Scared Money

Another day, another worry.  At least that’s what is on the mind of investors as market risk has further induced the flight to safety trade.  In addition to Euro zone debt default contagion and the Korean conflict, today we get added fears of a Chinese economic slowdown as well.

The worry from China is that inflation has increased so much that China will have to raise interest rates and tighten credit conditions.  Should money flows slow significantly than economic grow could stagnate which would further pressure the global economy.
Bond vigilantes have now turned their attention to the debt of the remaining PIIGS countries as yields are being pushed higher.  The Euro has continued its sell-off and is now trading below 1.30 vs. USD.
However news out of the Euro zone isn’t totally negative, as German unemployment rate held steady on smaller than expected job loss figures.  Euro zone CPI data came in as expected.
North of our border, Canada reported a negative monthly GDP figure, posting a .1% contraction vs. an expected .1% gain.  This helped push the annualized GDP down to 1% vs. an expected 1.5%.
Overnight in Japan, the jobless rate increased slightly to 5.1% vs. an expected 5%.  This helped send the Nikkei lower in addition to the Chinese slowdown fears and increased demand for Yen.
The other safe haven plays (US dollar, Swiss franc, and gold) are all higher as well.
In the forex market:
Aussie (AUD):   The Aussie is lower as a potential Chinese slowdown will affect Australia greatly as China is the leading importer of Australian exports.  Tomorrow’s GDP report likely will show a bit of a slowdown as higher borrowing costs and a stronger Aussie may have hurt exports.
Kiwi (NZD):   The Kiwi is also lower on risk aversion and last night NZ reported that building permits declined 2% vs. an expected gain of 1.4%.  A Chinese slowdown also hurts NZ.
Loonie (CAD):  The Loonie is lower across the board as lower than expected GDP figures (see above) lessen the chance for a further BOC rate hike.  There was some speculation that Canada would be the next to hike, but given global economic conditions, I don’t think anyone (except maybe China) will be hiking rates any time soon.  (Click chart to enlarge)
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Euro (EUR):  The Euro is also lower across the board as the bond market is not letting up on the other countries that are potentially facing debt problems.  Unless the ECB does something to thwart these bond attacks, then both Spain and Portugal could be forced into taking bailouts.  The “prize” right now is Spain, but the market will settle for Portugal if Germany decides to step up.  (Click chart to enlarge)
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Pound (GBP):  The Pound is mostly lower as well as risk in the Euro zone is dragging the Pound down.  Consumer confidence figures came in lower than expected and at this point I don’t think the UK is too upset that the Pound is selling off.  However, UK bank exposure to Euro zone sovereign debt could become an issue.
Dollar (USD):   Congrats to the Dollar, which is getting prettier by the day.  As bad as the US economy is, the Dollar’s role as a safe haven currency trumps negative data such as home prices, which show slight declines vs. expected gains.  Consumer confidence figures are due out later this morning.
Yen (JPY):   The Yen is showing strength today as potential problems in the Pac Rim have re-established the Yen as a safe haven.  The unemployment rate ticked up slightly and the inverse correlative affects of the Nikkei selling off have increased demand for Yen.
It appears as though the era of “extend and pretend” may be coming to an end.  Today marks the first meeting between the President Obama and the opposition party, who is now the majority in the House of Representatives.  Differences over how to handle the economy will be a major issue going forward and we may see an end to the profligate spending that has mired the US in debt worse than the entire Euro zone combined.
Not only has the euro zone come to terms with the idea of having to “take their medicine”, but Germany appears to be force-feeding those countries facing problems.
The UK has already put in place austerity measures so Pound weakness due to Euro zone problems is a welcome relief for the BOE.
Even China may get into the act and look to halt inflation by raising rates; though I wonder how much longer the government will be able to keep the dam from bursting.  There is major trouble brewing over there and eventually market forces could prevail.

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