Wednesday, August 16, 2006

After the Hat Trick

EUR/USD 1.2771 Hi 1.2796 Low 1.2768
USD/JPY 116.24 Hi 116.29 Low 115.91
AUD/USD 0.7632 Hi 0.7658 Low 0.7627
EUR/JPY 148.50 Hi 148.59 Low 148.21

Well the hat-trick was achieved: the cease-fire, the re-opening of the Alaskan oil supply and the FED PAUSE. WOW!! The U.S. Stock Market has seen some relief. As of yesterday's close the Dow Jones is up nearly 5% YTD, the S&P nearly 3% and the Nasdaq 100 is down nearly 7% YTD. Which I guess is better than an all out Bear Market, but only just. The OIL price has dipped slightly, the USD is holding. The big problem is that the benefit to the Bush Administration has so far been negligible. Bush's popularity hasn't even got up off the carpet. The concern now is that the Bush Administration decides that it doesn't care. After all there is NO RISK for the Bush Administration. Bush won't be in the next legislature, nor Cheney, nor Rumsfeld.... so there is NO DOWNSIDE for these guys. Why worry what the electorate thinks? Who cares about the Blogosphere? Think about what a Bush Administration still held in check by its concern with popularity achieved. Now try to imagine what a Bush Administration unleashed from concerns with popularity could achieve. Keep that in mind as we move forward.

A trigger happy U.S.A. is still seen as the greatest risk for peace in the world. The talk in Middle East is that the Bush Administration has adopted the principle of pre-emptive war that is absolutely contradictory to the principle of peace. Yes, we have noticed. And the target is still Iran.

Yesterday's release of PPI data in the U.S.A. had the market cooing that the FED PAUSE really marks the end of interest rate hikes in the States. This, together with the slight softening in OIL prices, helped the Stock Market Bulls come out of their pens. The market can run with the interest rate story only for as long as the recession story doesn't get any bigger. And only for as long as the interest rate pause doesn't impact the performance of the USD in a significant way. Should the USD start to see REAL SELLING pressure then there will be a risk that IMPORTED INFLATION brings back talk of INTEREST RATES hikes. But we are some way off that now. First, because so far the USD is pretty much holding and second, because imported inflation would take time to show up in the data. So for now stocks will toss between: no more hikes and economic slowdown.

Data due to be released today could be interesting. While all the STOCK MARKET BULLS will be watching for signs that inflation is dead when CPI is released, the BEARS will be watching the Housing data. Nobody thinks that the housing market in the States is going anywhere but down. The consumer is already fully loaded with debt, the U.S. employment market is starting to show signs of stress, home sales are falling and taking house prices with them. The U.S. consumer is not in a good place right now and there is simply no room for consumers to increase their leverage to pay for further consumption. Any increase in consumption will have to be fuelled by rising incomes, or by using up savings. So don't hold your breath. Given that consumption now accounts for a staggering 70% of the U.S. economy, weak consumption is going to hit overall economic growth hard. A BULL MARKET in stocks will have to fight the U.S. economy all the way.

The USD is trading the interest rate outlook. Retails Sales Friday convinced the market that maybe another rate hike was in the pipeline. Yesterday's inflation numbers changed all that. Today's data is likely to point to further weakness in housing. Inflationary numbers are unlikely to be as soft as yesterday's PPI data. Take away the statistical noise and there is a clear picture of softer U.S. economic activity. Further USD weakness is a matter of time.

While the U.S. Administration fights the USD bears (PPT and all that), the British Administration has no such constraint. And the same forces which are acting on the U.S. economy are at work in Britain: higher rates are eating away into the consumer sector. Economic weakness is starting to show just as old Europe fights back. The EUR/GBP has bottomed. Anything under 0.6750 should be bought. The very short term target for the Eur/GBP is 0.6850. More upside from there is expected. The GBP is the poor man's alternative when being USD bearish is not delivering.

Oil 72.96
Gold 637.00

Further USD weakness will undermine the bearish case for OIL and GOLD. While there is still potential for a correction, this is not a long term trend. Those looking to ride the correction in GOLD and OIL should exercise caution.

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