WISE MONEY

The highlight overnight was the release of the minutes from the August 10th Federal Reserve Open Market Committee meeting. Some Federal Reserve officials were concerned that a decision to keep securities holdings unchanged would inadvertently signal an intention to resume large scale asset purchases.

Also, a few policy makers said the economic effects of the decision “would be quite small,” but at the same time, some officials saw “increased downside risks to the outlook for both growth and inflation” and voiced concern that further shocks would cause “significant slowing in growth”.

The debate shows the challenge Fed Chairman Ben S. Bernanke may face in achieving consensus for any additional monetary stimulus to reverse a slowdown in growth and reduce joblessness more quickly.

In a speech last week, Bernanke said “Policy makers haven’t agreed on specific criteria or triggers for further action”.

In other important US economic releases, we had the Conference Board’s confidence index yesterday afternoon which showed that confidence among U.S. consumers rose more than forecast in August; a sign the biggest part of the economy may avoid a slowdown that would derail the recovery.

The Conference Board’s confidence index increased to 53.5 from a five-month low of 51 in July, figures from the New York- based private research group showed. More confidence may help ease concern that consumer spending, which accounts for about 70 percent of the economy, will falter.

As we approach the ECB meeting this Thursday, yesterday’s Eurozone annual inflation reading fell from 1.7 in July to 1.6 in August, coming in well under the ECB’s target of 2%. Inflation looks set to remain muted for the rest of 2010 and into 2011 as European governments implement austerity packages to shore up their sovereign balance sheets.

Yesterday we also saw German unemployment continuing to fall, for the 14 month in a row, slightly better than expected sparking a rally in the Eur/Usd which provided strong support going into the release of the Fed’s minutes. Investors had been keenly anticipating the release of these minutes but were somewhat disappointed as it lacked any new information triggering another move higher for Eur/Usd.

Reports today suggest FX analysts are the most pessimistic on the Pound since May 2009, predicting the Chancellor’s cuts will eat into economic growth, the already soft economic recovery is forecast to slow causing Sterling to fall back against both the Dollar and Euro. Median estimates suggest the Pound will drop 8 per cent against the Euro by year end as the recent bullish UK data starts to deteriorate.

The US Dollar rose sharply on Friday against the Euro, Sterling, Aussie and Canadian dollar on the back of risk aversion, while safe haven currencies such as CHF and JPY strengthened against the dollar.

The Fed is perceived by the markets to be in a holding pattern until further directional economic data is released. Weakness in global equities carried through to European markets sending major indices lower while US stocks are lower as the sell off continued.

The Euro fell against a basket of currencies on Friday and remains on the defensive this morning as comments by a senior ECB official fuelled expectations for liquidity to remain a concern for the single currency.

ECB Governing Council member Axel Weber told Bloomberg in an interview published on Friday it would be “wise” to extend unlimited liquidity to banks past the end of 2010. The Euro was further hit after the US Federal Reserve said the US and global economic recovery was losing steam, striking a nerve with investors.

The euro zone is seeing an increasing split not only in banking but in the economy in general. While the euro zone economy improved in the second quarter with Germany setting the tone, southern Europe recorded much more muted growth.

Market analysts believe the ECB may have little option but to keep flooding the money market with cash to help banks and governments in the EU.

The dollar strengthened overnight after the Fed took steps to try and bolster the fragile US economy, saying they will maintain their holdings of securities to stop money from draining out of the financial system. In a bid to avoid a double dip recession, The US central bank said it would reinvest between $200-300m of proceeds from maturing mortgage bonds from the first $1.2 trillion QE cycle.

It left its policy rate unchanged and renewed its pledge to keep rates low for an extended period.

Following the fed announcement treasuries surged as markets anticipated a renewed round of asset purchases should the economy slow further.

Figures since the last FOMC meeting in June indicates that the pace in recovery in output, manufacturing, retail, employment and housing has slowed significantly.

However Wall Street fell heavily last night down around 2.5% as investors worried about further debt increases and slowing growth.

Speculation over the announcement of another round of quantitative easing (QE2) at tonight’s Federal Reserve meeting is reverberating around the money markets at present.The consensus seems to be that that additional liquidity will be added to the system through reinvestment of maturing assets already on the Fed balance sheet, rather than return to fully blown quantitative easing.

The recent surge in commodity prices after Russia placed a halt on exports of grain is a worrying development for the Fed, it will need to consider that further down the road after it may find certain parts of the economy experiencing inflation at the same time as others are suffering from rampant deflation.

This is why this Fed meeting is seen as so important– we wait to here which way the inflation/ deflation needle is pushed (unless we end up waiting until next month!).

Sterling continued its climb against the Dollar yesterday as momentum from Fridays disappointing US jobs figures continued in early trading.

But the Dollar has regained some ground this morning after the announcement from the Royal Institute of Chartered Surveyors that UK house prices have declined for the first time in a year.

On Friday, the Dow Jones fell by as much as 120 points after annualised growth in gross domestic product (GDP) was found to have slowed from 3.7% in the first quarter to 2.4% in the second.That came on the back of growth of 5% in the final three months of 2009. The US was initially thought to have grown by 2.7% in the first quarter but that was revised upwards on a day of surprises for economists.

The US Commerce Department also revised downwards GDP figures all the way back to the beginning of 2007.

The second-quarter slowdown led economists to question whether the US might be poised to enter a period of negative growth later in the year, leading to a much-feared double-dip recession.

The Dow Jones fell sharply after the release of the GDP data before recovering ground to settle down 40.72 at 10,426.44 in lunchtime trading. Economists had predicted second-quarter growth of 2.5pc, but their disappointment was compounded by the revised data for the first three months of 2010.

The biggest concern in the City was the size of the downward revisions to previous years’ growth. In 2009 the economy was previously estimated to have declined by 2.4%, but the figure was revised to a drop of 2.6%.

The disappointing growth numbers were compounded by the International Monetary Fund’s (IMF) annual report on the US economy. The IMF said there may be a need for the Obama administration to increase the amount of fiscal stimulus in order to boost the recovery, warning the “outlook remains uncertain”.

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Last night Ben Bernanke, Chairman of the Federal Reserve, delivered his twice yearly report to Congress where he outlined their outlook on the US economy.
Due to the oblique nature of Central Bank parlance, Mr Bernanke’s speech was closely watched for any indication, however vague, that the Fed thinks the economic recovery in the US is not proceeding the pace originally thought.

He duly obliged, saying that the outlook was “unusually uncertain” and stressing again that persistently high unemployment remains a real problem and is likely to remain so for an extended period.

The dovish tone and increasingly cautious outlook naturally led to a reduction in risk appetite and the corresponding sell off in US equities and rise in the Dollar.

Cable had a volatile days trading yesterday, just before 8am we saw a huge Sterling sell, dropping from 1.5290 to 1.5168 in a minute before recovering after reports of a fat finger or algorithmic trading problem at a bank in the Netherlands.

Whatever happened, we are sure someone is seeking alternative employment this morning.

Angela Merkel’s announcement of a ban on short selling any sovereign bonds, credit default swaps and shares in Germany’s top ten financial institution was supposed to bring calm to the markets – instead it’s turned into a spectacular own goal.

The euro US Dollar foreign exchange rates has since hit a fresh low, sliding to 1.2140 before recovering significantly after rumours of the Fed and ECB checking prices at major banks (which is tantamount to direct involvement) and stock markets around the world suffered further falls.

There was widespread condemnation of the move, the main fear being that the regulations would scare investors away from the Eurozone just at the point when it needs them the most (BNP Paribas reported major capital flight to Switzerland yesterday).

It is also a blatantly political move masked in economics, designed to garner support from the left and shore up Merkel’s government.

The effectiveness of a one country ban on short selling was Deutsche Bank, Germany’s largest financial institution, who after the ban was introduced ceased trading in CDS’s between 7am and 9am until they realised the ban only applied in Germany and promptly resumed normal business through their London office.

The release of the Bank of England minutes yesterday shows a continuation of the dovish stance of the MPC. They again voted unanimously in favour of keeping interest rates on hold and remained cautiously optimistic that the economic recovery would pick up pace the latter part of this year and into next.

However, with inflation still above the target level of 2%, a rise in interest rates later this year cannot be ruled out. Sterling posted gains yesterday against the Euro, moving once again above the 1.17 level and also gained 5 cents against the Aussie Dollar as a short squeeze on the carry trade caused investors to cover their positions and push the Pound higher.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.