In This Issue.
*Boehner floats a 'Plan B'...
*Euro rises above $1.33...
*Central banks make rate decisions...
*Commodities continue to move higher...
And, Now, Today's Pfennig For Your Thoughts!
House Speaker Boehner floats a 'Plan B' to avoid the fiscal cliff...
Good day. It was another quiet day in the markets, but we kept ourselves busy on the desk with several customers doing some 'end of year' positioning in their accounts. With Christmas and New Years on Tuesdays, it sounds like many of the desks are going to be very lightly staffed during the remaining two weeks of 2012. This usually means the currencies will stay in a fairly narrow range, but the smaller trading volumes also leave them vulnerable to large reactionary moves to unexpected events.
The fiscal cliff is one event which everyone is expecting, but the markets have been priced as if a compromise will be worked out by year end. US Speaker Boehner is pushing the negotiations with his 'Plan B' which will probably be voted on by the House tomorrow. Boehner's plan would raise tax rates on income over $1 million (taking that talking point away from the President) and permanently extend current tax rates on all other incomes. The plan would also freeze the estate taxes and set tax rates on capital gains and dividends at 20 percent on income higher than $1 million. The plan leaves in place all of the automatic spending cuts which are part of the fiscal cliff.
Plan B may pass the House, but it has no chance of passing the Senate and the vote is nothing but a negotiating tool. The two sides do seem to be inching closer, but they still haven't really tackled the ugliest part of the negotiations -which of their favorite programs will endure the largest of the spending cuts. The pressure is steadily increasing on both sides of the aisle, and we will likely see a lot more positioning going into the year end as neither party wants to accept the blame for letting us drop over the cliff.
The dollar drifted lower yesterday, and the euro continued to strengthen in overnight trading, moving above $1.33 for the first time since the beginning of May. Ty pointed out that the Euro was trading at just $1.206 back on July 24th. The euro moved higher after a German report showed business confidence improved by a larger margin than had been forecast. The IFO business climate index climbed to 102.4 in December from a reading of 101.4 last month. Sentiment had dropped to a 2 ½ year low in October, but has been steadily rising ever since. A Bloomberg survey had pegged the projected increase at 102, so the actual number was a definite surprise on the upside.
The euro may also be benefitting from some of the selling of the yen. Central Banks and Institutional Investors are probably starting to move some of their currency holdings back out of the yen, and they are already 'full' of US$. Many of these investors reduced their Euro exposure during the height of the sovereign debt crisis, and the recent upgrade of the Greek rating is another sign that the European debt crisis is starting to calm.
I just realized I hadn't written anything about the Greek credit rating upgrade (guess I really have started to ignore these rating agency announcements). Standard & Poor's raised its rating on Greece by six notches to B-minus from selective default Tuesday, citing a strong and clear commitment from members of the euro zone to keep Greece in the common-currency bloc. It is the highest rating S&P has given Greece since June 2011. Despite the challenges still facing Greece, S&P placed a stable outlook on the new rating. Mario Draghi's 'all in' move of announcing unlimited support for the euro earlier this year certainly seems to have worked. But as Chuck has warned, the euro crisis is not over, it is just taking a back seat to the US fiscal crisis. I would still expect to see some volatility in the euro during 2013.
One of the first of the PIIGS to institute severe austerity measures was Ireland, and the Irish economy is starting to show the signs (both positive and negative) of these spending cuts. Ireland is currently about ¾ of the way through budget cuts which will eventually shave off a fifth of government spending over eight years. They have also instituted tax increases which will send their overall fiscal situation in a much better direction. The IMF has warned that any additional austerity measures should be delayed until the full effects of these latest cuts make their way into the economy. But the latest GDP numbers show Ireland's economy is growing in spite of all of this austerity, with GDP increasing .2% during the 3rd quarter. This was well below the projected number of .6%, but any growth is still a good sign when most of the rest of the Euro area is still in a recession.
Central Banks across the globe will be making interest rate announcements over the next few days. As I mentioned yesterday, Sweden's Riksbank cut rates, and Hungary's central bank followed suit (as predicted) with a cut of their own. While the cut in Hungarian interest rates was widely predicted, the central bank also lowered its inflation and economic growth forecasts, leading to a sharp sell off for the Hungarian forint. Today the Czech central bank is expected to hold their rates steady, but with rates already near zero there isn't much room for further cuts.
Norway's Norges Bank is also expected to keep rates unchanged for a fifth meeting as a strong housing market offsets the desire to push down the value of the krone. The Norwegian currency has become a bit of a 'safe haven' for European investors and the Norgest bank has cut rates 75 basis points over the past 12 months to try and cap the currency's appreciation. But the lower rates combined with falling unemployment and rising wages have helped propel the country's house prices soaring. So the Norges Bank is really stuck between a rock and a hard place with a housing bubble offsetting the concerns from exporters regarding a rising krone. Currency investors should benefit as any delay in action on interest rates by the central bank should lead to more strength for the Norwegian Krone.
India's central bank kept rates unchanged but signaled that it could be forced to raise them in the coming months as prices continue to rise. The Reserve Bank of India kept rates unchanged in spite of some calls from the country's Finance Minister for a cut. India is expected to have the lowest growth in a decade this fiscal year, and many feel the central bank should cut rates in order to stimulate faster growth. The RBI has projected growth at 5.8% during the coming year, but also raised their inflation forecast to 7.5%. That inflation rate is the fastest among the BRIC nations, keeping the central bank from further rate cuts.
Oil continued to climb higher yesterday, as traders feel more confident about the avoidance of the fiscal cliff. Better news out of China/Asia has also led to a general rally in commodity prices. I read a story yesterday on Bloomberg which indicated the big banks are a bit split on their calls for a further commodity rally. Both Goldman Sachs and Morgan Stanley think commodity prices will continue to rise, while analysts over at Citigroup think prices have peaked. The story points out that investors poured money into commodity funds during 2012, even though commodities are headed for their first annual retreat since 2008. The folks over at Goldman feel growth in emerging markets will fuel demand, a position that I agree with.
New Zealand is a commodity based country as the globe's leading dairy producer. As disposable income rises in some of the emerging markets, the diets of these emerging consumers are also changing. These consumers are increasing the amount of protein in their diets creating more demand for agricultural commodities. A rise in demand from Asia helped narrow the current account deficit in New Zealand to 4.7% from a revised 4.8% in the 12 months through June. The kiwi was little changed after the report, but has gained over 8% vs. the US$ this year which puts it among the best performing currencies during 2012 (just behind the Mexican Peso and the Norwegian Krone).
Finally, Chuck got a bit of news from Morgan Stanley yesterday which he wanted me to share with all of you today. According to MS, "their base case forecasts suggest both nominal Treasuries and TIPS will deliver negative total returns over the calendar year - something that has never happened before." Investors will certainly be searching for somewhere to get some positive returns in 2013, and the currencies and metals may provide some good opportunities.
And then there was this. My wife got the following in an email from a good friend and thought it was Pfennig worthy:
This puts things into a much better perspective as to the present economic situation..
Lesson # 1:
U.S. Tax revenue: $2,170,000,000,000
Fed budget: $3,820,000,000,000
New debt: $1,650,000,000,000
National debt: $14,271,000,000,000
Recent budget cuts: $38,500,000,000
Let's now remove 8 zeros and pretend it's a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Total budget cuts so far: $385
Got It ?????
OK now, Lesson # 2:
Here's another way to look at the Debt Ceiling:
Let's say, You come home from work and find there has been a sewer backup in your neighborhood....
and your home has sewage all the way up to your ceilings.
What do you think you should do ......
Raise the ceilings, or remove the s***?
To recap. House Speaker Boehner floated his 'plan B' but it is nothing more than a negotiating position. The euro rose to a level we haven't seen since April after Greece's credit rating was increased and central banks start to diversify out of Japanese yen. Hungary followed Sweden's lead with a rate cut, while the Czech, Norwegian, and Indian banks are expected to keep them unchanged. Commodity prices rose, mostly on the back of an increase in oil prices. New Zealand's current account deficit narrowed but the kiwi was unchanged.
Currencies today 12/19/12. American Style: A$ $1.0511, kiwi .8374, C$ $1.0150, euro 1.328, sterling 1.6297, Swiss $1.015. European Style: rand 8.4720, krone 5.5652, SEK 6.5368, forint 216.41, zloty 3.0719, koruna 19.0349, RUB 30.675, JPY 84.45, SGD 1.2195, HKD 7.7501, INR 54.5575, China 6.2309, pesos 12.7057, BRL 2.0784, Dollar Index 79.129, Oil $88.36, 10-year 1.81%, Silver $31.5825, Gold $1,671.90, and Platinum $1598.50.
That's it for today. Happy Birthday to Ty Keough! We tease Ty about being one of the 'old men' on the desk (both Chuck and Frank are older) but he is also one of the fittest. Ty rides his bike to work every day, only taking the car if/when the temperatures are below 28 degrees!! Ty has been an important part of our WorldMarkets desk for over 8 years now, and was a customer of ours for a number of years before that. Got to get this out the door now, as we just found out we will be another person short this morning; I may actually have to get into the phone queue again - should be interesting!! I hope everyone has a Wonderful Wednesday and thanks for reading the Pfennig!
Chris Gaffney, CFA
EverBank World Markets