Forex Market Outlook 9/27/11
Yesterday's market rally has continued this morning after news broke yesterday that indeed EU leaders were making significant progress toward coming up with a solution to the debt crisis.
The current plan being floated is one that resembles the US TARP program (Troubled Asset Relief Program) whereby the ECB creates a special purpose vehicle (SPV) that will buy distressed bonds and sovereign debt from banks and issue debt which can be used to access liquidity from the ECB. The general idea is that the bad bonds will sit on the ECB's balance sheet allowing European banks to continue operations.
While these plans have been floated before, this one seems to be a bit more credible as more details emerge. International pressure on EU leaders to do something (and do it quickly!) was confirmed by Treasury Secretary Geithner, who has hit the TV circuit over the last few days.
As a result of this news, risk assets are back in favor with Dollar and the other safe havens declining. This week is fairly light on news so this morning's better than expected German consumer confidence figures had little impact.
It is likely that the US home price figures and consumer confidence figures due out later this morning will have a similar effect. While they are expected to have declined, the markets are more concerned with re-capturing some of last week's losses than with minor data points that show what we already know--that the US economy and thus the global economy has slowed.
One of the "bright spots" about the Euro debt crisis is that it is receiving much of the blame for what ails the global economy. The prevailing notion is that if this situation can just be rectified, then the global economy can resume growth again.
While this situation has been a major source of risk in the marketplace, it must be noted that it is not the sole cause of the global economic slowdown. This "sideshow" may buy time for politicians here in the US to figure out how to work with one another again and institute some pro-growth policies that can get our economy moving again.
We are stuck in a vicious cycle of high unemployment, which reduces consumer confidence and thus demand, which then in turn causes businesses to reduce output which means that they will cut spending if profits fall significantly. The easiest way for them to cut spending is to cut their workforce, which further perpetuates the cycle.
But things aren't as bad as they seem, as corporate balance sheets have never been healthier and hiring could resume if businesses could become more confident that we have the right policies to grow the economy.
Unfortunately, right now we do not. Washington DC is broken and the fact the markets have been laser-focused on the Euro debt crisis of late has let these guys off of the hook.
If a credible resolution be reached by Euro zone leaders, then we need business to come back here in the US. It all starts with government getting gout of the way and allowing the "American Pie" to increase in scope and size. We shouldn't be trying to re-allocate a shrinking pie in the name of "fairness" or whatever else they are calling it.
Until we can shelve the ideology in favor of pragmatism, we will continue to stagnate. So it all starts with the Euro zone, for if they can't get their act together, then what we do here in the US becomes a moot point.
But for now the markets want to believe that the EU will get it together, which I suppose is better than the alternative. While we are not out of the woods just yet, signs point to better days ahead.
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