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Realignment In Global Currencies Caused Global Equities To Pause - Salvador Dali
Sunday, September 28, 2014

The worst week for global equities in almost two months finished on a positive note as optimism in the economy’s strength helped counter a procession of concerns from geopolitics to valuations and interest rates.


The Standard & Poor’s 500 Index lost 1.4 percent for the week, paring declines on the final day with a 0.9 percent rally. The MSCI All-Country World Index dropped 2 percent for the five days, the most since Aug. 1. The Russell 2000 Index of smaller companies decreased 2.4 percent. The MSCI Emerging Markets Index tumbled 2.8 percent, heading toward its worst month since January.

We have to remember that most equity markets are near or at their all time highs. What is different is that I DO NOT see any of these so called all time high markets experiencing crowd madness, euphoria driven rallies, blinkered decision making ... every single market, even at or near their all time highs have been relatively subdued.

That is the crux of the current rally. Is it a liquidity driven rally? Well any bull run has to be driven by cheap money. The only thing is that not many people want to gear up or take advantage of low interest rates to leverage up to participate in the markets. However, many corporations and funds have been more than willing to gear up. Many institutional funds are willing to look for better returns. Hence much of the INDEXED STOCKS highs are due to this, an accumulation by institutional funds ... hence you do not feel the euphoria so much.


The bulk of the activity has been in small caps, look at any market for the past 2 years. There certainly has been a flattening of many major property markets, not correction, but flattening out. We can surmise that a substantial amount of that liquidity may have trickled into equity markets, esp the smaller caps play.

However most equity markets traded sideways for the past week or so, MAINLY as there is an adjustment or realignment process going on in the global currencies arena. It appears there are some main conclusions reached by the majority:
a) Fed will raise interest rates very soon
b) resource led currencies will not get any help from China demand
c) Japan's reflationary tactics gaining traction
d) US recovery more solid and is diverging from EU

Equities fell early in the week as stronger economic data fueled concern the Federal Reserve may raise interest rates sooner than anticipated. The issue took a back seat on the final day as the S&P 500 rebounded from the biggest one-day decline since July on a report showing U.S. gross domestic product expanded in the second quarter at the fastest rate since 2011.

Interest Rates

Investors are analyzing reports to assess whether growth is strong enough to withstand higher rates. The S&P 500 reached a record on Sept. 18 after the Fed maintained a commitment to keep interest rates near zero for a considerable time after completing asset purchases. The Fed also said that the timing could move forward if data continues to exceed expectations.

Interest-rate concerns boosted the dollar, sending the greenback to a four-year high and its sixth straight week of gains. Its rally sent the MSCI Emerging Markets Index to a third week of losses. The gauge has tumbled 5.8 percent in September.

Reports for the week showed the U.S. economy rose at a 4.6 percent annualized rate in the second quarter, up from an August estimate of 4.2 percent. New-home sales surged to the highest level in more than six years, and American factories received more orders for machinery as an improving economy gave companies the confidence to expand.

The USD was set for the biggest monthly gain in more than two years as reports showing a stronger U.S. economy added to bets the Federal Reserve will boost interest rates sooner than its peers in Europe and Japan.

The greenback rose to the strongest level in 22 months versus the euro before the European Central Bank meets Oct. 2 to discuss the region’s slumping economy. The yen approached the weakest in six years amid slowing inflation and mixed signals on the speed of pension-fund changes. Emerging-market currencies headed lower, while the Bloomberg Dollar Spot Index reached the highest since 2010.
Brazil’s real is the biggest loser among the dollar’s 31 major counterparts this month as investors weighed voter support for President Dilma Rousseff in next month’s election amid a recession and inflation. The real has dropped 7.6 percent to 2.4201 per dollar, and it touched 2.4433 yesterday, the weakest since Jan. 29.

New Zealand’s dollar has tumbled 5.9 percent as central-bank Governor Graeme Wheeler called its level “unjustified,” one of policy makers’ criteria for intervention. The kiwi, nicknamed for the image of the flightless bird on the NZ$1 coin, reached 78.60 U.S. cents yesterday, the lowest level since September 2013.

The kiwi led currencies of commodity-exporting nations including the Australian dollar lower amid doubts about the sustainability of economic growth in China, the world’s second-biggest economy.

The yen fell as Health Minister Yasuhisa Shiozaki, whose ministry oversees the Government Pension Investment Fund, said pension reform would go ahead. Shiozaki said there’s no plan to postpone a law change that would improve governance of the Government Pension Investment Fund. A review of asset allocation may see it increase riskier investments, including foreign stocks and debt.


The Bank of Japan, which meets Oct. 7, is trying to boost inflation to 2 percent by pumping 60 trillion yen ($550 billion) to 70 trillion yen a year into the economy. BOJ Governor Haruhiko Kuroda said Sept. 18 in Tokyo he won’t hesitate to adjust monetary policy if needed.

The Fed is considering when to raise interest rates for the first time since 2006. There’s a 78 percent chance the benchmark rate target will go up by September 2015, according to fed-fund futures data compiled by Bloomberg.

So, what will happen? It appears that players used to very scared of any raising of rates by the Fed and were somehow too attached and reliant on QE measures to sustain interest in equities. However, I see a pronounced deviation from that view now. The increase in rates by Fed will actually be a lifting of a stumbling block as unemployment data looks too good to ignore. If the real economy is strengthening, one or even two rate hikes won't kill the market. Maybe the third strike.

I expect a vibrant equity market globally for the last quarter of 2014.

Bullard says Fed 'far behind' schedule for interest rate hike

(Reuters) - The Federal Reserve's third round of bond buying had a better than expected impact on the U.S. labor market, a Fed official said on Thursday, making it all the more necessary for the central bank to move faster with hiking interest rates.

St. Louis Fed President James Bullard pointed out that the economy has exceeded the economic forecasts the Fed presented in September 2012, when the central bank's latest bond buying program - known formally as Quantitative Easing (QE) - was launched.

"The policy rate normalization process remains far behind the schedule laid out at the launch of QE3," Bullard said in prepared remarks for a business event here on Thursday.

true Bullard said raising rates in the first quarter of 2015, a forecast he has maintained throughout the year, would already be past what a standard monetary policy rule calls for.

Bullard is not a voting member on the Fed's policy setting committee. The former central bank staffer said inflation continues to run somewhat below the Fed's policy setting committee's target of 2 percent.

Bullard said the committee will have to change its interest rate guidance language at the next meeting.

Since March, the committee has said it will keep rates ultra-low for a "considerable time" after its current bond buying program ends. That program is set to end this month.

"My presumption is that something will have to change," Bullard said to reporters after a speech to business leaders. "I don’t think we can use the existing 'considerable time' language."

In response to a question from the audience, Bullard said that manufacturing jobs are returning to the United States but not in sufficient numbers to drive the economy.

Bullard also said he would support a more tiered regulatory system that would help ease regulations on community banks.

In a session with reporters after the speech, Bullard downplayed the impact that the surging U.S. dollar will have on the economy and monetary policy.

"If you look at it on a trade weighted basis, the dollar is not too far away from averages that it’s enjoyed over 10 to 15 years. So we’ll see if that moves in a significant way going forward but I’m not anticipating it will."




(Reporting by Michael Flaherty; Editing by Diane Craft & Kim Coghill)

(Reuters) - The European Central Bank laid out plans on Thursday to buy rebundled packets of debt within weeks to shore up the flagging euro zone economy and its president said the bank would do more if needed.

It was, nonetheless, one of the last arrows in the ECB's quiver before the broad buying of assets known as quantitative easing.

Just months after unveiling a multi-pronged attack to help the economy, with cheap bank loans, lower interest rates and a pledge to buy reparceled debt, President Mario Draghi insisted the ECB had been making progress.

true "We've done a lot," Draghi told reporters in the southern Italian city of Naples as protesters nearby paraded banners saying: 'Free us from the ECB!'

"Just go back with your memory to the last three years, even four or five years. We've done really a lot to improve the financing conditions. And now, of course, we are waiting," he said, commenting on a long-awaited improvement in lending.

Draghi, speaking after the central bank's governors had decided to keep interest rates unchanged at just 0.05 percent, also urged euro zone countries to keep up with budget targets, just days after France announced a budget that would flout them.

He outlined an ECB program to buy reparceled debt known as asset-backed securities as well as covered bonds, secured on solid assets such as property, and raised the prospect of bolstering this market and, in turn, lending.

It is a scheme that will start in mid-October for covered bonds, with other purchases of asset backed securities following before the end of the year. Draghi said the potential 'universe' for the type of debt that the ECB was interested in was up to 1 trillion euros, although ECB buys may not be that high.

The ECB will cast its net widely to include debt from Greece and Cyprus with a credit rating of junk on condition that such countries are under a formal international financial program.

"We want to be as inclusive as possible, but with prudence," Draghi said, adding that conditions would apply.

The ECB hopes the program, which will last for at least two years, will spur a market for such credit and support lending to the small- and medium-sized firms that form the backbone of the euro zone economy.

"As all our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to our aim," Draghi said.

He said the intention was to pump money into the economy by expanding the ECB's balance sheet back to the sort of level it was in early 2012, which would mean adding hundreds of billions of euros


GROWING DOUBTS

There a doubts among market analysts and economists that this can be achieved with purchases of asset backed securities.

A Reuters poll on Monday showed money market traders on average expect the ECB to buy a total of 200 billion euros of ABS and covered bonds over a year.

A separate scheme to boost lending by offering banks up to 400 billon euros of cheap four-year loans attracted a disappointing initial take-up last month.

Market expectations that the ECB will launch quantitative easing have shot up in recent months as the bloc teeters on the edge of deflation.

Draghi said the ECB council was unanimous that it would take further steps if it needed to - commonly accepted as code for QE. But that ultimate move remains a difficult one for the ECB to take, given stiff internal opposition.

The euro gained against the dollar while euro zone bond yields rose as the ECB chief gave no hints of an imminent sovereign bond buying program.

Draghi faces opposition on a number of fronts.

Bundesbank chief Jens Weidmann has already voiced doubts about the ABS purchase plan and his predecessor, Axel Weber, who resigned over an earlier ECB bond-buying program, was strongly opposed.

Underscoring the sensitivity of the issue in Germany, Hans-Werner Sinn, the head of Germany's influential IFO economic research institute, attacked the ECB's new project.

"The ECB will finally be turned into a bail-out authority and a European bad bank," he said.

Asset-backed securities are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now the ECB.

Covered bonds are similar instruments but the underlying assets are ringfenced so if the bank goes bust, the assets are still there. That makes them safer than ABS.

Draghi has appealed to governments to back the purchase plan with guarantees for some riskier ABS tranches, a step that would add a seal of security to the market and encourage other buyers.

But France and Germany have rejected that.

One thing that has gone the ECB's way is a significant fall in the euro to near two-year lows which should push import prices up and help growth via exports.




(Additional reporting by John O'Donnell, Paul Taylor and Rene Wagner. Writing by Paul Carrel/Mike Peacock. Editing by Jeremy Gaunt)