October 15, 2010

Market Wrap: for the week ending 15-Oct-2010

• US Treasury delays its report on currency practices of major US trading partners (Reuters)
• Euro area annual inflation was 1.8% in September 2010, up from 1.6% in August (Eurostat)
• US consumer sentiment index fell to 67.9 in October from 68.2 in September (Reuters)
• US Consumer Price Index increased 0.1% in September on a seasonally adjusted basis (BLS)
• Singapore’s central bank surprised global markets by tightening monetary policy (FT)
• Gold prices at another new high of $1387 on Thursday (FT)
• US Producer Price Index for finished goods increased 0.4% in September (BLS)
• 288,345 properties were foreclosed upon in the US during July-September quarter (RealtyTrac)
• US trade deficit in goods and services in August 2010 increased 8.8%, to $46.3 bn (ESA)
• Pay on Wall Street is on pace to reach a record high of $144bn up from $139bn in 2009 (WSJ)
• Industrial production in the Euro area was up by 1.0% in August compared to July (Eurostat)
• US foreclosure mess is spreading to other banks, GMAC and Wells Fargo to review documents (AP)
• China's foreign-exchange reserves surged by a record $194bn to $2.65 trillion as of Sep-2010 (Bloomberg)
• Minutes of FOMC meeting suggest quantitative easing will implemented soon (Reuters)
• Global financial leaders failed to find a currency resolution at last week-end's IMF meeting (Bloomberg)

Weekly Market Barometers    
Stock-2010-1015   fx-2010-1015

Chart Of The Week
The race to the bottom continues and the US Dollar is still in the lead in terms of losing purchasing power.  When the market commentators pronounced the Euro as “toast” earlier this year, we advised to be patient and not write the single currency off just yet.  The US Dollar has been in a similar predicament in recent months.  Expectations for further quantitative easing have pushed the US Dollar to all-time lows against the Swiss Franc, the Australian Dollar and the Singapore Dollar.  It is near historic lows against the Japanese Yen as well.  Just how much the US Dollar has been loosing value over the long-term is not all that clear to the general investing public.  A long-term chart showing the US$ versus Japanese Yen shows the significant decline of the greenback against the Japanese Yen since the early 70’s.  

source: www.fxistrategies.com

As much as this trend is alarming, there is a silver lining in all this.  Japan had near zero interest rates and deflationary pressures for two decades now.  Property prices have never recovered since the boom years of the 80s.  The Stock Market Index is barely 1/4 of it's peak in 1990.  And yet, the Japanese currency has continued to make gains against the US Dollar.  It has also performed remarkably well against other currencies since the financial crisis.  Although this may seem somewhat counter-intuitive, despite near zero interest rates and essentially no return on Japanese denominated assets, the currency has remained strong.  If the US were to follow a similar fate as Japan, it would be a nightmare for property and equity prices.  But there may just be some hope for the US Dollar.  The pressure on the Dollar remains strong, particularly in view of the ever-mounting US debt burden.  But don’t write the greenback completely off just yet!

Recommended Read 
The threat of a currency war has been the preferred theme in recent weeks.  The much anticipated report on currency practices of major US trading partners which was scheduled for release on October 15, 2010 has been delayed by the US Treasury department.  At the same time, China who was seen as the biggest culprit in the currency mess has continued to amass foreign currency reserves now amounting to over $2.6 trillion, the majority of which is in US Dollars.  Needless to say, the situation is tricky and sudden adjustments to the current exchange rates could have massive impacts on a country’s domestic economy.  An interesting proposition is presented in the Economist article Fumbling towards a truce:

Managing currency tensions will require greater harmony on all these fronts. Fortunately, for all the rhetorical barbs, there are some signs of progress. In a little-noticed comment during the weekend’s meetings, Yi Gang, a deputy governor of China’s central bank and head of the country’s foreign-exchange reserves, said that China aimed to bring its current-account surplus below 4% of GDP within 3-5 years. In the hope of shifting the conversation away from currencies, South Korean officials have been pushing the idea that G20 leaders embrace goals for current-account surpluses and deficits at the Seoul summit.

Recommended Video 
Some people hate him, others flock to him especially when the economic going gets tough. The ever-so vocal Peter Schiff gives his opinion on inflation, the Fed and the Dollar.  Please consider the views of a prominent inflation hawk: Peter Schiff: "It's Scary How Clueless Bernanke Is"

Good luck and good investing!

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