Forex Market Outlook 10/10/11
This morning confidence has returned to the markets and we are starting out in risk-taking mode with global stocks and commodities higher to start the US session. News out of the Euro zone that a Merkel-Sarkozy meeting over the weekend solidified agreement on what they are going to do about the debt crisis and the problems plaguing the shared currency--yet no concrete plans were laid out. Again. What they did do is set a deadline for a deal at the end of the month, essentially buying themselves more time.
But we've seen this all before. A plan to make a plan. Market credibility is important at this stage of the game and if the two can't deliver then this could ugly pretty quickly. One of the major points mentioned though was an agreement that the European banks need to be re-capitalized to increase liquidity and offset potential losses due to sovereign debt exposure.
This however begs the question of how the Greek debt issue will be handled, and it seems as though they may require a further haircut from private investors, as I mentioned last week. Other questions to ask are whether or not any restructuring would constitute a default and trigger credit default swap payments and will the potential losses create a world-wide panic? So it seems as though they are starting to prepare for a negative scenario. While the markets appreciate the unified statement that a plan will be forthcoming, the devil is always in the details and the to-be-agreed-upon measures may be negative.
Meanwhile, they still haven't fully ratified the July 21st agreement which is now seen as thoroughly insufficient, though it is expected to be approved this week.
News coming out this week is what I would consider "second tier", highlighted by Euro zone CPI, Australian employment figures, and US advance retail sales.
The markets seemingly would like to take risk as we have seen increased sell over the last few months and the Euro debt crisis has been the major impediment to risk appetite. While the global economic picture is not terribly rosy, you have to remember that markets are forward-looking so its not so much about what is going on right now but what may happen in the near future.
This is exemplified by the debate over economic direction here in the US and while things haven't been great, I get the feeling that activity is ready to explode if we can just get the politicians out of the way. While the business climate is negative right now, these are the times that you have to invest whether you are a business or an individual as you want to be in to catch the upturn when/if it happens.
There is also news coming out of China this week that may give a perspective on how the biggest engine of global economic growth is faring and should they seem to be flat to slightly better than it could set the stage for a 4th quarter rally.
So the data this week needs to be examined as parts of the whole and though there may be some volatility, it is important to get the overall picture. Data has been pretty good in my estimation despite investor sentiment and considering the massive selling we've seen of late, one might expect that the global economy would be a lot worse.
But it isn't. While things aren't great, they're not horrible either. Unemployment is high, but there are pockets of strength. The longer this economic malaise continues to drag out, the impatience with the lack of productivity will increase and businesses sitting on so much cash might have to deploy capital for lack of anything better to do. Even in this ugly business climate with regulatory and tax uncertainty, and the overhang of further crises in the Euro zone.
If these two issues can be put to rest and the markets re-gain some confidence, then we could see some dramatic moves to the upside.
