Tag Archive | "Mixed Message"

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Global Markets Await Federal Reserve Report

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.

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Bernanke Mixed Message Sends Nervous Tremors

Muddled messages from the Federal Reserve and a sharp downturn in China’s manufacturing sector and in consumer confidence, sent global equity markets into a tailspin in overnight trading. Better than expected employment numbers in the US brought some stability back as the DJ average rebounded from a triple digit losses at the open. For the week ended May 11, 2013, claims for state unemployment benefits after the first week dipped by 112,000 to 2.91 million recipients, the lowest number of claimants in five years.

Japan’s Nikkei share index .N225 dipped 7.3 percent overnight following data from China’s manufacturing sector and news that the euro zone’s extended pattern of contraction looked more ominous. The Nikkei index had been up a stunning 45 percent this year.

Japan’s newest easing initiative has driven the value of the yen down and led to a very liquid economy that is sputtering for growth. Japan’s profits and growth are stagnant giving reason to question the fantastic gains in equities. It is increasingly clear that global markets are reliant upon quantitative easing that in many ways outweighs output.

Tobias Blattner, a European Economist at Daiwa Capital Markets, told Reuters; “All the global developments we see in the markets right now are purely liquidity-driven, they are no longer underpinned by fundamentals. We must learn to live with that kind of volatility.”

Yen and Euro Rise  

Analysts appeared confused by Bernanke’s statements before Congress. During his questioning, markets slipped immediately. After the Q&A following the Congressional hearing, markets recovered. However, the minutes of the Federal Reserve showed support for reducing Fed’s aggressive purchasing policy if certain factors came into place.

Bernanke told Congress that growth hit 2.5 percent during the first quarter and that employment was encouraging but still well below acceptable levels. He also explained that inflation was steady at about 1 percent, half of the red flag milestone set by the Federal Reserve. Inflation has benefited from reduced energy consumption and pricing.

The dollar-yen dipped as low as 1.01.45 before rallying to 101.68, a 1.4 percent fall from Wednesday’s levels. The euro also made headway against the dollar, trading at $1.2894, a 0.3 percent gain for  the day.

Euro zone weakness is weighing heavily on global manufacturing.

Bernanke Leaves Analysts On Edge

One of the purposes of the Fed’s purchasing program is to increase wealth. Equity markets have been big beneficiaries from this strategy. Americans are saving at the highest rates in 4 years. Recent good news from the National Association of Realtors points to gradual recovery in the housing market.

Bernanke explained the impact of the Fed’s $85 billion monthly bond purchases;  “Monetary policy is providing significant benefits. Monetary policy has also helped offset incipient deflationary pressures and kept inflation from falling even further below the (Fed’s) 2 percent longer-run objective.”

The Federal Reserve’s minutes showed that several board members advocate reducing the purchasing program as early as June. This sent tremors through the equity and bond markets. The benchmark 10-year treasury bond climbed over 2 percent for the first time since March. Japan’s 10-year bonds climbed to 1 percent.

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