Stress Test Results in Adding Just More Stress
Rumor has it that US Regulators have told the two largest US Banks, Citgroup and Bank of America, that the results of their "stress test" show that will require further capitalization. What this means in simple terms is that the banks are not ok - they have so much debt, bad debt at that, and they are in need of more money to help them stay afloat.We all knew that Citigroup was a zombie bank, a bank that is dead, bankrupt, kaput, but is being sustained by the generosity of the US taxpayer (with the help of the Chinese treasury Bill holders, of course). But after the results of Treasury Secretary Tim Geithner's test on bank stability - aka The Stress Test - we are witnessing the fact that the US has no intention of following through on their plan to fix the banking sector. It was said that the results will determine the fate of the banks - if they show that they are in fact needy of further capitalization, the US would either systematically disassemble the banks in an orderly manner, or let them fail outright.
The problem is, when the plan was announced, if you remember, it was amidst much criticism that the US did not really have a plan - that they were being too soft on banks with severe problems for fear that their bankruptcy would cause a panic. So Geithner came out with the stress test idea and said that banks that do not pass, will be reorganized (A nice way of saying taken over). But now the outcome has changed - and it seems that the US banks that are at the heart of this whole credit mess will be getting more money to run their failing operations. It looks like the whole plan was to get these results out AFTER President Obama's first 100 days, the yardstick that sets the tone for the presidency.
Is it not ironic that these results were planned for Obama's 101st day?
Wednesday looks like it is shaping up to be a tough one for the US Dollar as risk appetite returns for a bit. I call it profit taking - it will be short lived.
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Bad time for world economy, Forex and commodities
US Recession and Inflation
The latest round of inflation data are indicating that the rate of inflation is decelerating faster than anticipated. The United Kingdom Consumer Price Index (CPI) fell -0.7% on an annualized basis in a single month and the Retail Price Index (CPI) fell at the fastest rate in 20 years. The US Producer Price Index (PPI), the lead indicator, fell a full percentage point in October, from 6.2% to 5.2%. The talk has quickly shifted to deflation, which is certainly a significant risk in the near term with powerful asset deflation, commodity deflation and plummeting consumer demand conspiring to compel a slowdown in inflation. The US Christmas shopping season will likely see retailers chopping prices deeply to get customers through the door and today Marks and Spencer, a large British Retailer, announced a one-day, 20% off everything sale. A look over at the white hot government printing presses and endless stimulus plans that are being discussed should reassure us that the situation we are least likely to find ourselves a few years down the road is deflation - as a reversion to inflation is far more likely eventually. For now, however, deflation is king and the data on inflation is a clear argument for the all of the major central banks to lower their rates to essentially zero in the coming quarters. This will continue to weigh on the carry trades and favor the USD and the JPY.
World Equity Market
Nervousness in equity markets was obvious yesterday. According to the market updates at Finexo, the S&P 500 toyed with the idea of testing the 818 low on the December Future, but rejected the sell-off once again, this time ahead of the low, and rallied sharply into the close after two straight days of swooning sharply into the close – there are no easy identifiable patterns here. Likewise, JPY crosses tested lower and the USD was a bit stronger as well before easing back after the rally in risk. The persistent rally in fixed income is giving the JPY a tailwind as falling interest rate spreads between the rest of the world and Japan usually tend to do. So as consolidation ranges constrict in EUR/USD and EUR/JPY and the market wrings its hands wondering what to do next, we wait and watch the major equity index levels for signs that a new meltdown is in the works, which is still the scenario we endorse until proven otherwise. This would trigger a new leg up on the USD and the JPY. 8000 on the Dow cash index and that 818 level on the S&P 500 futures are interesting levels to watch.
Forex
For the major currency pairs, pull up a daily chart and a 21-day simple Moving Average (MA), which has become the latest obsession whether you are looking at the EUR/USD, EUR/JPY, USD/JPY or AUD/USD. In the absence of a clear direction over the last several days, this technical level has become an intense focus. The danger is that it suddenly becomes worthless as we suspect that it is a bit of a self-fulfilling technical level at this stage. Once real flow hits the market due to a new surrender in equities or on the flip-side, a huge rally, the MA will fade in importance. Still a break above this level and a hold into the close would be a significant technical development here and now.
Alert
Be careful out there, the potential for volatility is every bit as high as it has been at any part of the recent cycle and the relative calmness we have seen of late could be the calm before an intense new storm once these ranges fall.
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