[B]Weekly Bank Research Center 10-22-07[/B]
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[B] Reserve Bank Diversification to Hurt Dollar and Euro [/B]
[/B] [/B] [/B]</p> [I][I] Stephen Roach, Head Economist, Morgan Stanley [/I] [/I]
In this note, we argue that the emergence and full deployment of the SWFs – i.e. , rebalancing their investment portfolios toward their long-term desired targets – could translate into large sales of both the USD and the EUR, and large purchases of EM currencies and the JPY. In other words, while official reserves are likely to continue to evolve in a way that is USD-negative and EUR-positive, the emergence and maturing of SWFs will likely help support the non-G7 currencies, and hurt, in particular, both the USD and the EUR: It will not be a tug-of-war between the USD and the EUR anymore. EM currencies and equities’ impressive performance in recent weeks are consistent with this perspective on the SWFs.
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[B] Euroland Inflation Risk Rising [/B]
[/B] [/B] [/B] <em> Niels-Henrik Bjørn Sørensen, Senior Analyst, Danske Bank
ECB members have been strangely at odds this past week. Some have been highlighting the downward effect on growth and inflation of the currency and credit crises, while others have stressed that activity indicators are still not pointing down, and that oil and global food prices are rising strongly. The divergence of opinion reflects that the outlook is unusually uncertain and that ECB members are simply focusing on dif-ferent developments.
<strong style=""> [B][B][B] [B] Interest rate market review - bonds, cash and swaps [/B]
[/B] [/B] [/B] [I] Trevor Williams, Chief Economist at Lloyds TSB Financial Markets [/I]
Growing doubts that the Fed will lower interest rates again at the end of the month led to a global rise in shortdated bond yields this week and resulted in a flattening of the yield curve. The biggest swing took place in the UK where a speech by BoE governor King forced some participants to revise their forecast that base rates would soon be cut. Stronger than expected economic data also weighed on gilts. UK 2yr yields rose 20bps this week to 5.29%, out performing the US and the euro zone where yields rose 9bps and 18bps, respectively.
<strong style=""> [B][B][B] [B] Are There Any Lesson From 1987 That We Can Use Today? [/B]
[/B] [/B] [/B] [I][I]John E. Silvia, Ph.D. Chief Economist, Wachovia[/I] [/I]
While the origins of the 1987 Stock Market Crash and today’s Mortgage Market Meltdown/Credit Market Squeeze are quite different, the impact on the economy may prove to be remarkably similar. One of the reasons why the economy grew so solidly back in the 1980s was that we saw a dramatic decline in the dollar and sharp turnaround in net exports. Domestic demand did slow roughly as expected. We are a seeing a similar turn of events today, with export growth nearly offsetting the entire decline in residential construction. Businesses tied to the domestic economy are struggling while those tied to global economic conditions are seeing solid gains in orders and earnings. Focusing solely on the negatives ignores the economy’s propensity to constantly evolve. The second half of the expansion tends to be driven by different forces than the first half. Typically, economic growth in the first half of the expansion is driven by consumer spending and housing, while growth in the second half is driven by exports and business fixed investment. That is the pattern we saw in the long economic expansions of the 1980s and 1990s and also appears to be playing out today.
<strong style=""> [B][B][B] [B] No bottom yet in U.S. housing market [/B]
[/B] [/B] [/B] [I] Steve Chan, Economist, TD Bank Financial Group [/I]
With the troubles Americans are having with their housing market, you’d think their homes were possessed by poltergeists. Remember how a thriller movie builds to the point where you know something is about to happen, so you grip the arm of the chair a little tighter and your heart pounds faster with anticipation. That must be how market participants feel every time U.S. data are released. By now, one would think that bad news on U.S. housing market conditions is as predictable as the first naïve youth to fall victim in the horror movie, usually the part in the movie where you yell at the actor on the screen to not open that door. Yet, financial markets were definitely caught off guard when the U.S. Census Bureau reported a 10% collapse in September housing starts on Wednesday, after a report on Tuesday that showed homebuilder confidence at a record low. You have to imagine the only thing in the back of everyone’s minds is…get out.
<strong style=""> [B][B][B] [B] Other Pre-screened Independent Contributors[/B]
[/B] [/B] [/B] [I] J-Chart [/I]
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