The Growing Gulf :  The US v Global Gloom

 

This week gave us perhaps the starkest picture of the growing contrasts between the ongoing struggles in the Eurozone to the impressive and unexpected upturn in US economic recovery seen Friday in the non farm numbers.

Of course US growth has been a media topic since the  Fed began its reversal of  QE policy . The FOMC’s policy has been data driven and Fridays number was a huge advance, the largest this year and way beyond the expectation.

It is true the say that the oil rout has not shown up in the data and it will take time to do so and  the rate of growth will no doubt bear the effects. So it will in the Eurozone also where they have no strengths or signs of economic life to counter them.

Deepening Contrasts

There was some extra cruelty for Draghi making his ‘non-announcement ‘ the day before the US results. The ECB chairman has made it clear that he supports the introduction of QE but the opposition is not weakening and he needs the votes. They were not there this week at the ECB meeting, the opposition becoming more vocal with a focus on the probability (as they see it) of a QE program not working even if used rather than on it not being required. There have also been discussions as to legality within the ECB’s mandate.

Of course we already know the Germans head up the opposition and also the Frenchman Benedict Coeure. All Draghi could do was make a vague promise to re-look at a QE initiative at the next meeting. This was a disappointment to the markets especially along-side all the gloom and doom of  new lower forecasts for inflation and growth prospects.

The effects of the oil price fall can only make things worse in terms of low inflation and there is a chance that the fragile 0.7% inflation projection for next year doesn’t really factor in the full effects of the rout.

Mr. Draghi will be lending more money to banks next week, by way of LTRO (long term refinancing option) to bring some more liquidity and kick start a little growth in non financial businesses and households, but few think it will have anything but a mild effect and certainly not enough to stave off the spectre of deflation.

And here is the final problem for Draghi, even if he eventually achieves his majority can he implement QE in the face of German opposition when they play such a major part in the Zone’s financial union?

It was of course the US that brought Euro depression into even sharper focus with the impressive jobs numbers.

Leaps and Bounds?

 Well,may be not just yet, but the US data results on Friday were not just about the increase in job creation  which went way beyond expectation but the signs of wage growth in the average hourly earnings numbers.

This puts dollars in pockets and wallets and the ordinary citizen can feel the recovery in the economy themselves. It ceases to be a matter for the politicians the economists and the media. This is where confidence can really kick in.

This has to be seen in the context of the slide in oil prices and that is necessary to repeat. On Friday however the US could not have wished for a better outcome or indeed a more encouraging sign of growth.

There is still a lot of vulnerability in economic expansion, not just oil but the global outlook generally and the inevitability of the strengthening dollar, but we are as always looking at the comparatives of the various economy pairs that we trade and in the UK we have an old expression…’In the land of the blind, the one-eyed man is King’ In the case of the US it may well be getting some sight back in the second eye!

The effects of oil prices, global use of massive QE and its unravelling, high equities will keep us on our guard. It is unknown territory but we as traders focus on present conditions and circumstances.

Informed Trading decisions

 

Here are some of the current salient facts

1. The US is growing in strength

2. Eurozone is heading towards deflation.

3. Data is critical to policy.

4. Oil prices are at a 5 year low, this causes inflation pressure especially for the economies with growth stagnation (e.g., EZ and Japan)

5. All commodities as expressed by the index have fallen % this year

6. Traders are still prepared to take risk
7. Global economic outlook is for lower forecasts and downward inflation pressure.

 

Global Economic Review

 Equities 

 Here is a snapshot of 3 major global equity indexes showing how well they reacted to strong US data.

 The Reserve Currency Index 

Always keep an eye on the USD Index;

Japan

Japan is one of the world’s largest oil importers, meaning import prices will vastly improve for them. The mixed effect, however of lower prices stimulating growth has to be set against the threat of inflation slowing further. Japans massive QE (QQE, Qualitative Quantitative Easing) is still not making the inroads they need to raising inflation so like the Eurozone they too face increased risks of deflation. As with the Euro, only interested in shorts.

 

Canada

One of our major commodity currencies so we are well aware of the risks. Canada had a slew of data this week, including trade balance that missed the expectation, and a reduction in their employment numbers, also missing. The BOC governor Poloz had warnings about inflation but did point out that US strength will improve the country’s exports. Not all bad news!

 

Australia

Both retail numbers and trade balance beat expectations, but the latter is still -1.32 billion! With its dependance on iron ore and oil prices, its reaction to all Chinese fluctuations, and the strong data from the US it was not a surprise to see the downtrend continue to its    year low. Chinese manufacturing PMI testers on 50.00, with all that it implies. I have been in short positions for some weeks, and will be continuing to look for long term short positions.

 

 Switzerland

Post gold-vote  and time to weigh the consequences. With the referendum choosing (as the SNB desired) not to increase gold reserves, the SNB are left with available money to buy as many euros as they need to peg the exchange to the euro’s value. That decision they made some time ago and they do have the funds to achieve it. If it keeps pace with a falling Euro the Swiss franc’s buying power could be seriously reduced. For that reason and with US data looking better and better I will be looking for longs on a long term basis if the fundamentals stay in place.

 Trading Decision Perspective

The Fundamental Quick Checklist ..

 The data available has a good deal of information and foreword guidance to get us into the bracket of ‘increased possibilities’ but when boiled down to the bare necessities the two keys of fundamental market movement are Inflation and Interest Rates.

 In its simplest analogy, factors (such as Oil and other commodities) will affect inflation data and inflation data will affect monetary policy and thus interest rates. Of course all results and data, whether it be GDP PMI or one of the many others are intertwined and affect each other . Focusing on the essentials will in turn focus attention in the right place and as far as possible keep us out of trouble in our decisions.

With global outlooks threatening stagnation or worse deflation on everyone’s minds watching the vital data that will drive the pairs we trade becomes ever more necessary.

No let up next week, NZD rate statement, Australian employment numbers , SNB monetary policy statement and US retail and PPI. And watch for the next round of money lending by the ECB on thursday.

Will be updating later in the week, until then happy 3D trading!

 

Judith Waker

fotistradingacademy.com