In a volatile day for currency markets, the USD made headway against the euro, yen, GBP, Aussie dollar and Loonie. Helped by more positive economic data, the dollar rebounded during the day after losing ground against the euro and yen in early trading. The dollar halted its assault at $110 vs. the Canadian dollar and posted significant gains aga8inst the Australian dollar.

Factory output and employment gained momentum according to data from the Mid-West Atlantic region and the Philadelphia Federal Reserve Bank. The data suggests stronger than expected employment in the sector in the two regions which include states of Ohio, Pennsylvania, New Jersey and others. The Philadelphia Fed said its business activity index climbed 9.4 points this month from 6.4 percent in December. This marks a significant gain that would help to counter last month’s disappointing non-farm payroll report.

Bolstering the manufacturing data was a report from the US Labor Department showing that state unemployment benefits dipped by about 2,000 claims to a seasonally adjusted rate of 326,000. The combination of these reports will test the accuracy of the Labor Department’s December payroll report.

The data struggled against early morning returns from Goldman Sachs, Citigroup, two companies that were burned by bond trades in the fourth quarter. Goldman stock was a big loser on the day, falling 21 percent at one point. Citigroup shares turned down 4.1 percent and the S&P financial sector index lost 0.7 percent. The news caught investors by surprise in the wake of positive gains posted by JP Morgan Chase, Wells Fargo and Bank of American on Wednesday.

The DOWD was off 76.53 by mid-afternoon. The S&P 500 lost 4.2 po0its to 1,844.18 as the NASDAQ posted slight gains.

Helping the dollar was continues encouraging data regarding inflation. The December Consumer Price Index rose just 0.3 percent after being flat in November.

Bank of England Currency Rate Scandal

 In information released through freedom of information releases, Reuters reported that The Bank of England discussed their processes for setting foreign exchange rates one ear before the manipulation occurred.

Minutes from the April 23, 2012, meeting of the subgroup of the London Foreign Exchange Joint Standing Committee revealed discussions around fixes, the daily setting of benchmark exchange rates. At the meeting, revelations about online chatrooms that discussing advance notice of the daily settings was revealed. The subgroup met at the London offices of BNP Paribas.

The Financial Conduct Authority, the regulatory wing of the Britain, reported that the BoE only became aware of the irregularities months after the April, 2012, meeting. It was action by the US Department of Justice that forced the investigation into the $5.3 trillion-a-day market in October 2013. Large penalties, fines and legal action are expected.

US equity and currency markets turned lower overnight in the face of political bickering about whether the US government should pay its bills. All three major equity markets turned down at the open on Friday and were poised to give back Thursday’s gains by 10:00 a.m. The dollar also gave ground against a number of currencies despite weakening banking news in Europe and uneasiness in Japan.

In the US, Senators Ted Cruz and Mike Lee continued their stall tactics, defying Republican leadership, and slowed the vote on the debt ceiling-Obamacare defunding bill forwarded by the House. This, in turn, will slow appropriate revisions to be returned to the House that would keep the government open. The delay tactic increased the likelihood of a government shutdown and put the debt ceiling, which will expire on October 17^th, into crisis mode.

Investors are not amused. After good employment news on Thursday, The Consumer Confidence Index missed expectations on Friday coming in at 77.5, the lowest level since April 2013. Meanwhile, consumer confidence in the UK was at its highest level since 2007 and even uneasiness in the European banking sector kept consumer confidence in the euro zone higher than in the US.

In early morning trading, the Dow was off 95.05. The S&P 50  was down 9.86 and Nasdaq was 16.33 points lower.

Discord Over European Bank Stress Tests

The euro zone intends to submit its banks to controversial stress tests as a first step in solidifying the region’s banking sector. Capital infusions enabled US banks to reboot their capital reserves but in Europe there is no backstop to ensure that banks are adequately capitalized. This has caused a general tightening of credit markets in the euro zone’s more tenuous economies.

Credit markets in Greece, Italy, Portugal and Spain are frozen. As a result there is virtually no growth in these countries and unemployment remains at record highs.

The stress tests are regarded as important to stabilize international markets and currencies. However, after the stress tests are performed, there is no plan in place to remedy shortfalls. Many banks in the region have insufficient reserves. The net effect of the stress tests will be to highlight weaknesses in the banking sector with no plan to remedy the reserve shortfalls.

The tests administered by the ECB, the European Banking Authority (EBA) and the EU will reportedly be stringent. The ECB will be focused on the euro zone’s biggest banks. The model will be used by the EBA to test the remaining banks in the euro zone through a program known as the Asset Quality Review.

Europe’s top 42 banks are 70 billion euros below new international capital norms. However, analysts suspect that the problems are much bigger ion the euro zone’s smaller banks.

Euro zone purse strings are controlled by Germany who is opposed to the construction on a region-wide re-capitalization plan. Without such a plan, the stress tests will put pressure on governments in the area to boost the banks.

The prognosis is that the absence of testing gives the banks a grace period but the day of reckoning is on the horizon.

Currencies

The USD was down 0.1 percent against a basket of currencies. After gaining 0.3 percent on Thursday.

The biggest move of the day came from the UK where British sterling was up 0.4 percent at $1.6096. The UK recovery appears to be gaining momentum.

The dollar did not fare well against the euro ($1.3558) or the yen 98.280.

Yield on the 10-year Treasury continued its trend toward 2.5 percent and was at 2.62 percent early Friday.

Uneasiness about Federal Reserve policy and about the succession plan have sent equity markets into a tailspin and currency markets into a state of high volatility. On Monday, US equities posted their fourth consecutive losing day. In overnight trading, global shares again lost ground as concerns about the Fed weighed heavily on the global marketplace.

And, not to be overlooked is concern about who will replace current Fed Chair Ben Bernanke. President Obama has apparently narrowed the field to the two most popular candidates, former Treasury Secretary and former President of Harvard, Lawrence Summers, and current Fed Vice Chair, Janet Yellen.

As Obama considers his options and refines his choice, he seems to be adding additional weight to the job description. On Monday, the President addressed the lingering need for more legislation in line with the controversial 2010 Dodd Frank law. The President called upon regulators to move forward with much of the regulatory reform cited in the law that has been slow to develop. Only 40 percent of the new Dodd-Frank regulations have been implemented and some of the bill’s most protective regulations remain in flux, tied up between five groups of regulators who cannot agree on policy.

On Monday, the President called upon the Federal Reserve, the Federal Deposit Insurance Corporation and the Consumer Financial Protection Bureau to more aggressively overhaul regulations and ensure protection against another meltdown similar to 2008.

The beleaguered Consumer Protection Agency has been leaderless since its inception. In July, the Senate finally confirmed long-time candidate Richard Cordray to lead the agency, which is charged with reforming a host of consumer credit products, including mortgages.

However, the new Fed czar will have to add tighter regulation to its list of primary responsibilities. For the past 5 years, Chairman Bernanke has concentrated upon jobs and inflation. With Obama’s new mandate, regulation will be a top priority. This announcement may give some insight into who the President favors to replace Bernanke.

Summers vs. Yellen

As the world watches this drama play out, the minutes from the last meeting are due out tomorrow. The Federal Reserve is also meeting this week at Jackson Hole. What markets want to know is when tapering will commence and to what extent. The lack of definition has created shifts in emerging economy currency markets and propped up British sterling and the euro.

However, global equity markets are uneasy fearing that money will become tighter in the world’s largest economy. Fiscal conservatives say a pullback from current stimulus spending is overdue. Less conservative economists believe there is nothing to fear and the Fed should continue its aggressive buying policy.

Conservatives are at peace with inflation and are content with the slow job growth. More liberal economists believe inflation is under control and there is no reason to halt bond buying until employment shows significant progress.

In the backdrop to the Summers – Yellen selection, the Federal Reserve will be closely watching the September bank stress tests. A spokesperson for the Fed said on Monday; “Large bank holding companies have considerably improved their capital planning processes in recent years, but have more work to do.” When the stress tests were applied in 2013, 18 banks were scrutinized. Beginning in September, 12 additional banks with assets of more than $50 billion will be added. In the round of testing concluded in March, JPMorgan Chase and Goldman Sachs were reprimanded. The spokesperson said that although 14 banks met Federal Reserve expectations, there were consistent issues with modeling techniques.

As the President considers the two possible new Fed leaders, Summers clearly has a higher profile than Yellen. However, many of Summers’ decisions and policies have been controversial and he has pulled back from many of his positions prior to the recession. Obama’s Monday declaration that regulation is an important part of the Federal Reserve may well shift the momentum to Yellen.

Summers, who served as Treasury Secretary under President Clinton, played an important role in overturning Glass-Seagall, which had restrictions between commercial and investment banking. This lack of regulation gave birth to the aggressive investment banking policies that helped create the financial meltdown and allowed for the creation of “Too Big To Fail “ banks.

Summers also supported a lack of regulation of the swaps market. The opposition allowed for the explosion of derivatives that were major causes in the collapse of the country’s financial institutions. Summers resisted and in fact is on record as scoffing at concerns that abuses in derivatives were putting the nation’s investment banks at risk.

Since 2009, Summers has reversed direction in keeping with Obama’s response to the challenges. As a trusted Obama adviser, Summers may have an inside track but his political history is muddled and unclear. Obama has consistently stated that regulators should not be politically connected. It would be difficult to distance Summers from politics.

During her tenure as President of the San Francisco Federal Reserve, Yellen saw the housing collapse coming before the actual meltdown. She spoke publicly about the risks and the exposure of the nation’s banks. Yellen warned that banks should be required to raise their capital requirements. As Vice Chair, Yellen has continued to call for higher standards.

If Obama can separate the politics from the mission at hand, Yellen appears the highly qualified choice. From a consistent policy standpoint and as an early advocate of tighter financial regulation, Yellen should be the candidate to take the reins from Bernanke. The possibility of her appointment and the undefined tapering policy are adding edge to the markets.

The momentum behind the western European economic recovery and the US economy are taking a heavy toll on emerging economies and currencies. The trend is most visible in the rise of the blue-chip Euro STOXX Index, which has gained 9 points this year and in the remarkable strength of US equities. Similarly, the MSCI Index of equities from emerging powerhouses Russia, India, China and Brazil has slid 13 points in 2013.

The euro continued its recent stable trend after good data from Germany boosted the currency. With a more stable euro and renewed whispers about the tapering of the US Federal Reserve’s sustained buying spree, investors have shifted their attention to the more stable currencies. With improved yields in US Treasuries, emerging economies are seeing larger than expected outflows.

Perhaps the most encouraging news from Europe is the resurgence of private sector enterprises. Data from this sector showed growth in July for the first time in the last 18 months. At the same time, private industry growth around the world dipped by 13 percent.

However, the effect of the Federal Reserve’s tapering initiative is driving the world currency markets. Projections show that currencies in Turkey, Brazil, Russia, India and South Africa will decline between 7 and 14 percent in 2013. Meanwhile, the yen has lost more ground to the euro and continues to fluctuate wildly against the dollar.

The European Central Bank has indicated the region must remain focused on unemployment and private sector job development. However, economists feel that the front-loaded austerity measures enacted two and three years ago are easing. The hope is that credit markets will ease and that private businesses will pursue growth more aggressively.

Tapering Is Coming

Markets appear to have adjusted to the reality that tapering is on the horizon. The dollar continues to gain relative strength and the benchmark ten-year Treasury is gaining favor with international investors. Speculation that tapering could begin as early as October was fueled by remarks from two separate governor’s of the Federal reserve on Tuesday. The strength of US corporations supports tapering and Chairman Bernanke would like to see the reduction plan underway when he leaves office.

At the same time, the Bank of England’s (BoE) new head, Mark Carney, has announced steps to boost British sterling and to encourage job growth, clearly a top priority. Encouraging economic data indicates that the UK has climbed out of recession and is recovering. Carney has said the BOE will leave interest rates at 0.5 percent until the unemployment rate dips to 7 percent. Experts feel that will require about 3 years.

UK manufacturing has finally ended three years of dismal reports with some encouraging data. Consumer confidence is rebounding and the strained financial system appears stable. In overnight trading, sterling reached its highest point since June 21^st at $1.5493 before settling at $1.5446, a 7 percent gain.

In Japan, the Nikkei Index shed 4 percent as the yen gained strength against the dollar. The USD struck a 45-day low at 96.76 yen. The yen’s strength reflects pullbacks from riskier economies in Asia and in returns on the country’s massive investments in the US.

Disappointing numbers from the US labor Department’s non-farm payroll report unnerved investors and shook currency markets around the globe. The disappointment came along with some very positive data from June regarding consumer spending and US factory goods.

The payroll data reflects the economy’s inability to sustain growth on its own merits and will surely be viewed with concern by the Federal Reserve. Non-farm payrolls added 162,000 jobs in July, a solid number but well below projected increases of 184,000. However, the unemployment rate fell two-tenths to 7.4 percent, the lowest rate since December 2008. Over the past three months, non-farm payroll growth has averaged about 175,000 new jobs per month.

The Federal Reserve concluded two days of talks on Wednesday without announcing any policy change. Markets received this status with enthusiasm.

Markets reacted quickly to the disappointment. After closing at record highs on Thursday, equities endured modest losses on Friday. The disappointment was apparently negated by the probability that the Federal Reserve will remain committed to its $86 billion per month stimulus through the rest of the year. The S&P 500 index, which crossed the 1700 threshold on Thursday, the DOW and Nasdaq all were down by midday.

Earnings Strong

Another offset to the employment data is the strong performance of US corporations. Of the 375 companies that have reported second quarter earnings, 67.5 percent have surpassed expectations. On Friday, AIG, the giant insurance carrier beleaguered during the recession, announced its first capital return since the 2008 bailout. The company is offering a dividend and stock buyback. Shares jumped 3.4 percent to $48.67.

Linkedin also surpassed expectations, reporting heavier than expected sales. The stock jumped 9.8 percent to $233.88. Over the last four quarters, 55 percent of reporting companies have posted bigger gains than expected.

Other Data On Friday

The Commerce Department’s gauge of core inflation rose 1.2 percent in June. May inflation showed a 1.1 percent rise.

The average work week tuned down to 34.4 hours. Earnings slipped 0.1 percent.  5.7 percent of Americans with jobs could not log enough hours to qualify as full-time jobs. In July, 4.25 million Americans had been unemployed for six months or longer.

Politicians have rejected the President’s infrastructure worm programs and thus have forced the Federal Reserve to be more active than most Americans would like. Additionally, government layoffs continue to hurt the economy as the sequestration passed by Congress will play out during the rest of 2013. As Congress prepares for their August vacation, taxpayers should be asking what Congress will do to get Americans back to work.

Currency Changes

The euro rose 0.4 percent against the USD to $1.3265. The dollar posted gains against the yen to 99.11. The dollar index fell 0.4 percent to 81.994 against a basket of currencies.

Federal Reserve Chairman Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

Bernanke and Fed Tapering Together

Federal Reserve Chairmen Ben Bernanke and his $85 billion per month bond buying spree will be tapering down and winding down together.  Wednesday’s announcement eliminated speculation about the Fed’s plans. Tapering will begin later this year and the spending spree will conclude in 2014, the same year Bernanke will relinquish the reins.

The news has sent shock waves through global equity markets and created uneasy volatility in currency markets. The move sends a loud message that markets and investors must return to fundamentals. Interest rates will rise, enterprises will be valued by their performance and the Fed will have to start planning to dispose of trillions of dollars of assets. It’s back to the basics and for many it’s about time.

The Fed’s position should not have been a surprise. In his May 22, 2013, meeting, Bernanke set the stage. Equity markets reacted but bounced back. This time, the fall has been faster and deeper.

Currency markets have also reacted strongly. On Thursday, the benchmark 10-year US Treasury note was down 24/32, yielding 2.4412 percent. The USD reached two-week highs against major currencies and is poised to extend gains on Friday. On Fridy, the 10-year Treasury yield rose to 2.531 percent.

Meanwhile, investors rushed to pull money from emerging economies. The dollar posted a 1.53 percent gain against the yen to 98.28 yen. The dollar pushed the euro to a two-week low at $1.3162. Speculation is that the euro will soon fall below the $1.30 mark.

Disappointing factory output in China had analysts wondering if the government would intercede.  China’s economy slowed to the lowest growth rate in 13 year in 2012 and is on pace to shrink further this year.

In Europe, Markit’s Flash Eurozone Composite PIN remained below the trend line for growth in the region. With China’s slowdown and the tapering of US stimulus, prospects for growth in Europe are dim. The Fed’s stimulus had a major impact upon the global marketplace. In overnight trading, political turmoil in Greece pushed 10-year bonds up 70 basis points to an unsustainable 11.4 percent.

Peru’s currency, sol, closed at 2.79 against the USD, it’s lowest close in more than 2 years. The central bank immediately tried to sell 950 billion soles in two-month notes. Currencies in Malaysia, Thailand and the Philippines experienced large volume pullback, underscoring the fragility of emerging economies.

The dollar got a further boost from improved factory output in the Midwest and from an increase in existing home sales. Against a basket of currencies, the USD reached a two-week high of 82.145, up 0.5 percent. The Australian dollar fell to a 33-month low against the USD. This decline was heavily influenced by China’s nine month low factory report.

Equity Markets. Tremble

On Wednesday and Thursday, the S&P 500 suffered its biggest losses since April. The index fell below its moving 50-day average for just the second day this year.  The S&P was 4 percent below the record high of 1,669.16 set the day before Bernanke ‘s May speech.

The Dow Jones shed 293.06 points, nearly 2 percent, settling at 14,819.13 at Thursday’s close.  Equities in Europe lost 3 percent. MTSCI’s emerging market index slumped 3.69 percent. The Asian Pacific region outside Japan fell 3.87 percent. MTSCI’s all-country world index lost 2.93 percent, while the FTSEEurofirst 300 index settled at 1,143.99, down 3.07 percent.

On Friday, major equity indexes rallied slightly. The Nasdaq fell for the third straight day. 47 percent of Nasdaq stocks rose on Friday. 10.29 billion shares exchanged hands on the New York Stock Exchange.6.36 million Nasdaq shares were traded.

When trading commenced on Friday, the S&P 500 was off 5 percent from its all-time high reached on May 21. The CBOE Volatility Index fell 8 percent after jumping 23 percent on Thursday.

For the week, the DOW was off 1.8 percent. The S&P 500 was down 2.1 percent  and Nasdaq shed 1.9 percent. Nicholas Cage, the chief market analyst At ConvergEx in New York summed up analyst sentiment; “A lot of investors thought the sell-off was overdone after we broke through those technical levels, but all the existential things that drove us down are still in place. People aren’t sure what’s going to happen with Fed policy or rates or anything else. It is too soon to say we hit a bottom.”

The two-day Federal Reserve meeting will conclude on Wednesday with Chairman Ben Bernanke scheduled to conduct a press conference following release of the much-awaited report. Global markets have experienced great volatility since Bernanke’s mixed message released on May 22, 2013.

Ever since, Bernanke has been in the news. On Sunday, President Obama suggested that Bernanke would be stepping down in 2014 after serving 8 years as Chairman. Bernanke’s handling of his press release in May, stirred concerns in global equity and currency markets. It is expected a more carefully worded explanation of current monetary policy will be put forth on Wednesday.

Economic data released today would support a continuation of the existing $85 billion per month bond buying policy. New home construction signaled a stronger recovery in housing that was indicated with strong starts in April. Housing starts are up 6.8 percent to a seasonally adjusted annual rate of 914,000 units. April’s report was also raised from 853,000 to 856,000 new starts.

New permits dipped below April’s strong performance but still reflect the largest number of permits for single family construction in five years. The construction industry has been hit hard by unemployment and contractors report difficulty finding qualified workers and a shortage of building supplies.

May’s 12-mointh core inflation rate remains below the Federal Reserve’s stated goal of 2 percent but does suggest stabilization. The overall CPI jumped 1.4 percent easing concerns about prolonged deflation. This data should not negatively affect the Fed’s decision to scale down its stimulus.

However, the “tapering” of the extraordinary support from the Federal Reserve will be forthcoming but with disappointing growth data from China, high volatility in Japan and unstable conditions in Europe, the dollar is expected to continue today’s improvements against international currencies.

Asian Currencies Decline    

In India and Indonesia, the strengthening dollar or the prospects of a stronger dollar have led to massive withdrawals by international investors. The Indian rupee closed in on another record low to 58.98 per USD compared to the record low of 58.69 set last week. India had attracted more than $12 billion in foreign investment since 2012. The fall could be more severe if markets get what they expect from the Fed’s two-day meeting.

In the last 17 trading session, foreign investors have been net sellers of more than $4.5 billion in Indian bonds.

Indonesia, another Asian entity that relies heavily upon a growing China, saw its rupiah fall 0.7 percent on Tuesday. The fall came on the heels of government action to reduce fuel costs. The central bank was forced to intervene.  The finance ministry was only able to raise 2.65 trillion rupiah of an 8 trillion rupiah offering.

Meanwhile, in the Philippines, the peso fell 0.8 percent to 43.22 USD. The Malaysian ringgit fell 0.8 percent to 3.1580 USD, its lowest rate since July 30, 2012.

If the Federal Reserve announces tapering of its stimulus, the outflows from these nations could be devastating. In Indonesia, foreign investors sold about $1 billion in bonds from May 31 through June 13, 2013. Foreign holdings decreased to 32.4 percent.

Dollar Rallies Against Yen  

Tuesday marked the second consecutive day that the dollar has made headway against the yen. Traders anticipate that Bernanke will extend the current buying initiative but add definition to the inevitable tapering. Tomorrow’s announcement should stabilize equity markets but also give strength to the USD.

Joe Manimbo, a senior market analyst at Western Union Business Solutions in Washington, echoed market sentiment; “The yen’s fresh leg lower today could be a sign that many investors think the Fed will signal a reasonable chance of a taper as later in the third quarter. The yen is seen vulnerable to less policy accommodation from the Fed, a move that would tend to put upward pressure on U.S. Treasury yields, burnishing the greenback’s allure.”

The USD rose 1.1 percent to 95.96 yen after falling to a two-month low of 93.78 yen on Thursday last week. The dollar has touched record highs against the yen since Prime Minister Shinzo Abe radicalized the nation’s currency policy by extreme monetary easing. The liquidity has given rise to Japan’s equities but has greatly weakened the currency.

The Euro Climbs

Despite disappointing data from Germany and the lowest demand for new autos, the euro rose to $1.3385. The climb was based on surprising report from ZEW data, a German analyst firm that showed investor sentiment was improved in June. The FTEU3 shares climbed 0.1 percent on Tuesday.

Politics continued to plague the euro zone and US economies and China’s rising housing crisis added fuel to the fire as currency markets trembled under the weight. European and Asian equity markets slipped on Monday as the US markets trended down by midday.

The euro slumped to 1.30USD. Britain’s pound slumped to a 2-year low against the yen and to 1.50USD on Monday.

In the euro zone, the lack of resolution to last week’s elections had markets on edge. The yield on Italian bonds rose, but the lack of a permanent government has many economists worried about how ECB Chairman Mario Draghi can help the struggling economy. Without a government, no commitment of austerity can be made to the ECB thus sealing off the infusion of more euros.

In the US, markets received the news of the sequester without blinking but by Monday a sobering tone was noted in Washington. President Obama reached out to Congressional Republicans and to Democrats in the hopes of composing middle ground legislation.

Obama apparently asked for consideration of a new direction for the massive spending cuts, specifically throwing entitlement reform and tax reform on the table.  Several Republican s have said they would consider closing some tax loopholes as long as entitlement reform is art of the package.

Public consensus is that the US must deal every aspect of the entitlement scenario. A lack of progress will certainly affect every sector of the US economy.

A revealing report from China on 60-Minutes confirmed what many analysts already realize. The Chinese construction market is overdue for a slowdown. 60-Minutes showed cities of unoccupied, new housing. All apartments in the massive buildings are sold but they remain vacant, unaffordable for the majority of the population.

On Sunday, China announced that its residential construction sector had slowed to its lowest activity in five years. China added more damaging data indicating that factory output slowed to multi-month lows in February.

China is already curtailing its ever expanding residential development but the effects have yet to be felt. This could be a housing bubble that has the potential to dwarf the US housing collapse.

In the UK, the pound fell because of reaction to a decline in the construction industry. This decline could push the country into its third recession in five years.

The data has supported the Bank of England’s cries for further quantitative easing, but there is unrest throughout the economy. Ian Stannard, the Head of European FX Strategy at Morgan Stanley explained, “The construction PMI today was quite weak, but the really big one is the services PMI which comes tomorrow and if that comes in weak as well it would increase the possibility of further action at this week’s BoE meeting.”

Forecasts for a global slowing in 2013 seem more likely now that politics has entered the economic fray.

In the complicated politics that is holding the global economy ransom, Angela Merkel stepped out in front of the bus to sound optimistic about the solution to the Euro Zone debt crisis. If you think you have heard this message before, you have. Yes, it is a posture the politically troubled German Chancellor has taken in the past only to reverse her position within weeks. At home and abroad, Merkel is losing her grip.

But, once again, equity markets and currency markets responded positively to her latest endorsement of the Euro Zone and the ECB.  But, like Merkel, her message is tired and probably lacks credibility. She has become a tap dancer of sorts dodging bullets and buying time by mixed messages of support, intimidation and bullying. Could this be a last gasp effort to try to rally support for what promises to be a stern political challenge at home? Definitely.

For Germany, the Euro Zone, the ECB and the US, September will be a crucial month. Politicians and investors are expected to return to work and either pump life into the global economic woes or squash all hope.  Germany’s announcement came on the heels of Finland’s report that the country was preparing for the possibility of a Euro Zone breakup.

There is a strong case for Germany to withdraw from the Euro Zone. Politically, Merkel is the only Euro Zone head of state that has faced an election and still remains in power. Her grip on Parliament is a single vote majority, a situation that will reverse in the next election. Merkel has played just about every card in the deck, including a generous tax refund to the populace to try to quell resistance but the chancellor may be playing into a done deal.

Merkel threw her support behind ECB President Victor Draghi’s recent stance that the ECB would aggressively buy bonds in the Euro Zones most troubled economies. Germany has insisted, along with the International Monetary Fund (IMF) that countries like Greece and Spain should not receive any bailout funds until they commit and stand behind the requirements of the European Stability Mechanism (ESM).

Merkel’s stance has alienated many Euro Zone nations who believe a more measured and balanced approach is the only way to grow economies and get their citizens back to work. In a recent statement, France has joined the call for less austerity and more pro-growth initiatives. France has adamantly supported its position that it will not cater to Germany or Merkel. The Euro Zone’s second largest economy does have some clout at home and abroad.  Its position is more in line with what economists believe to be reasonable.

However, the impact of Merkel’s statement was felt in global equity and currency markets. The euro climbed to six-week high against the yen. The dollar also rose to a five-week high against the yen. As The largest importer of American goods, what is good for the Euro Zone is good for the US. However, one of Federal Reserve Chairman Ben Bernanke’s available boosts for the US economy is to weaken the dollar in efforts to make US goods more affordable and desirable.

Overall market conditions are low. Volume is low, bulls are driving the market and September may change the playing field one more time before the US elections. There is some speculation that a poor economy will actually boost President Obama’s chances come November.  The thinking is that the worse the economy is the more likely voters are to disdain an overhaul of the questionable federal benefit programs.

A more realistic analysis is that no matter who wins the Presidency, if Congress, which yesterday posted a 10 percent approval rating, is not fixed the office of the President of The United States will be largely ineffective.

European Central Bank President, Mario Draghi, continued the 3-year euro zone tactic of following an optimistic statement about the region’s debt with a no-substance description of a solution. Last week, analysts were greatly encouraged by Draghi’s seemingly strong statement that he would announce a solid plan to help struggling economies under the ECB’s umbrella. Instead, Draghi today suggested a plan to implement previous plans to ease the debt-ridden countries.

The disappointment was reflected immediately in global equity, commodity and currency markets. Draghi’s statement is just one more incidence of too little, way-too-late positive action. Each time these promised solutions are expected to provide relief, they fall through. One might reasonably expect that investors would not count on anything concrete until the entire euro zone is underwater.

Of course, Draghi’s original report last week was stifled by euro-rich Germany, whose exporting initiatives are keen to a lower valued euro. Besides offering no immediate solutions, Draghi was vague about what options the ECB could take in the near future. His sole commitment was that the ECB would soon begin to draw plans to begin outright purchases of member bonds to help stabilize borrowing costs.

However, investors backed off Spanish bonds, driving the yields over the dreaded 7 percent mark.  In anticipation of Draghi’s announcement, the euro climbed to four-week highs at $1.2404 USD. After analysts realized the lack of content, the euro plunged to $1.2132 by mid-afternoon. The fall was the largest one-day decline since August 8, 2011. Against the yen, the euro fell to 94.90, an 8 percent drop.

The most poignant parts of the ECB’s statement were:

• Interests Rates will remain at 0.75 percent. Investors anticipated a drop to 0.50 percent.
• Stated that the ECB would only assist economies that applied for intervention and who met the strict and punitive austerity measures and appropriate supervision.

Analysts expect the ECB to begin purchasing Spanish and Italian bonds as of September but neither country has requested to access the EU’s European Stability Mechanism (ESM). At the bottom line of Draghi’s press conference is the undeniable reality that the ECB cannot go where Germany does not want to go.  And, Germany is not keen to make quick, short-term solutions.

Draghi and the ECB have come under fire from the US and other international investors. However, Draghi revealed that German central bank head, Jens Weidmann was opposed to bond-buying. Whatever the ECB intends to do must be approved by Germany, the euro zone paymaster.

Draghi’s non-announcement came on the heels of another dismal assessment of the economic recovery in the US furnished by Fed Chairman Ben Bernanke. The Chairman acknowledged disappointing numbers about the US economy and the state of US unemployment.  Acknowledging that the economic recovery lacked momentum, Bernanke did not suggest that more quantitative easing was on the table. Most analysts believe a third round of easing will be necessary in September about the same time the ECB is scheduled to release bailout funds.