The global financial market got the lift after Friday’s news that Spain is considering to seek a bailout package. Stocks, gold, currencies and bond market surged on hope that Euro-zone economies are now close to reaching some sort of understanding. The volatility has surely reduced and the market has traded in a reasonable trading ranges.
Market tone remained bullish, as buying on dips was preferred by investors after the mood set by the European Central Bank promising to make every effort to spur growth in the Euro-region, which got further boost by FED’s additional easing policy. After last week’s FED making 3rd QE announcement, market is focusing on economic data and US election, but market concentration has surely once again shifted towards Europe.
Request from Greece asking for more time to implement reforms are threatening and news that Torika’s review of Greece could be delayed until US elections is not very comforting. Rumors are also circulating that Greece could ask for another bailout package. Reports of Torika going on a week’s vacation is neither helpful. All this could turn out to be disturbing news for the market this week.
With Spanish 10-year bond yield already dropping by nearly 150 basis point to 5.74 pct, Spain should seriously consider asking for bailout package or if it is waiting for yield to further fall to 5 pct or below, this could a wishful thinking, which may later prove to be too late and messy too. But the hindering factors that may be the delaying cause are that it has to cut spending, freeze pension and rise the retirement age. They are all tough measures to implement, as size of protest in Spain is also on a gradual rise.
What I have started fearing is that the delay by Spain in asking for a bailout package will once again erupt the Euro-zone crisis and this may be a very difficult situation to counter because ECB does not have immediate mandate to act. So far it’s all verbal volleys by Draghi, which requires more documentary evidence and if the bailout is further delayed I will not be surprised to see market getting impatience. But I am also sure that serious back door discussions must be going on and waiting for the final outcome.
Another major development of the week was Japan’s 3rd time easing through injection of another USD 127 billion. Japan extremely worried as its export are not picking due strong Yen, as has far injected USD 1.55 trillion against FED QE injection of USD 2.35 trillion.
Despite weak economy and with debt of near 200 pt against its GDP, investors still find Yen very attractive because of uncertain economic condition in Europe and USA. Apart from carry trade opportunity another reason for Yen’s popularity is that basically it’s a liquid currency unlike CAD, Aussies, Kiwi or the Scandinavian currency.
This year since mid-March, Yen after touching the highs of 83.80 has so far gained sharply defying BOJ to break the 80 level band to a USD in April and since then Japanese currency have been hovering between 77.70 to 80.35 range.
SNB facing similar problem of strong Swiss Franc that is hurting its export did well by pegging Swiss it’s currency against Euro by providing a floor and continues to threaten the market that it is considering raising the floor from 1.20 against Euro, it also quietly and frequently intervenes to support SFR. But SNB’s smartest strategy is that it is leaks information in the market and often warns the market of using various tools such as placing deposit fee or many occasions rumor of intervention order is spread, which has proved to be very effective. I am sure this is stopping investors to take risk in SFR.
Japanese strategy of dumping Yen through intervention or its 3rd quantitative easing (QE) has so far failed to bring desired result, which is unlike Swiss Central Bank strategy.
The real problem faced by Japan is the aging population, as almost quarter of the population is of over 65 years. Despite zero interest rate policy since almost a decade, Japanese business entrepreneurs finds it very difficult to create demand for its goods and services in the domestic market and its economy is struggling to overcome its decade long struggle against deflation.
Meanwhile, strong Yen does not allow its economy to inflate. Basically, to reduce cost of its deficit financing cost, Japan was the original recipe provider of low global interest rate trend, which is now followed globally realizing that tax increase is not a possibility, as it poses big risk to the political leadership and revenue cannot be generated unless business grow in real sense. The world seems happy to buy time and follow Japan’s footstep.
At times it is hard to understand that real factor driving the market, with China/Japan tension looming and the trading transaction between 2-countries reaching whooping USD 345 billion in 2011, it is hard to understand that why Japanese currency enjoys its current strength. Technically, with combination of liquidity injection along with China/Japan tension, Yen should have lost 5-10 big figures. Let’s see that if the tension prolong and will the investors have the courage to hold the Japanese currency. I think Yen in near term will gradually weaken as market will soon realize that holding Yen could be a costly affair, but this may not be the long-term strategy as buyer will hop in to buy Yen at better levels.