Tag Archive | "Recessions"

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Euro Zone GDP Contracts Further


The 17-nation euro zone output shrank by 0.2 percent in the first quarter 2013 creating the longest recession in the bloc’s history. Projections for the future are not promising. Analysts project slight growth in late 2013 but no significant upturn until 2015. The first quarter contraction marks the sixth consecutive quarter that euro zone GDP has contracted.

France which has been teetering on the edge of a recession finally crossed the line and suffered a 0.2 percent downturn, equaling its output in the fourth quarter 2012. Unemployment in France is at record levels.

France joined the list of euro zone economies in recessions. Finland, Cyprus, Italy, The Netherlands, Portugal, Greece and Spain are solidly entrenched in recessions. Italy and Spain, the euro zone’s third and fourth largest euro zone economies, have endured seven consecutive quarters of negative growth.

The new data pushed the euro below the 1.29USD mark. The currency fell to six-week lows and shows little hope for recovery. The trend of the euro and the anemic growth in the bloc may prompt the ECB to engage in more aggressive monetary easing initiatives.

Last week, the ECB cut interest rates to historic lows. However, Mario Draghi, ECB president, has said that he is not opposed to another rate cut.

Austerity vs. Growth

To a degree, German led calls for austerity have stabilized the euro zone treaty. But, most of the nations want to shift the focus to growth. Euro zone unemployment is estimated to include more than 19 million workers.

The consensus is that the natives of the euro zone have been pushed about as far as they can go. France has been an advocate for growth and has marked the formation of a Europe-wide banking supervisor as an important step in the region’s recovery. German finance minister Wolfgang Schaeuble and Chancellor Angela Merkel have opposed this new initiative fearing that Germany would have to bear the heavy load.

On Tuesday, Schaeuble appeared to soften his position, suggesting that the new, broader banking union could be structured by June. A second aspect of this initiative would call for identification of banks that need to be closed. Schaeuble told French finance minister Pierre Moscovici that the new banking union was a “priority object.”

Germany, always the pillar of the euro zone, is facing its own manufacturing, export and GDP problems. GDP was revised from negative 0.6 percent in the fourth quarter 2012 to 0.7 percent. Germany narrowly avoided falling into recession by posting a 0.1 percent gain in the first quarter 2013. Despite its tempered growth, Germany enjoys the lowest unemployment rate in years.

Liquidity Driving Equity Markets

The euro is off 2.3 percent in May, hitting 1.2883USD in overnight trading. The dollar rests comfortably in the 102 range against the yen. The ECB is likely to consider another rate cut before the end of the year. The dollar reached 102.63 yen overnight.

Meanwhile, the Federal Reserve and the Bank of Japan continue to pour money into easing programs. The weak yen is very liable to cause more export stress in Europe.

The UK has been damaged by the weaker euro and the stronger pound. UK exports have lowered to Europe but have increased to other markets like Southeast Asia and Africa. Outgoing Bank of England head, Mervyn King hinted that the BoE may be softening its easing program shortly. King put forth the first positive outlook for the UK since the outset of the financial crisis. Britain has been successful encouraging small business growth but still fights high unemployment and a slumping housing market.

All eyes will be on Italy’s upcoming 30-year bond auction after Spain had a successful 10 billion euro sale of its 10-year bonds on Tuesday. After Fitch Ratings upgraded the nation’s sovereign debt, a positive accomplishment, Greece’s 10-year bonds surged in Wednesday’s auction. Greece is no longer viewed as a country about to leave the euro zone, a credit to the tough love imposed by Germany.

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Forex Market Inverts as Emerging Markets Soar


As I pointed out in last Friday’s post (Volatility, Carry, Risk, and the Forex Markets), volatility has been declining in forex markets since peaking after the collapse of Lehman Brothers. In fact, volatility among emerging market currencies has been falling particularly fast, and recently, something amazing happened: “Three-month implied volatility for the seven biggest developing country currencies fell to 10 percent in March compared with 11.4 percent for industrialized nations.” This inversion could rank as one of this year’s most important developments in terms of its impact on forex. The only runner-up that I can think of is Japanese LIBOR falling below American LIBOR.

Despite its remarkableness, this development isn’t unsurprising, since 8 of the 10 best performers in forex this year are emerging market currencies, led by the Costa Rican Colon, Mexican Peso, and Malaysian Ringgit. Still, we usually assume that with high return, comes high risk. How could it be that are thought of as risky currencies are now less volatile than the so-called majors. Does it really make sense, for example, that the Turkish Lira is less volatile than the British Pound.

Without exploring this particular pair in detail, in a word, the answer is yes. In 2010, emerging market growth is projected to be higher than in the industrialized world. Inflation is relatively stable, and debt levels are comparatively low. Meanwhile, all of the G4 currencies (US Dollar, Euro, Japanese Yen, and British Pound) are plagued by the possibility of Double-Dip recessions and debt crises of varying seriousness. In sum, “Developing nations reduced their foreign debt to 26 percent of GDP last year from 41 percent in 1999, while advanced nations’ debt may surge to 106.7 percent of GDP this year from 78.2 percent in 2007.” Talk about heading in opposite directions!

EMBI+ 2009-2010

Investors are taking notice. While the JP Morgan Emerging Market Bond Index (EMBI+) is now rising at annualized rate of 22% (implying a decline in emerging market bond yields), rates on comparable EU and US debt is rising. Last week, the 10-Year Treasury Rate topped 4% for the first time in 18 months (though it has since retreated). Meanwhile, credit default swaps are pricing in a .4% chance of default in the US. Granted, this is still infinitesimal, but anything above 0% would have been derided as ridiculous only a few years ago. This year, the US is projected to spend more on servicing its debt than any other country except for the UK. The projected $1.6 Trillion deficit for 2010 certainly won’t help things.

2009-2010 10-Year Treasury Rate
Thus, emerging markets are projected “to lure $722 billion in overseas investment this year, 66 percent more than in 2009…Developing-nation bond funds attracted $7 billion this year, pushing assets under management to a record $74.7 billion.” Many portfolio managers are betting that this will be a long-term trend: “The rally in emerging-markets has barely started yet.”

What are the forex implications? For the first time, we could see the G4 currencies start trading as a bloc. [Previously, it was the US Dollar versus everything else. The introduction of the Euro ten years ago only strengthened this trend, which is ironic considering the EU has also become an establishment currency. But, if you look at the charts, the Dollar/Euro pair has rarely traded sideways, and traders have used it as a basis for making broader claims about the markets]. Now, it looks like this could finally change: “The big trends will be in non-G4 currencies against G4, such as dollar/Norway or euro/Aussie, and in emerging market currencies.”

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New “Partition” in Forex Markets


In October, I wrote about a “separation” that had taken place in currency markets between the “sick” currencies and the “healthy” currencies. At the time, I argued that the former category was comprised mainly of the Dollar and the Pound, with most other currencies healthy by comparison. While I still stand by this paradigm, I would like to revise it slightly. Specifically, I would like to add the Euro and the Yen to this list.

The recent blow-up surrounding the downgrade of Greece’s debt and subsequent explosion in the price of credit default swaps (which insure against default), have shined a spotlight on the fiscal problems of many of the EU’s member states, including Spain, Italy, Portugal, Ireland, and others. The situation in Japan, meanwhile, has been much more gradual, though equally dangerous: “In 1990, Japan’s total national debt load was 390% of GDP. Now it’s 460%. In the interim, the country has suffered sub-par growth and routine recessions.”

The fiscal problems of the US and UK governments as well as the debts of their citizens and companies have long been famous. For that reason, when the sick/healthy paradigm was first proposed, they were the two most obvious candidates. Having conducted some additional analysis, it’s now patently obvious that the same problems affect the EU and Japan. Given that their economies are also in weak shape, it doesn’t really make sense to group them in with the healthy currencies. Canada (and the Loonie, by extension) is also looking sickly, with its surging national debt and record budget deficits. The only reason it is being spared from the list is because of its richness in natural resources; in other words, it has something tangible that it can use to pay its debts.

Among the so-called majors, then, only the Swiss Franc, Canadian Loonie, Australian Dollar, and New Zealand Dollar get clean bills of health. A re-casting of the paradigm, then, would put the super-majors (Euro, Yen, Pound, and Dollar account for more than 75% of all foreign exchange activity) on one side, and virtually every other currency on the other. Given that national debt ratios and interest rate differentials diverge across the same boundary, it’s not hard to conjure a basis for this partition. “The IMF forecasts that gross government debt among advanced economies will continue to rise until 2014, reaching 114% of GDP, compared to just 35% for developing nations.” Adds another analyst: “If you look at currencies as a proxy for growth, then you can anticipate that emerging-market currencies will appreciate against the dollar.”

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There is also a correction that is taking place within the group of sick currencies. Investors have come to realize belatedly that a Dollar sell-off doesn’t make any sense against the Euro and Yen, whose economic and fiscal situations could hardly be characterized as healthy. “Against the majors, we’re pretty close to the end, if we haven’t already reached the end of a bear market in the dollar,” asserted one analyst. Given that the Dollar’s demise had all but been taken for granted, this reconsideration isn’t coming natural. Volatility has surged to a 3-month high, and investors are responding by moving funds back to the US. Among the majors, then, it looks like the Dollar is still the “least worst” currency.

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Brazilian Real Nears Record High Against Dollar


The Brazilian Real has been the world’s best-performing currency against the Dollar in the year-to-date, having risen 32% through the beginning of October. At this point, a mere 8% rise would send it crashing through the high that it touched last summer, prior to the collapse of Lehman Brothers.

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The currency has now firmly returned to pre-credit crisis levels, suggesting that investors have once again become complacent and/or they believe the worst of the recession is over. For now at least, the data appears to support that notion. After contracting for two consecutive quarters, Brazil’s economy grew at a healthy clip of 1.9% in the second quarter, compared to the previous quarter. “Brazil is the first Latin American country to emerge from recession—and one of the earliest among the G-20 countries to have done so—following a 1.9% quarter-on-quarter expansion in economic activity in the April-to-June period,” summarized The Economist. To put things in perspective, the economy still contracted on an annualized basis, but such is to be expected considering the depth of the recession. Accordingly, the economy is projected to remain flat for the year in 2009 before returning to consistent growth in 2010.

Brazil GDP Growth (Quarter-previous quarter)
Some commentators have explained this in terms of “decoupling,” the pre-crisis theory that held the global economy (and certain emerging markets) were no longer dependent on the US to drive growth. While the simultaneous recessions in virtually every economy initially seemed to disprove that theory, the fact that some (Brazil, China, etc.) are recovering faster than others is causing analysts to once again asset its merit. However, a Google News search of “Brazilian Real” displays a preponderance of stories that connect the Real with the Dollar, so it seems the decoupling is still partial at best.

The fact that Brazil’s economy entered the recession late and emerged early can be attributed to an exceptionally well-balanced economy.  Exports account for only 13% of Brazilian economic output. In addition, commodities comprise the majority of exports, for which demand remains relatively strong. Compare this to China, which derives 40% of its GDP from exports of namely consumer and industrial goods. Domestic consumption has also remained strong, such that Brazil hasn’t had to promote fixed investment and subsidize growth with government spending.

As a result, the government’s fiscal position remains extremely strong. Its bonds remain investment-grade, which is a unique accomplishment in a region known for defaults, especially during recession. Despite the comparative lack of risk, Brazilian interest rates remain extremely high, even when adjusted for inflation. The benchmark Selic rate currently stands at 8.75%, and there is speculation that the Central Bank will follow the lead of Australia, another commodity rich country, and tighten soon. Interest rate futures currently reflect a 1.75% rise in rates by January 2011.

Investors have taken the hint and poured funds into Brazilian capital markets. Equities are surging, thanks to demand for shares in Santander, a recent IPO and one of the largest in Brazilian history. Brazilian bonds are also selling well and are often oversubscribed (when demand exceeds supply) by investors. Due to such strong fundamentals, meanwhile, the word “bubble” hasn’t featured too prominently in investor circles…yet. At the same time, currency futures are pricing in a gradual decline in the Real over the next year, implying that its run could soon come to an end.

Brazilian Real Forex Currency Futures

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U.S. Employment: The Worst Has Happened


In line with pessimistic “whisper” numbers, the U.S. non-farm payroll report has surprised to the downside.  Today’s results are particularly disappointing as recent economic data had previously sparked glimmers of hope that one of the worst recessions in decades may be abating.  However, now it seems that dreary days are ahead for the U.S. as a key driver for growth continues to remain under water.

According to the Labor Department, non-farm payrolls for the month of September dropped more than expected compared to expert estimates.  Previously, analysts had anticipated a decline of only 175,000.  However, the headline figure was far worse as the report showed that U.S. based companies had shed 263,000 positions in the last 30 days.  Moreover, the unemployment rate, as expected, rose to 9.8 percent (a fresh 26-year high).

This new release reinforces what Federal Reserve policy heads had stated earlier and now places concern on the sustainability of a strong economic recovery.  Last month, central bankers had noted that “economic activity has picked up”, however, overall consumption through households will likely remained subdued by “ongoing job losses” and “sluggish income growth”.

Taking a look at the reports details there is plenty of cause for concern:

  • Payrolls in construction and builders continued to decline as companies in the sector shedded 64,000 jobs following a subsequent 5-digit drop.
  • Service industry workers (including retailers and restaurants) saw a further drop of over 100 percent of last month’s figures.  The sector lost 147,000 workers in the last 30 days as establishments aren’t looking to carry costs into what could be a thin holiday season.
  • Specifically, retailers lost almost 5 times the amount of workers since last month.

The fact that most sectors are continuing to cut positions at a heady pace builds support for the case that the national unemployment rate may actually be understating the current situation.  Just yesterday General Motors had announced that further job cuts are likely as the American icon was unable to sell off its Saturn branch.  The closing will create 13,000 in job losses and close over 300 dealerships worldwide.  This picture will place more speculation on the fact that companies in October may be headed for further cost cutting in order to boost bottom lines in the fourth quarter.

Ultimately, this morning’s release will likely boost support for a U.S. dollar turn in the mid term given the fact that it is yet another sign that the world’s largest economy may be faltering.  Consumer spending continues to lag on slow job growth and economic expansion seems to be in jeopardy considering the widening national deficits.  However, given the rather dull action in the last 24 hours, suffice it to say that the worse number will likely keep risk takers in the game with market expectations already having been met.

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US Dollar: Flurry of Data Lures Traders Ahead of U.S. Non-Farm Payrolls


Today it was revealed that all things may not be as rosy for the world’s largest economy.  Economic data released in the early New York session continued to run contrary to previous speculation that the U.S. may be exiting one of the worst recessions in history.  Now it seems that sentiment may escalate ahead of the monthly employment report set for 8:30 ET tomorrow morning.

Data Pessimism

According to the Institute for Supply Management (ISM) index, manufacturing activity slowed compared to earlier estimates by analysts.  The factory gauge dropped only slightly to 52.6.  However a closer look into the component figures and there is ample evidence for at least a little bit of worry.  Production dropped 6.2 points to 55.7 as new orders components were scaled back by 4.1 points to 60.8.  All of this means that manufacturers may be scaling back in order to see how things shape up in the fourth quarter before making any upside adjustments to labor and capital investment in the final quarter.  Moreover, it spells disaster for the V-shaped recovery proponents as softer labor markets will continue to be a drag to overall economic growth as steady and consistent consumption continues to come in weaker than expected.

The national manufacturing report was followed by an even less optimistic initial claims announcement that showed a worse than expected increase in people filing for first time unemployment.  For the week, experts had anticipated a continuation of what has been seen over the last month or so: continued improvement as company firings seem to have bottomed out.  However, soaring far above the four week moving average, the initial claims number rose by 551,000.  News surrounding the closing of the Saturn automobile brand is adding to the overall undertone as 13,000 positions are expected to be cut shortly after the company closes its doors at the end of the year.  The move by General Motors Co. follows the inability to unload the division as acquisition talks crumbled in the last seconds with U.S. based Penske Automotive Group.

nfp_2009

What Can We Expect?

Given the rather weak employment readings from both the Labor Department and ISM releases today, market participants may be shifting to a negative bias for tomorrow’s highly anticipated report. Although official expectations are rather optimistic, at a drop of only 180,000 jobs, the reality may be far worse when taking into consideration that the previous 216,000 print in the previous month of August may have been vastly understated.  Even worse is the fact that the employment rate is likely to continue higher, on pace to print a fresh 26 year high of 9.8 percent as some in the marketplace expect a figure surpassing 200,000.  The scenario, if proven correctly, will help to build momentum for the U.S. dollar as positions in riskier assets like the Euro and British pound may be shed intraday.  However, should if we see a strong stabilization in the employment picture, at or below expectations, it may be enough to help revive strength in U.S. dollar selling.

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FX Market: Euro, Pound Boasts; Canadian Dollar Coasts


Both euro and sterling pound experienced upside momentum during the session, helped by an improvement in regional U.S. manufacturing data. According to the Institute for Supply Management – Chicago report, business activity ratcheted higher in the month of August. The report sparked some signs of economic recovery as the reading increased to the pivotal 50 figure, higher than the 43.4 posting experienced in July.

Even more surprising were upticks in the separate components creating the overall index. Orders climbed to the highest level in a year as the employment index jumped a solid 3.4 points higher to a reading of 38.7. The month’s results support nothing but optimism on the idea that the world’s largest economy may be on the mend following one of the deepest recessions in decades.

However, given rather tepid data support in recent months (ie manufacturing, employment and confidence),  results for August may be subject to a downgrade next month as additional reports have cued in on a more pessimistic outlook. As a result, traders will likely take today’s results with a grain of salt, while looking ahead to potentially more concrete evidence through this week’s non-farm payroll report.

Expectations are for an optimistic loss of only 250,000 jobs in the economy.

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Canadian Dollar Suprise

Although traders saw a less than expected rise in Canadian GDP, the fact that the figure rose in positive territory helped to boost a rather strong bid tone for the underlying Loonie. For the first time in almost a year, Canadian growth actually increased by 0.1 percent in the month of June, according to Statistics Canada.

What was especially positive about the figure is the fact that overall annualized growth has now improved to a mere contraction of 3.4 percent. This is almost 50 percent lower than the 6.1 percent contraction seen in the first quarter of this year. Helping to put the nation into the black was a rebound in consumer spending and a housing market that reheated following rescue measures implemented earlier in the year.

Incidentally, the current situation bucks what was previously expected for growth even as exports and business investment took a bit of a nosedive in the three month period. Ultimately, those bullish the Canadian dollar won out on the day as the currency continued to be bid higher following the announcement – the currency rose from an intraday low of 1.1091 to just below the 1.0950 figure.

More bidding is expected in coming weeks as the Canadian economy continues to remain one of the few economies that are expected to arise from the ashes in the coming quarter, earlier than other industrialized counterparts.

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FX Market: New Home Sales and Durable Orders Set Up U.S. GDP


According to reports released by the US Commerce Department today, both purchases of new homes and long lasting goods orders rose more than previously forecasted. The optimistic showing helped to reinforce the likelihood that the world’s largest economy may now be exiting one of the worst recessions in 70 years. However, are the numbers really that transparent and all telling? Taking a deeper look into the conditions and background of these figures, there might be evidence of something less than a glass half full mentality heading into tomorrow’s GDP figures.

New Home Sales Jump

Although new home sales jumped by a whopping 9.6 percent in the month, there is ample evidence for sector worry. Referencing the report, the pace of annual home sales accelerated to 433,000 and was the highest in four years. However, lending a hand of support for the figure seems to be the $8,000 tax credit implemented earlier this year. The program has helped to boost the housing figures since its inception in mid February. For the record, new home sales have steadily increased and beat estimates by four out of the last six months. But what happens when the tax credit program ends in the last days of November? The likely finalization of the program is likely to bring an end to the recent uptick in homeownership, which continues to remain underwater compared to last year’s levels. In comparison, rate of sales of new homes in 2008 were approximately 12.5 percent higher than now, with median prices that were 10 percent higher at $230,000. The good ol’ days.

new_home_08262009

Additionally worrisome is the fact that the positive results seemed to have stemmed from one region of the country. Rather than a broader lift in housing, a surge in the Northeastern states helped to prop the report up handsomely. In the month of July, new homes sales jumped by 32 percent in the area. This is a far cry from other regions of the country, which are still showing considerable losses of interest. With unemployment still a burden on a majority of the country, the one time surge in regional demand is likely to overshadow the continued economic pessimism that will likely translate into thin consumption for quarters to come.

Durable Goods Orders Rise From The Grave

Prior to revisions, US durable goods orders slid by a 2.5 percent clip in the month of June. However, the report managed to eke out an impressive 4.9 percent gain for July. This means that American consumers, previously thought to be under the gun, purchased longer lasting items like computers, automobiles and refrigerators. But once again, today’s figures may have led to premature economic partying. Excluding the usually volatile transportation component, the results actually gained a more mild 0.8 percent. The number is dismal when considering the pace of consumption was higher by 2.5 percent in the previous month. Machinery orders declined by 7 percent as the transportation portion added 18.4 percent to the figure on a 100 percent surge in orders for civilian aircraft. All in all, the durable goods orders, although still considered to be optimistic, remains in line with new home sales figures in overshadowing economic weakness still present in the US economy.

durable_goods_08262009

Targeting the US GDP Report

Ultimately, the realization of the softer economic landscape will likely surface in tomorrow’s gross domestic product report. Already posting a soft 1 percent contraction (compared to a 6.2 percent downfall earlier in the year), the figure is expected to contract slightly more this time around by 1.4 percent. Further slowdowns in consumption and manufacturing are likely to contribute heavily to the report as the findings derive results from the second quarter. The sentiment will for sure keep dollar bulls in the ring for a bit longer as traders exit riskier fx trades en masse for a safer currency asset.

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