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The Story Of The First Quarter GDP

Written by A Forex View From Afar on Thursday, April 30, 2009

The GDP report revealed a story of two tales, one in which consumers are the main character and has a happy ending and another where businesses came to the spotlight, but does not have the same happy ending.

The quarterly data showed a surprising 2.2% up-tick in consumer spending, something that indicates that consumer expenditures, which account for two thirds of the economy, remain resilient. At the same time, inventories dropped at a record $103.7 billion annual rate last quarter, which had a major negative influence over the nominal GDP numbers.

“If we take into account that consumer spending rose in the first quarter despite the tight credit conditions, and that business’ shed almost all the available stocks, we may see some positive surprises in the second quarter” TheLFB-Forex.com Trade Team said.

However, despite all the recent positive news, the economy kept contracting at a very strong pace making the current recession the worst in the last half of century. The business side of the economy shows a rather weaker picture, the GDP report points out.

“Business fixed investments plunged 37.8% in the first quarter, the most on record, while nonresidential and residential construction saw a double-digit plunge. Moreover, companies cut expenses on equipment, software and construction projects at a 38% annualized rate,” TheLFB-Forex.com Trade Team said.

“These numbers show the weakness of the corporate environment, which is struggling to survive,” TheLFB-Forex.com Trade Team noted. “Most likely, corporate bankruptcies are heading toward a record this year,” they said.

The GDP numbers are still weak, and do not show a substantial improvement from the previous quarter. However, the financial markets focused mainly on the unexpected rise in consumer spending. It will be interesting to see how spending will evolve in the coming period, giving that unemployment is still rising at a very fast rate, credit markets are still tight and most importantly, the U.S. savings rate is at very low levels.

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The Challenges Of The PPIP Program

Written by A Forex View From Afar on Thursday, April 30, 2009

The Treasury might have scored a big victory recently, since the Public-Private Investment Program, or PPIP, drew bids from more than 100 fund managers. The PPIP program plans to attract private investors that are able to raise more than $500 million in capital to bid for the “illiquid” assets.

“Most likely, some of these potential buyers will be rejected by the Treasury’s term and conditions. However, the remainder would still be able to create a sizable market for the distressed assets,” TheLFB-Forex.com Trade Team said. “By having such a big number of possible bidders, the Treasury might come up with a more realistic price for the toxic assets, one that would also encourage the banks to sell them,” they added.

“The timing may be very good, if all the recent positive news continues in the coming period. If the fund managers perceive that the economy is recovering, they may place some very high bids for the banks’ assets, as theoretically their value will recover with the economy,” TheLFB-Forex.com Trade Team said. “The only problem would be, in this case, to convince banks to let their assets go, and write-down additional losses.”

On the other hand, the main condition for this to happen is that investors must think the economy is bottoming at the time the toxic-assets auction process starts. If not, bids may be lacking, especially at the first auctions, something that might have a negative impact over the entire program.

Additional problems could come from the fact that the recent changes in the market-to-market accounting rules turned many (if not all) of these toxic assets into winners, since now banks can value illiquid assets using their own models. The question that rises now is why would a bank actually want to write-down a loss (the difference between the book value of the asset and the auction’s price) and more specifically, sell it when the bank can be certain that at some point in time the asset will recover its original value?

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Mr. Trichet’s Comments And The Euro

Written by A Forex View From Afar on Wednesday, April 29, 2009

The currency market continued to march inline with the S&P futures today, as has been the case lately. S&P futures, together with the overnight spot equity markets can be a very good gauge of the overall risk-aversion phase, which tends to have a strong influence in the currency market.

However, the euro had a slightly different pattern during the overnight session. The main reason seems to be recent comments made by Mr. Trichet, which declared that lowering interest rates is not always the best path to fight a global recession.

“In other words, Mr. Trichet re-affirms what the ECB members had been saying lately, that the key interest rate may not be going lower than 1%” TheLFB-Forex.com Trade Team said. “This, in turn, had a strong effect in the currency market, since the spread between the Fed and the ECB is likely to remain at the current level,” they added.

Moreover, Mr. Trichet showed his support for the ECB actions, saying again that different situations require different actions. In the past meetings, the Chairman of the ECB has stressed empathy for the inter-banking markets, which are lower in the U.S. on short-term maturities, but on the long term, yields are lower in the Euro-area.

“It appears as though it was Mr. Trichet’s comments, in part, that helped the euro be the best performing currency of the day, after on Monday the single currency was sold heavily,” TheLFB-Forex.com Trade Team said. “On positive equity markets, the euro might advance in the coming days, as the Fed appears ready to print additional dollars, while the ECB looks resilient,” they added.

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The Link Between “Positive Economic News” And Consumers’ Wallets

Written by A Forex View From Afar on Monday, April 27, 2009

Some analysts are beginning to argue that the equity markets have bottomed, and are currently in a bull-run that will continue in the coming periods, while the economy has reached a vital turning point. The main arguments for these claims are recent reports, which, overall, have beaten analysts’ expectations. However, an overview of the vast majority of these reports will only suggest that the economy has merely bounced from its low, and the overall economic data is still not very encouraging.

Friday gave us another example, when the European equity markets and the euro rallied after the German Ifo Business Climate rose 1.5 points from a 26-year low.” It depends on what the market is focusing on, either, that the index is at a record low, or that the index rose 1.5 points,” TheLFB-Forex.com Trade Team said.

However, these so-called “positive reports” come at an expensive cost. In order to see the pace of economic contraction slow (as is being suggested in some circles), the government will run a huge deficit over the medium to long term. “This means that the government will cut costs as much as it can once the economy is in a recovery phase or in some cases even before, and will probably raise taxes to raise additional cash,” TheLFB-Forex.com said.

"According to government projections public deficits are likely to stay at very high levels for years to come from now, something that will be reflected in consumers’ wallets, and their lack of action in pulling out cash. The administration is looking at a 12% budget deficit, something that will require more promisory notes to be printed, bound, and issued, with the likely outcome being that they are then bought back at a huge forward cost by the Federal Reserve".

"The Debt/GDP ratio in the U.S. is also likely to weigh on market sentiment, but so long as equities are held in their current range the Usd will continue to get bought. A break higher in equities however will send the dollar lower, the positive side of economic stories will be all that are heard, and consumer wallet action will increase. A short equity market break will lead to a continuation of the last twelve months of scambling to find fair value, both on the dollar and on consumer wallet action" the Trade Team said.

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Ahead Of The IMF Meeting

Written by A Forex View From Afar on Saturday, April 25, 2009

The IMF meeting is fast approaching and it will be very interesting to see if the 185 member countries will actually expand the IMF’s resources to provide credit, as it has been promised in the past G7 and G20 meetings.

The issue is very important, since the latest reports of the institute compares today’s emerging economies with the ones seen during the 80’s and the late 90’s when Latin America defaulted, and Eastern Asia saw its own currency crisis (which by the way was doubled as the “IMF crisis”).

“Most likely, the report is referring mainly to Eastern Europe, to which most European countries have a sizable exposure. Countries like Austria, Italy, Belgium, Sweden, and to some extent France and Germany will experience the full consequences of a crisis in Eastern Europe,” TheLFB-Forex.com Trade Team notes.

“Add to that Latvia and Lithuania just saw their debt rating downgraded by Moody’s, and both countries have a negative outlook. If Latvian debt gets downgraded again, it will reach speculative or junk grade, meaning that the country has a limited chance of issuing bonds to fund its deficit,” TheLFB-Forex.com Trade Team added.

The IMF should intervene in such cases, and has done up to now for Latvia and the rest of the Eastern European countries. However, the IMF is running out of funds, something that may compromise the institute’s future plans.

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U.K. Deficit Continues To Expand

Written by A Forex View From Afar on Wednesday, April 22, 2009

The Chancellor of the Exchequer, Alistair Darling, forecast a 3.5% contraction in 2009, making it the biggest deficit since World War II. The current projection, of 3.5% is twice as big as the November estimates when the global economy entered into a strong contraction phase.

Currently, the Treasury projects that the country will run a 146 billion pound deficit this year, the biggest on record. This will put upside pressure on the gilt’s yields, meaning that investors will demand more money to fund the U.K. deficit. However, the Bank of England has already acted to counter this, by having direct (and public) interventions in the gilt markets, the U.K’s government instrument to borrow from the financial markets.

For now, the U.K. economy outlook is lying to the downside. Earlier in the day, a report showed that the labor market hit the lowest level in a decade, as the unemployment rate hit a 12-year high. Currently, the OECD estimates that the U.K. economy will contract 4% in 2009, slightly less than the U.S. and the Euro-area

During the Chancellor’s press conference, the pound plunged against the other major currencies. The pound lost 180 pips in less than 30 mins against the dollar, and 100 pips against the euro in a similar period.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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