The US dollar has appreciated steadily against most of its major counterparts this past week (the notable exception being USDJPY). However, the greenback’s rise has been conspicuously reserved. Realistically though, most markets are following the same slow pace. This is due to a sense of equilibrium that has fallen over the market.
[B]The Economy and the Credit Market[/B]
The US dollar has appreciated steadily against most of its major counterparts this past week (the notable exception being USDJPY). However, the greenback’s rise has been conspicuously reserved. Realistically though, most markets are following the same slow pace. This is due to a sense of equilibrium that has fallen over the market. Risk seems to have found a balance, projections for economic recovery are similar across the board and even strategies to unwind government aid seem to be at the same stage. This fundamental stability won’t last for long however. The market’s speculative drive will soon pit each currency against its counterparts; and at the forefront will be the US dollar. For growth, recent indicators offer steady improvement from recent record lows. More influential though was the IMF’s recent growth upgrades which kept the pace of the US recovery ahead of the Euro Zone and Japanese revivals. For risk, the abundant US stimulus is still in place should unforeseen problems arise; but unwinding this aid seems as if it could be a particularly troublesome issue for American officials.
[B][/B]
[B]A Closer Look at Financial and Consumer Conditions[/B]
Financial and credit conditions don’t look as stable today as they did just three months ago. The steady drop in short-term Treasury and Libor rates is no longer taken as a sign that conditions are returning to normal. Officials and market participants alike can readily see the sizable gap between the cost of short and long-term credit. The liquidity pumped into the market’s by the government has clearly met a choke point at the bank’s level. While the Treasury and Fed were looking to stabilize the credit markets during the worst of the financial crisis, they no doubt expected the aid to eventually find its way to the consumer in the form of loans. This has yet to happen.
The US economy is still mired in recession; but then again, most economic leaders are. What matters at this point is whether the world’s largest economy can recover faster than its trade partners. If we take the IMF’s forecasts at face value, that may be the case. Updating its April projections, the regulator raised its outlook for global activity with an outlook for 2.4 percent expansion in 2010 from a previously expected 1.9 percent. And, while the US was expected to see a contraction of 2.6 percent this year and only 0.8 percent pace of growth in the next, both figures are better than their Japanese and Euro Zone equivalents. At this rate, the US is expected to pace the eventual recovery.
[B]
The Financial and Capital Markets[/B]
Over the past few months, risk appetite has stalled; but just in the past few weeks it seems optimism has actually turned into pessimism. What has changed between now and three months ago? Market commentators and policy officials are still saying the worst of the recession is past us. However, this is not a constant driver. Eventually, this limited forecast has to hit a point of equilibrium where the cautious outlook would be fully priced in. Considering how far the markets have rebounded and the fact that we are still a long ways away from positive growth; it is surprising we have actually come this far. Investors are now waiting for signs of expansion, a pickup in lending, better yields and a reasonable plan for the government to gracefully exit the market space while not leaving a financial vacuum in its wake. According to the commentary to come out of the G8 thus far, optimism for growth is reserved, financial stability is still a struggle and exit strategies are murky and deep into the future.
[B][/B]
[B]A Closer Look at Market Conditions[/B]
Capital markets look as if they may have turned from congestion to bear trend in just the past week. After three months of rally, the inflow of capital that was sidelined during the worst of the financial crisis seems to have finally dried up. Now, investors will look more critically for capital appreciation and rising yields. Will they find it? The consensus for economic recovery is for a drawn out and slow return to growth. Since returns follow growth, it makes sense to expect the same pace for the markets. In the near-term, the health of the corporate sector (and thereby equities and debt) will find its bearings through second quarter earnings reports starting next week.
Risk indicators have backed off modestly over the past few weeks. Clear trends in swelling or receding risk are likely sidelined until the next unforeseen crisis strikes. Since tumbling from late-2008 / early-2009 highs, risk premiums that were inflated through fears of another credit seizure have been fully worked off. Now at levels that are more in tune with the state of economy’s health, market participants will have to weigh longer-term concerns (like the pace of an economic recovery) with those risks that lie just below the surface (such as the effectiveness of the public-private investment plan). With such matters, it will be important to remain open to global conditions, not just the US.
[I]Questions? Comments? Send them to John [/I]