Movement in several financial sectors around the world have acted to push the U.S. dollar up, including a dismal jobs report in the U.S. and fears that the Eurozone is on the verge of collapse. Germany is set to hold a judicial hearing to decide the legality of the continued bailout of its fiscally unstable neighbors and many expect the country to discontinue aid. The dollar has lately been struggling due to a shaky U.S. economy and credit downgrade, but even greater uncertainty in other markets make it look relatively safer. For more on this continue reading the following article from The Street.
The dollar is up broadly at the beginning of the week on Friday’s disappointing U.S. jobs report and escalating fears over the eurozone crisis.
European indices have come into aggressive selling pressure with the Euro Stoxx 50 benchmark down 4.6% this morning, as a disappointing U.S. jobs report fueled concerns about the magnitude of the global economic slowdown while growing EU political risks hit bank shares.
Regulatory pressures remain an added headwind for financial systemic risk after the U.S. Federal Housing Finance Agency filed lawsuits against 17 global institutions over the sales of mortgage-backed securities in the buildup to the 2008 crisis.
This pushed the shares of European lenders named in the lawsuit down 6% to 8% this morning. Crude oil fell 1.6% to $85 a barrel overnight.
The Bund benchmark future reached a new lifetime high of 137.89 amid growth signs that the European Central Bank has scaled back operations in Italian and Spanish bond markets, where 10-year government bond risk premiums are up 26 basis points and 14 basis points, respectively.
Euro zone sentiment remains poor. The political backdrop continues to deteriorate ahead of an expected German high court ruling this Wednesday on the legality of the eurozone bailouts.
German Chancellor Merkel’s CDU lost a weekend election in her home state of Mecklenburg-Western Pomerania. Her coalition has lost numerous votes in recent months, showing that Merkel’s handling of the eurozone debt crisis is taking a big political toll. It also underscores the bailout fatigue being felt in the stronger eurozone countries.
There is a full slate of central bank meetings this week, including the ECB, Bank of England, Reserve Bank of Australia, Bank of Japan, and the Riksbank. No rate changes are expected from any of them, though we expect that the ECB will be the most closely watched one for any clues regarding future policy.
The Federal Reserve’s Beige Book for the Sept. 21 meeting will come out this week, and in light of the poor U.S. jobs data, more analysts are looking for some sort of Fed action at that meeting.
In the emerging-market space, central banks in Malaysia, the Philippines, Indonesia, Korea, Poland, Russia, and Peru all meet as well. We believe emerging-market central banks have moved into dovish wait-and-see mode for now, with the obvious exception of Brazil and Turkey (which have both cut rates). At some point, more EM banks are likely to cut rates if the global outlook worsens, but we think it is prudent that they remain on hold for now.
The yen remains confined within a tight 76.5-77.5 range against the dollar after a new cabinet was announced. Incoming Japanese Prime Minister Yoshihiko Noda has announced the new cabinet, which features members of the Democratic Party of Japan (DPJ) who have strong ties to the opposition Liberal Democratic Party.
The appointments mark an attempt to quell the party tensions that characterized the tenure of former Prime Minister Naoto Kan.
The finance minister position was given to Jun Azumi, a former journalist and parliamentary affairs chief, who remains an unknown quantity in terms of fiscal and monetary policy remain unknown. Hence market expectations around his appointment have been low. Still, new budgets will be expected to call for tax hikes as a way of financing future public sector expansion, most likely focused on a consumption tax, which had proven politically controversial for Kan.
Inflation readings for August in emerging markets have largely come in on the high side, but policymakers will be hard-pressed to tighten policy because of the negative global backdrop.
Turkey’s CPI rose a bigger-than-expected 0.7% month over month and 6.7% year over year, and we suspect the weak lira (TRY) was a major factor behind this.
Although we do not think markets will punish countries that remain in dovish wait-and-see mode, they have been punishing the two that have cut rates already this year, Turkey and Brazil.
Brazil’s currency, the real (BRL), and TRY are likely to continue underperforming this week.
Elsewhere, Indonesian inflation came in higher than expected too, but policymakers there have been pretty open to rupiah (IDR) strength and are not obsessing about the exchange rate. As a result, IDR is not going to be seen in the same negative light as BRL and TRY, as sentiment has been harmed for the latter two by active encouragement of weaker currencies.
We have always thought encouraging a weak currency is a dangerous strategy, and it is coming home to roost for Brazil and Turkey.
This article was republished with permission from The Street.