Mr. Fisher said that he would suggest that, “if the [US economic] data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage. Financial markets “have become hooked on the monetary morphine we provided” after the 2008 financial crisis.” Morphine, happy powder, call it what you will, the effects if virtually free money are manifest everywhere in the current price of certain assets. Any wonder the “QE-hooked druggies” are shuddering at the mere thought of such a change coming?
We have covered the issue of China’s growth-related woes extensively in our Monday commentary so we will not dwell on it here. The reverberations of Premier Wen’s revised economic growth forecast for his country are still with us; Chinese stock markets sank by the most in one month as fears that a hard landing might be the most likely outcome and that years of excess and ill-managed growth will catch up with the economy. Chinese housing price still need to, or could, decline by up to 30% or even 50% in order to reach what might be judged as a reasonable valuation level.
Europe’s economy is on a contractive path as well however, as shown by yesterday’s not-so-rosy metrics. The region’s economy shrank 0.3% in the final quarter of 2011 and now the Old World is facing its second recession in less than 36 months. The recently implemented austerity measure in various EU member nations has only raised the odds that such patterns will continue and/or deepen in the coming couple of quarters.
Italy might “lead” the pack of decliners with an anticipated 1.3% contraction in its economy while German economic expansion might only make progress at the 0.6% p.a. pace. As well, the threat of a disorderly default by Greece has not yet fully dissipated. The Institute of International Finance (IIF) raised the specter that the eurozone might be hit with one trillion euros’ worth of damage in such an event and that Italy and Spain would have to be rescued shortly thereafter.
Whether or not the default debacle takes place depends in large part on the degree of success that Greece will have in negotiating a voluntary debt swap with certain counterparties. For the time being, that deal is slated to be headline material for tomorrow. Chances are that it will come to fruition, but that does not imply that Greece’s (or the EU’s) troubles are over.
The scenario described above also sent risk-taking speculators into the perceived safety of the US dollar on Tuesday. By now, we all know what that kind of quest for a refuge brings about. In this case, it was a three-week high for the greenback; it traded at above 79.80 on the trade-weighted index, and Treasuries also hit a three-week high. Meanwhile, the euro came awfully close to breaking under the $1.31 mark. Equities suffered in the US as well; the Dow fell xxx points –its largest drop in three months, i.e. the worst one this year- as investors turned gloomy yesterday.
This morning’s US ADP private payroll data and ameliorating US productivity figures did improve risk-taking sentiment, but by just a tad. Or, who knows, maybe the Street was just happy about the upcoming Apple news conference. Now we’ll be able to see our portfolio losses in…high definition as we drive off the embankment, totally distracted.
Until Friday, do “drive” carefully…