Tag Archive | "Overtures"

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Dollar, Global Equities Rise Sharply

Federal Reserve non-voting, regional members stated positions that the Fed could taper its easing policy as early as this summer but the rumors could not dim the fact that US consumer sentiment is moving forward aggressively. Buoyed by rising sentiment, especially strong in high income Americans, the US dollar climbed to multi-year highs against the a basket of currencies and struck a 4-year high against the yen on Friday.

Global equity markets and US equities gained upward momentum and looked to close strong for the week. The benchmark S&P 500 rose from its worst decline in three weeks on strong consumer sentiment and a rally on European shares. Europe noted surprisingly strong data from automakers and in domestic sales.

However, the euro trembled under a release that the European Central Bank (ECB) was making overtures to its banking members. With the region mired in a deep recession, the ECB is considering turning the overnight deposit rate negative. This would mean that member banks would have to pay the central bank to access overnight reserves.

The euro dipped below the $1.28USD mark briefly touching $1.2795 before bumping above the threshold. At 1.2824, the euro was down 0.4 percent for the day.

Meanwhile the dollar touched its highest rate against the yen since the Lehman Brothers collapse in 2008. The dollar climbed to 103.09 yen before steeping back to 102.95, up 0.7 percent overnight.

Gold endured another day of sharp declines while Brent oil rose 78 cents settling at $103.56 a barrel. US crude jumped 68 cents to $95.94. The consumer confidence index surprised analysts and is spurred by a more optimistic view of personal finances. Declining gas prices and stable inflation rates are allowing US consumers to spend more, a critical driver for GDP growth.

The Federal Reserve Debate

The Federal Reserve has stated that it will continue its aggressive buying policy until the unemployment rate hits 6.5 percent, one percent lower than it is currently. Additionally, despite all the easing to date, has not led to significant inflation rises.

It is expected that the sequester, which has taken a back seat to the recent fabricated crises, will dampen job growth, the administration’s prime concern. These factors point to a continued easing policy.

In terms of the Fed’s stimulus program, only voting member have input. The voting members are Board members. Regional Presidents rotate onto the Board but play a minor role in terms of policy.

On Friday, Richard Fisher, the President of the Dallas Federal Reserve Bank, told the National Association of Realtors that; “We can rightly declare victory on the housing front and (reduce) our purchases, with the aim of eliminating them entirely as the year wears on. I believe the efficacy of continued purchases is questionable.”

Fisher’s comments set off a firestorm of activity that took equities slightly lower. As a non-voting member, Fisher’s hawkish comments will have little bearing on policy. That is not to say that his views have not been echoed by other non-voting member.

Philadelphia Fed Reserve Bank President, Charles Plosser, and Richmond’s President, Jeffrey Lacker, have also been outspoken in calling for reduced purchases and the elimination of the buying policy.

However, Sarah Bloom Raskin, a Federal Reserve Governor and voting member stated her position which coincides with the popular position of the Board; “The U.S. economy has continued to recover from the effects of the financial crisis and deep recession, though at a pace that has been disappointingly slow. The recovery does appear to have picked up steam in some sectors, most notably in housing … However, federal fiscal policy remains an important source of restraint.” Raskin was speaking to the National Economics Club.

The inability of Congress to take decisive action and put forth a responsible, balanced approach to deeper deficit reduction is also paralyzing the Fed. If Congress could put a plan in place that included new jobs programs, the Fed could exit much more quickly.

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Greece Government Receives Threats

The leader of New Democracy, Greece’s conservative party, won Sunday’s election and was immediately charged to align a functional parliament that would support the party’s pro-bailout stance. The vote was interpreted as support from the populace for Greece remaining in the euro zone and operating under the single currency.

All the euro zone nations offered plenty of support prior to the election. The tone was conciliatory and suggested that the 17-member euro zone would work with Greece to ease the tight austerity and extend the terms of the bailout that has fueled Greece’s 5th recession and 22.5 percent unemployment.

Germany went as far as taking out a full page add in the nation’s most well read newspaper.  The ad was a plea to voters to support the New Democracy.  The voters were not pleased with the tone of the article but pushed New Democracy over the top.  The party expects to announce a controlling alliance with the Socialist Party, PASOK.  This is the same coalition that has controlled Greece for decades.

On Tuesday, New Democracy’s top gun, Antonis Samaras, is expected to announce the creation of a government that will be able to carry necessary parliamentary rule to support the bailout. World markets opened on the up and the euro had a short rally before the nations that had seemed amenable to modifying terms of the bailout began to renege on their pre-election overtures.  Germany’s Chancellor, Angela Merkel was quick to stress the need for Greece to strictly follow the terms of the original agreement. Jean-Claude Juncker, former head of the European Central Bank and current leader of Eurogroup, backed Merkel’s puzzling policy reversal.  Juncker said that some conditions might be eased but that there could be no major changes to the bailout package.

The euro zone and Germany in particular has been criticized for austerity cuts that make it impossible for Greece’s 219 billion GDP to grow. Unemployment for young workers exceeds 30 percent.  Pensions and wages have been trimmed significantly.  If the euro zone and Germany do no offer some easing, Greece is doomed.

Combining this bitter reality to the crisis in Spain turned global markets into a late day tailspin. The euro touched briefly at $1.2601, fell to $1.2580 before closing at $1.2591. US analysts were quick to note that Spanish 10-year bonds crossed the 7.00 percent yield mark. There is a lack of confidence in the economies of Spain, Greece and Italy and investors are finally sensing the dysfunctional theater of operations. At the G20 in Mexico City, President Obama is pressing Germany to develop a long-term solution for the region. Whatever appetite international investors may have had for euro zone investment is stalled. Several forex experts have predicted the euro will fall to par against the USD before the end of 2013. Most of these investors also believe the euro zone will continue to shed members very quickly if Spain does not stabilize. This is bad news for the USA whose biggest importer is Europe.

In addition to PASOK’s cooperation, a smaller, left wing party known as Democratic Left has thrown its support behind New Democracy. It appears that the euro zone is prepared to let Greece kick the can down the road until the economic powers in the region set a course that benefits them. This is not the long-term arrangement international investors hoped to see. Once again, the political instability in the region is playing against the welfare of the troubled economies. Without pressure from the international community, Disaster looms.

In a race that went down to the wire, the conservative New Democracy party finished just ahead of SYRIZA and has begun talks on a new government. It is expected to form a coalition with the Socialist PASOK party, meaning that Greece would continue to be governed by the two parties that have ruled for decades and led the country to economic disaster.

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