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GBR Market Wrap: Euro Crisis Abroad, Jobs Stimulus at Home

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In this Week’s Issue: Sept. 9, 2011

Weekly Snapshot

• U.S. 10-year T-note yields decreased to an all-time low of 1.9% on Friday (AP)
• Chinese inflation fell in August to an annualized +6.2% from +6.5% in July (Bloomberg)
• U.S. President Obama proposes a $447 billion Jobs Stimulus Plan (Bloombgerg)
• European Central Bank cut its economic growth forecast and left rates unchanged (AP)
• The Bank of England has left its benchmark interest rate at 0.5% (Bloomberg)
• U.S. 30-year fixed-rate mortgages fell to 4.12%, the lowest in over 50 years (WSJ)
• Chinese officials said the Yuan will achieve “full convertibility” by 2015 (Bloomberg)
• The U.S. international trade deficit for July decreased 13.1%, to $44.8bn (ESA)
• The Bank of Japan has kept its key interest rate at zero to 0.1%, as expected (Reuters)
• The Swiss National Bank set a minimum exchange rate target of 1.20 Francs per Euro (Reuters)

Market Barometers



Weekly Chart

In these uncertain times when the markets are going haywire, investors have an even higher desire to find answers to the multi-million dollar question: “What drives the markets and where will prices be tomorrow?” Responses from all sorts of forecasters are abundant but somehow the market observer trying to find reasonably sensible answers often gets disappointed. Personally, I find a solace in simplicity: If there are more sellers than buyers, prices will go down.

One way to cope with uncertainty is to use humor and the inquisitive Felix Salmon found just that in the following blog post: JP Morgan explains the euro crisis with legos. Please refer to the index below to fully appreciate this graphic.

1. The toreador in a floppy hat, and the F1 driver with his helmet, represent Spain, Italy and the rest of the Euro Periphery. 2. The three men with helmets, shields, and medieval weaponry represent the CDU, CSU and FDP parties in Germany. 3. The blue-and-white sailor boy is Finland. Obvs. 4. The woman with an oversized carrot and her friend in overalls with a shovel represent the Social Democrats and Greens. 5. Wotan represents the Bundesbank. 6. The piggy bank is the IMF. 7. The grey-haired Banque chap is the ECB. 8. The chap in the red bib is Poland. 9. The artists are France. 10. The angry chef, the sweeper with a broom, the airline pilot, and the rest of the motley crew at bottom left, represent EU taxpayers in Core countries. 11. The storm troopers are the EU Commission and Euro Group Finance Ministers, chaired by Jose Manuel Barroso and Jean- Claude Juncker. 12. The monocled banker and his assistant are EU bondholders and shareholders. Sources: JPM/Reuters

Recommended Read
Stephen King, the chief economist of HSBC came up with a compelling rationale for the current dilemma facing financial markets. The answer is worthy of his namesake, the author best known for his work in the horror and suspense genre. Please consider
I can’t hear the markets but I can smell fear.

Yet More Signs of the New Normal

Last week, we examined a number of charts indicating a gradual trend to the now famous phrase: “The New Normal.” Here are a few more milestones on the path to the new normal…

Increasing government efforts towards managing exchange rates: The Swiss National Bank could no longer tolerate the rapid appreciation of the Swiss Franc against the Euro (and the Dollar). In a statement, the central bank said it will enforce a new target rate of 1.2 Swiss Francs per Euro “with the utmost determination and is prepared to buy foreign currency in unlimited quantities.” The market reaction was immediate and vehement. One of the biggest currency interventions in recent history. The U.S. Dollar gained about 10% against the Swiss Franc on the news.

Swiss Intervention

China finally gives an indication of a time frame: During a talk with European business executives, Chinese officials suggested that the Yuan will be fully convertible by 2015. This is perhaps the strongest indication of a target year in which China may actually come onto the world stage of capital markets. Everyone seems to agree that the Chinese Yuan is still vastly undervalued. It is expected that China will gradually manage its currency to slowly get back to the level prior to the massive exchange rate adjustment of the mid ’90s.  While everyone seems to agree that the Chinese Yuan will continue to appreciate versus the U.S. Dollar, the contrarian in me says we should at least consider the possibility that a freely convertible currency might cause substantial capital flight, potentially causing a weakening of the Yuan. Might 2015 be the year to buy Dollars again?

Japan all over again: The yield on the 10-year Treasury Bill fell to a new record low of 1.9% on Friday. This is clearly the result of a growing sense of uncertainty among investors. The same type of risk-off reaction continues to weigh on equity prices bringing some painful memories to those who had invested in Japanese stocks towards the end of the 1980s when the Japanese stock index peaked. Japanese stocks never recovered despite massive government stimuli and essentially two decades of near zero rates.  The Nikkei Index today is barely at a quarter of its value of the peak. U.S. markets by contrast are only at the first “lost decade” in terms of equity returns but the same Japanese-style policy is being employed to combat deflationary pressures, so far with only mixed results. Perhaps policy makers should examine the historic chart of the Japanese Stock Index.


Risk-Free rates no more: While the major developing nations are still able to finance budget deficits by incurring yet more debt at ultra (lower) rates, developments in Europe are showing the effects of investor sentiment who have lost the least bit of hope that Greece can come out of their quagmire without a default. The yield on 1-year Greek government bonds rose to a stratospheric 97.96%. As investors of Greek government paper have come to realize, it is their risk-free rate no more.

Greek 1-year

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 and He also authored the book, Money Music 101, available on Amazon and Kindle, in addition to publishing the popular investment blog along with a weekly newsletter.Disclaimer

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Clemens Kownatzki, MBA
Clemens Kownatzki, MBA
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