A market-defining weekend

Currencies Direct November 14th 2008 - 3 minute read

I am not sure if it's just wishful thinking, but opinion appears to be growing that some sort of fledgling agreement to co-ordinate an international cut in interest rates was hatched at last week's meeting in Sao Paolo. If this is correct, then expect to see an announcement as part of the G20 Heads of State communiqué at the close of this weekend's summit in Washington and lower interest rates all round come next week.

Not sure if the gradual acceptance of this possible development was the sole reason for the massive turn around in Wall Street's fortunes last night, but the bounce in US share prices was massive (DJIA up 6.67% and NASDAQ up 6.5%) and a positive impact on other stock markets has been/is being seen.

As I mentioned before, the problem is that monetary policy tinkering (albeit with a capital T) will not work on its own. In order for the stagnant global economies to benefit from lower rates, we need to see adjustments to fiscal policy plus a return of confidence to the financial markets and here is where the problem lies. The big player at the table is the US of course, who are presently in a complete fiscal mess.

While Congress is keen to pass through a large fiscal stimulus package, there is considerable doubt as to whether George Bush will sign it. The second biggest player is the Eurozone, which has no mechanism for the harmonisation fiscal policy and it is obvious to all that there is considerable discord amongst members as to the desirability of any immediate stimulus. Japan, the third largest in the group, has no scope for any sizeable fiscal adjustment as its debt ratio is far too large for it to be able to push anything meaningful through.

In other words, it looks very unlikely that any sort of agreement on fiscal stimulus will be reached this weekend and as such, the kick-start will sputter along for a while yet. It is interesting that the focus of Henry Paulson's bailout plan for the US banking system has shifted dramatically with concern centred suddenly on consumer demand, rather than the bank's huge portfolios of toxic assets and the fund being used to invest in financial institutions rather than just buying toxic assets from them.

This, I suppose, is about as close as we are going to get to a cash injection into the US economy as we are going to get ahead of the change in the US administration in January.

Today (14 November) we have a raft of GDP data from European countries culminating in the rate for the region overall. As stated earlier in the week, this is expected to show the Eurozone as an area is already in a recession and ought to promote the view that lower interest rates are imminent. One European Central Bank member has already been talking easier monetary policy this morning. There is no data from the UK today and we are then left with the US. Retail sales are likely to be dire but attention will be more on the performance of the Dow and any comments coming pre-G20 than on individual data. There are also plenty of scheduled speeches later from US officials (including both Ben Bernanke and Mr Paulson) which will be listened to for clues as to likely events this weekend.

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