GBR Market Wrap, April 29, 2011
In this Week’s Issue
• Spot Gold surges to yet another all-time high near $1,570 on Friday (FT)
• The U.S. Dollar fell to a new low of 0.8625 against the Swiss Franc (AP)
• Eurozone inflation in April rose to 2.8%, the highest level since October 2008 (Reuters)
• The Chinese yuan has breached 6.5 to the dollar for the first time since 1993 (Reuters)
• Ben Bernanke: rates will stay at 0-0.25% for another “couple of meetings” at least (CNBC)
• BEA advance estimate: U.S. real GDP grew 1.8% in the first quarter of 2011 (ESA)
• S&P cut outlook on Japan to negative from stable, and affirmed its AA- rating (Reuters)
• March new orders for U.S. manufactured goods rose 2.5% to $208.4 billion (ESA)
• Greece’s budget deficit in 2010 significantly larger than expected (WSJ)
• Greek 10-year Bond yields over 16%, 2-year yields above 25% (Bloomberg)
• Home prices in 20 U.S. cities decreased 3.3% from year earlier (Bloomberg)
• The price of spot silver reached a 31-year high of $49.85 on Monday (Bloomberg)
Are you nauseated by this week’s market movements? Welcome to the club…
Fed Chairman Ben Bernanke gave the first news conference after a Fed meeting (see video below), which was seen as a non-event by some commentators. Still, I thought there were some important takeaways, not so much in terms of what he said but how he said it. For instance,
The federal reserve believes that a strong and stable dollar is both in American interests and in the interest of the global economy. There are many factors that cause the dollar to move up and down over short periods of time. Over the medium term, where our policy is aimed, we’re doing two things. First, we are trying to maintain low and stable inflation by our definition of price stability. By maintaining the purchasing value of the dollar, keeping inflation low, that’s obviously good for the dollar. The second thing we’re trying to accomplish is to get a stronger recovery and to achieve maximum employment. Again, a strong economy growing with attracting foreign capital is going to be good for the dollar. In our view, if we do what’s needed to pursue our dual mandate of price stability and maximum employment, that will also generate fundamentals that will help the dollar in the medium term.
Steve Liesman’s Response: Mr. Chairman, one can’t help but notice it’s been unsuccessful so far.
If you felt a lack of confidence in his voice and demeanor, you were in the same camp as market sentiment, which was most immediately apparent in the price of Gold that shot up following the Q&A session.
Gold versus Bernanke
There were also a number of other negative records in U.S. Dollar terms which supported Steve Liesman’s response to Ben Bernanke. The Dollar dropped close to multi-decade lows against numerous currencies. Other currencies, such as the Singapore Dollar and Swiss Franc, let the U.S. Dollar tank to successive new historic lows, continuing the sad trend in recent months.
USD versus Singapore Dollar
USD versus Swiss Franc
Following the financial crisis, the Fed wanted asset prices to rise and so they did. Outside of housing, most asset prices have been on the rise since QE1 and QE2 were implemented. However, there was a cost to it and it has been showing in an ultra weak U.S. Dollar.
U.S. Dollar Index
And lastly, in terms of quantifying U.S. Dollar weakness, our recently mentioned targets of $50 for silver and $1,600 for gold are now clearly up for grabs. Take a look at how silver brings a new meaning to the notion of parabolic rise. This of course raises the question as to how much further the rally can go? Time for a mini-survey. When and at what price do you think silver will top?
Amidst all the hoopla about gold, silver, and the waning greenback, it’s easy to forget that other regions have their share of economic struggles too. Not nearly as talked about these days is the ongoing Greek (fiscal) tragedy showing up in almost unreal bond yields. Double-digit yields, which are highest in 2-3 year maturities, indicate that the market sees a much greater likelihood of default within the next couple of years.
2-year Greek Bond Yield
3-year Greek Bond Yield
In this context, please consider: The eurozone’s quack solutions will be no cure by Wolfgang Münchau.
Here now is the Q&A session during Ben Bernanke’s news conference. Enjoy!
Good luck and good investing!
Clemens Kownatzki, MBA is an adjunct professor of financial risk management at the Graziadio School of Business and Management, as well as the founder and CEO of FX Investment Strategies, a Registered Investment Advisor. In addition to running his investment advisory firm, he is a contributing author at SeekingAlpha.com and BusinessInsider.com. He also publishes the popular investment blog www.fxinvestmentstrategies.com along with a weekly news-letter.
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