase the amount that they have to repay on their loans.

Right now the carry trade has two very safe, very low yield currencies to borrow in—the Japanese yen and the U.S. dollar because the central banks in neither country are showing any inclination to raise interest rates any time soon.

The carry trade can be very, very profitable. Read more