GBR Market Wrap: All Eyes on Europe

In this Week’s Issue: October 28, 2011

• Weekly Snapshot
• Weekly Barometers
• Weekly Chart
• Recommended Read
• Recommended Video
• And The Winner is…

Weekly Snapshot

• U.S. consumer spending rose in September while personal savings declined
• The Japanese Yen was at a new record of 75.65 versus the U.S. Dollar
• China’s manufacturing sector expanded moderately in October
• E.U. asks Greece’s creditors to take losses of 50% on their holdings of Greek bonds
• U.S. consumer sentiment improved in October for the second month in a row
• U.S. real GDP grew at an annual rate of 2.5% in the third quarter of 2011
• U.S. durable goods orders for September rose 2.4% excluding airplane orders
• U.S. home prices were up 0.2% in August, the 5th straight monthly increase
• The Bank of Japan eased monetary policy by purchasing government bonds
• India raised interest rates to 8.5%, the 13th increase in the past 19 months

Market Barometers

Weekly Chart
It was all about Europe again as the world awaited results from the European summit which focused on the Greek debt crisis. There was an “agreement” of some sort wherein creditors were asked to take a 50% haircut on their holdings of Greek government debt. Painful indeed for those who were daring enough to lend money to Greece but perhaps still better than the values implied by bond markets. While Greece may have some short-term relief now, the news does not bode well for long-term prospects. It will take a long time and far higher bond yields to attract additional financing which is clearly going to be needed next time the Greek cash runs out again. My guess is three months from now…

In terms of the impact on Europe and its flagship currency, a major crisis has been averted for now. With combined efforts, Frau Merkel and Monsieur Sarkozy have become very adapt at kicking the much bigger can a bit further down the road. The markets cheered and rallied across the board in an all encompassing sigh of relief. What about future prospects though? Will the focus of the markets now shift to the other European periphery countries, Portugal, Ireland perhaps even Spain and Italy?

Is the Euro going to be more stable now and will it survive yet another round of attacks?

Putting things somewhat into perspective, we should recall that the Euro was only at 1.2 versus the Dollar when the Greek crisis first unfolded about 18 months ago. Many analysts then wrote that the Euro was “toast.” Fast forward to today and the Euro is trading above 1.4, substantially higher and than two summers ago. With Greece at a technical default level, the Euro has indeed remained remarkably strong, at least in relative terms compared with the Dollar. While Europe awaits the next sovereign debt issue, possible candidates are Portugal and Ireland, here is a direct comparison with equities. From this perspective, the Euro has performed remarkably well, was ahead of the S&P 500, and also only about half as volatile so far this year. However, we can rest assured that there is more to unfold in this European saga.

Recommended Read
The financial services overhaul legislation is well under way by now. Still, most players in the financial services industry are spooked by uncertainty as to when and how the new rules will pan out and how they will affect us if and once they are actually implemented. Please consider Dodd Frank’s long-distance paper chase by Gillian Tett, questioning whether more rules will make our financial lives any safer.

Recommended Video
The Euro is not toast after all. In fact, it has shown much resilience so far.  But despite this week’s positive market signals and an extension of a Greek default (although they are technically at default level), fundamentally nothing has changed. Greece still has a mountain of debt and the financial conditions of Portugal, Ireland and, to a lesser extent, Spain and Italy are essentially the same. This leads to the question as to the long-term viability of the Euro and its constituent countries. Please consider the following interview with Mark Dow who succinctly lays out the options for the Eurozone going forward.

And The Winner Is…
After a summer of political debate over the U.S. debt ceiling and while the European sovereign debt crisis has been brewing, quietly and almost surreptitiously, the Japanese Yen has continued to gain strength against the Dollar. This week, the U.S. Dollar fell to a new all-time low of 75.65 against the Yen. Perhaps more so a reflection of Dollar weakness rather than pure Yen strength, the strong currency however, is giving Japanese policy makers a big conundrum. Japan has again softened monetary policy hoping to lessen the value of the Yen going forward. Continued currency strength is a problem for an export-driven economy. So far the trend is clearly in favor of a stronger Yen. We are slowly approaching intervention territory. Let’s see how far the Bank of Japan will let the Yen rise before additional measures are taken.

Good luck and good investing!