Tuesday, July 25, 2006

Another U.S. Official Saves the Day

EUR/USD 1.2650 Hi 1.2673 Low 1.2604
USD/JPY 116.72 Hi 116.99 Low 116.51
EUR/JPY 147.68 Hi 147.48 Low 147.29

Condoleeza Rice's surprise visit to Beirut was well timed. Just when the DOOMSDAY CROWD was looking good and the Hezbollah-Israeli conflict seemed sure to ignite a region wide war, in flies Condi. WOW!! This makes Bernanke's timely testimony look like small beer. What timing, what panache !! Yesterday, just as Condi appeared miraculously in Lebanon, in Gaza the Palestinians offered a cease fire, Syria said it was open to talks, Israel noted that it wasn't in principal opposed to the deployment of a U.N. peace keeping force in Southern Lebanon. The only missing piece was Iran. But hey what's not to like ? Things were looking good. With Bernanke coming across all dovish, corporate results surprising mostly on the upside and peace looking possible in the latest Middle East conflict, the scenario was pleasing.

While the media and the markets celebrated, the reality on the ground is just a little less hopeful. Israel is continuing to bombard Lebanon, whose economy and infrastructure now lie in ruins, despite strident calls for a cease-fire by U.N. observers and dark mutterings about war crimes. And the chances of a cease-fire happening any time soon look remote. Rice has not in fact even called for a cease-fire. The idea being that a cease-fire can take place only once Israel has reached its military objectives. Only no-one has been told what these objectives are. It can be safely assumed that more bombing is required. Nuking Iran

Israel just placed an urgent request with Washington to supply more rockets. No questions have been raised about what this means about Washington's complicity in what some have construed to be war crimes. And no question has been raised that Washington will in fact meet this order, pronto. So the military escalation continues. The Lebanese have rejected Rice’s Peace Plan, no-one is even negotiating with Hezbollah (who are in fact the other party in this conflict) and the U.S. hasn’t asked the Israelis to back off. The Criminal Accomplice

The USD saw some buying interest on the recent “positive” developments in the Middle East. Not enough buying interest to break ranges, but just enough to give the USD bears a little scare. What happens from here will depend both on GEOPOLITICS and economic fundamentals. While corporate profits in the States are still looking good, economic data points to continued weakness. Ultimately weak economic fundamentals and deteriorating interest rate differentials should help USD bears win the day. War and the USD

Hungary and India have moved to hike rates. Europe is expected to move next week. China is tightening monetary policy and Australia and New Zealand are expected to move soon. The global shift to tighter monetary policy conditions is continuing. With inflationary pressures surprising on the upside and commodity markets remaining tight, there is no reason to expect a reversal in this trend.

Stock Markets, however, are making hay while the sun shines. Strong economic data in Europe, together with the positive performance of U.S. markets, has seen a return of the bull. For now the positive side of U.S. “moderation”, with the implied end to rate hikes, is allowing markets on both sides of the Atlantic to concentrate on the good news.

OIL 75.47
GOLD 622.40

Commodity markets are a chatter with talk that Hedge Funds have sloped off to play with "soft commodities". No need to worry about the volatility of OIL or GOLD any more. Everything can get back to normal. In addition, with a moderation under way in U.S. growth (note there is nothing as shabby as a slow-down happening in the States) the idea is that demand for OIL will soften and Ben Bernanke's dovish forecast for OIL prices will start to look a lot closer to reality than the Doubting Thomases would have us believe. The commodity price bears point out that weaker growth in the U.S. and tighter monetary policy conditions in Asia should start to hit commodities soon.

So far the fall off in the price of OIL has been brief and unspectacular. OIL is back above USD 75 a barrel. The Middle East "Peace Process” is starting to look a little bit like a positive press blurb designed to keep markets (and the voting public) distracted while military operations continue.

U.S. Officials have certainly proved adept at soothing troubled markets recently. It will take real results, however, before a new trend emerges in commodity prices and GOLD. Inflation is still out there. GEOPOLITICS don't look good and the Bush Administration still looks like an apologist for the Israeli Government.

The most disturbing possibility is that Israel is following a neo-con game plan which hasn’t been made public yet. Judging by the U.S. attitude to the recent escalation, the refusal of Rice to call for an immediate cease-fire, the Bush Administration's response to Israeli initial bombing of Lebanon's port and airport facilities (the Administration blamed Syria and Iran at the get go and expressed no surprise at the Israeli attacks - which shocked and surprised everyone else) it doesn't look like PEACE is on either the U.S. or the Israeli Agenda. And the rest of the world has not taken an aggressive enough approach to the crisis to force a cease-fire. So if PEACE is not on the agenda, what is ? If you want to know, find a neo-con and ask him.

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