Financial Trick or Treat

October 22, 2014

The ‘Trick or Treat’ greeting of Halloween revelers offers a choice of extremes.  The handover of a holiday sweet is a happy moment for giver and receiver alike, while the contrary exchange of an act of vandalism for getting no candy leaves all parties dissatisfied.  There’s no middle ground, and so it has been for financial markets of late, swinging this way or that but not simply standing still and marking time.  The past five trading days saw the dollar perform well, share prices rebound, and bond prices stagger anew.  The dollar gained 1.5%, 1.4% and 1.2% against the euro, Swiss franc and yen and also rose by considerably less against the Australian and New Zealand dollars.  The ten-year Treasury yield rebounded from 1.97% to 2.23%, and Greek 10-year debt had soared over 1-3/4 percentage points in a month but then slumped 35 basis points today.  A one-week correction in stocks after several weeks of falling may likewise have run its course.

Several potential big market-moving events occur in the remainder of this month.

  • The results of the latest stress tests for banks in the euro area will be reported on the 26th.  It’s rumored that over 8% of banks may have failed.  Against the backdrop of a possible return to regional recession, it will be hard to reduce the stinginess of bank lending.
  • Perhaps no uncertainty has caused more uncertainty and edginess in the marketplace than the timing of the first increase of the federal funds rate.  The FOMC releases a policy statement on October 28 that is likely to modify forward guidance language.
  • In Japan, faith has weakened that Abenomics can deliver the economy from chronic deflation.  Central bank officials have lately exuded more confidence in continuing moderate economic growth and eventual further acceleration of inflation than government authorities, who this month downgraded the assessments of the former to “weakness con be seen recently” and the latter to “consumer prices are rising at a slower tempo recently.”  The Bank of Japan Policy Board meets and releases a quarterly Outlook for Economic Activity and Prices with revised macroeconomic projections.
  • Being the end of the month, a host of data releases from many countries will be arriving, including the initial estimate of U.S. third-quarter GDP.  For what it’s worth, the Bank of Canada just revised down projected 2014 GDP growth for the euro area and Japan and projected 2015 growth for the United States, Euroland, Japan and the world.  Assumed global growth in 2016 was also scaled downward.
  • Just over the near-term horizon is the U.S. congressional and gubernatorial elections on November 4.
  • Information may emerge on whether the shootings in Canadian Parliament today represent a planned and organized extension of jihad to North America and the severity of that threat.  The battle to contain Ebola will also command a lot of investor attention.

Currency and other financial markets need to be prepared for continuing high volatility in the weeks ahead.  The 3-6 month trend still favors the dollar based on divergent growth and central bank policy prospects and the grimness of worst-case scenarios in the euro area and Japan. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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