Bulls Refuse to Give up on Stocks and the Euro in Spite of Tensions in the CDS Market, Growth Fears
Thu, Sep 23, 3:11 PM ET, by ForexTraders.com
Today gold came very close to $1300, stocks in Europe and Asia fell, while the Euro remained volatile. This was mostly caused by ongoing tensions in the European sovereign CDS market, and widening spreads of the periphery with the benchmark Bunds. It has been observed, also, that the market seems to be going through a period similar to the run-up of the second half of 2008, where a number of bubbles in the commodity and FX market burst to create great chaos. We do not believe the dollar sell-off will end in a trend reversal, and regard the recent bullishness as a consequence of the liquidity excess in the market.
Ireland CDS break a record, spreads with Bunds widen
Ireland's second quarter GDP shrank by 1.2%, in spite of expectations of 0.5% growth. This was received with a strong reaction by the markets, with 5-year CDS widening by 15 basis points to 475, after earlier reaching as high as 500, breaking another record. Irish-German 5-year spreads broke another record too. Markets are of course worried that the contraction will exacerbate the troubles of Ireland as it tries to implement austerity measures, and absorb the losses of the banking sector. Portugal, too, had its CDS 14 basis points wider at above 400 bp.3-month Euribor eased a little to 8.78% from 8.79%.
German PMI disappoints
German preliminary September manufacturing PMI came at 55.3 vs. market expectations of 57.6, while the services PMI was released at 57.2, matching expectations. Eurozone PMI also came weaker than expected. It certainly looks like the growth trend has reversed in the region, with the peak in PMI sentiment reached between July 2009, April 2010.
Wen JiaBao says 20-40% appreciation not possible
In comments made earlier today, China's Premier said, in response to various initiatives by U.S. Congress, statements by the President, and possibly some pressure from Larry Summers last week, that the demanded 20-40 percent appreciation of the Yuan vs. USD would not be practical for the Chinese economy since it would lead to massive social upheaval, bankruptcies, and unemployment. He also said, however, that the differences between China and the U.S. are "very easy to resolve", and repeated the customary statements about the two nations benefiting from a strong and stable relationship.
Markets have mostly interpreted these statements to mean that Renminbi's appreciation will be limited for now to 5-10% at most. 10% would be a little bit of a surprise if it comes before the end of this year, but the great pressure that the Chinese are feeling right now makes this a meaningful possibility nonetheless. Such an appreciation would bring the USDCNY rate to almost 6.00, which is a sensible target.
On the whole, today is dominated by negative news from around the world, but the center is of course the Eurozone with ongoing tensions in the sovereign market stealing the spotlight from the deterioration in general economic performance. Yet, pessimistic news have been around for quite a while, and the market can perhaps show a bit more resilience before capitulating in the face of overwhelming evidence.
SDI Glossary: "CD" Definition
SDI Glossary: "GDP" Definition
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