Markets Rally on ISM Data
- Improving Economic Conditions Bolster Market Confidence
- Optimism Boosts Commodities and Canadian Dollar
- Euro Falls, Estonia Joins Common Currency Zone
- Chile Announces Currency Intervention
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Improving Economic Conditions Bolster Market Confidence
Global markets entered the new year in high spirits as positive economic data in the United States encouraged investors to chase yield opportunities around the world. Global equity bourses rose after the Institute for Supply Management's closely watched factory index rose to 57 from 56.6 in the previous month. This marked the highest level hit since May last year, and the latest in a line of improving readings indicating a rapid strengthening in the world's largest economy.
Large institutional investments typically enter the year with bullish bets on commodities and equities, and it appears that 2011 is no different thus far, with large amounts of money flowing into the financial markets and boosting valuations.
Interestingly, as Federal Reserve Governor Ben Bernanke foretold last year, the US dollar is rising as investors become more optimistic about domestic growth prospects. The dollar has gained almost five percent since early November on a trade weighted basis. Many "carry traders" who had borrowed in US dollars and lent into higher yielding jurisdictions over the last two years are finding themselves losing money as US bond market yields rise and the greenback appreciates. By forcing traders to exit their positions and repay borrowings, a feedback loop has been created. In essence, a rising dollar is leading to a rising dollar.
Traders will be focused on Friday's US non-farm payrolls for the next few days. Recent positive data has contributed to a rise in expectations, and markets may be skittish in the next few trading cycles as participants take profits off the table and place new positions.
Optimism Boosts Commodities and Canadian Dollar
Copper for delivery in three months surged $75 to $9,700 a metric ton, hitting a new record. Across the board, economically-sensitive commodities rose as traders bet on rising global demand in the year ahead. Base metals, agricultural commodities, and the energy sector all saw sharp advances.
Crude oil prices moved to a 27 month high, and took aim at the $100 mark after a mass of cold air from Canada threatened to chill the Eastern seaboard - potentially boosting demand. That crude oil is also one of Canada's largest exports is surely no coincidence. We sense a conspiracy afoot...
Pushed upward by positive sentiment and rising commodity prices, the Canadian dollar held its ground after hitting two-and-a-half year high against the US dollar yesterday, pivoting around the .9930 mark. In a report cited by major newspapers, Goldman Sachs forecasted a further rise in the currency, up to 0.95 against the US dollar by the end of 2011.
Statistics Canada is widely expected to show that employment rose for a third month when it releases December's data this Friday. While these numbers are supportive of benchmark interest rate hikes, trade and debt numbers should act to constrain the Bank of Canada for some time yet.
Relative to the extreme moves seen in previous years, 2010 saw the currency remain within a tight range with the US dollar. Going into 2011, positive fundamentals should keep the currency well supported, although everything will hinge on the direction of the financial markets - which rarely experience the sort of unidirectional rally seen over the last year.
Euro Falls, Estonia Joins Common Currency Zone
The euro broke a short-lived Christmas rally, falling over the session as traders redeployed assets into more attractive growth markets. The currency had gained just over two percent against the dollar in the period between Christmas and New Year's, but lost momentum on rumours of yet another Greek downgrade from Moody's.
Eurozone inflation rose to 2.2% during December according to harmonised numbers published by EuroStat yesterday. While this is likely too high for the European Central Bank's taste, very few observers expect a tightening in monetary policy, given the sovereign debt backdrop.
Estonia became the 17th country to join the currency union since 1999 after successfully passing a number of financial tests and overcoming mild political opposition. Estonia has adeptly managed its recovery from the financial crisis, and the markets have been impressed with its measures to control debt and apply budgetary discipline.
The pound sterling lost almost two cents against the big dollar during Monday's session with British markets closed and liquidity at extremely low levels. This morning, the currency staged a sharp rebound after higher than expected inflation numbers were released, moving up to hit the 1.5625 mark. The December Purchasing Manager Index came in at 58.3, up from 57.5 in November, leading traders to speculate about an earlier exit from loose monetary policy this year.
The Australian dollar slipped nearly 200 basis points from Friday's peak near 1.0250 against the US dollar as traders worried about the impact of floods in the country's northeast. The flooding has shut down many roads and access to coastal ports, threatening to lower coal production and limit exports. Speculation is quickly rising about a retest of parity, although strongly positive sentiment in Asian markets should keep the currency well supported for now.
Chile Announces Currency Intervention
In a sign of things to come, Chile's central bank announced that it would intervene in currency markets, buying $12 billion US dollars in an attempt to push down the value of the peso. Chile's currency has risen 17 percent in the last six months as investors have poured funds into emerging markets and commodity linked currencies in particular.
Copper represents more than half of Chile's exports, and the red metal has been on a tear over the last year, up over 30% as supply shortages loomed and speculative interest ballooned. As this has translated into the peso's value, other export industries have been damaged and the central bank has become concerned about declining reserve values.
Currency intervention of this nature has a dubious record of success, although it did achieve short term results for Chile when it was attempted just prior to the financial crisis two years ago.
Many emerging market monetary authorities have announced measures aimed at curbing inflows and intervening in the currency markets over the last year, and more of the same can be expected in the coming months. These actions can create significant event risk for companies operating in the far flung corners of the world, going hand in hand with the significant opportunities available in the emerging markets.
Have an excellent week, and an even better year!
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