Thursday, August 03, 2006

Welcoming Back STAGFLATION

EUR/USD 1.2811 / 14 Hi 1.2835 Low 1.2740
USD/JPY 114.92 / 96 Hi 115.21 Low 114.53
AUD/USD 0.7612 / 16 Hi 0.7652 Low 0.7584
EUR/JPY 147.25 / 29 Hi 147.39 Low 146.19

The BOE and the ECB both moved to hike rates today. Comments by Trichet made it clear to the market that the ECB views current monetary policy settings in the Euro Zone as accommodative. Further rate hikes this year look likely, though Trichet gave no indication about the timing of the next move. He made it clear that the brief of the ECB is to preserve "price stability" and that the risks for inflation remain to the upside.

At the same time Trichet wasn't particularly optimistic about the outlook for economic growth in the medium to longer term. For Trichet all the longer term risks for growth are to the downside. He mentioned specifically the risks to growth coming from higher OIL prices, the potential for existing Global Imbalances (read massive Current Account imbalances) to upset world growth, and the risk of the return to Protectionism in the wake of the failed Trade Talks at the DOHA round.

Even given this view, Trichet said that the ECB will continue to "remove monetary policy accommodation". So we will have higher rates, driven by higher prices and, potentially, weak economic activity. Stagflation, ladies and gentlemen, is back.

European Stock Markets were upset by the joint move by the ECB and the BOE, but it was the surprise nature of the BOE (or at least the fact that the market had not anticipated a move) that really saw the bears come out of hibernation. The Footsie saw the most damage (down 1.62% on the day - and now up just 3.87% for the year). While the BEAR hasn't really been tearing stock markets apart, you only have to look at YTD performances of most markets to see that the overall picture remains weak.

Given Trichet's analysis, the outlook for the economy, company profits and Stocks Markets generally isn't inspiring. Although he mentioned that there could be upside surprises (that is for the moment he can't think of any really positive news) all the longer term economic risks the ECB sees on the horizon are to the downside. Oh the joy, the joy. And what a spectacular contrast to the relentless cheerleading about the economy (and everything else) we are getting out of the States.

Tech Indices in the States are leading the Bears. As always.

The FOREX Market doesn't really know what to do with this assessment. The outlook for higher rates has given the EURO a small boost. Nothing spectacular, and range trading is expected to continue until we have some new information. Tomorrow we have NFP out in the States. This one piece of crummy data will be analysed to death as every economic commentator out there tries to figure out if the FED will hike on August 8. The market is looking for around 140k. Anything wide of the mark could see volatility hit the roof, but one piece of data doesn't really mean that much.

Oil 74.90
Gold 654.00

GEOPOLITICS isn't any better but it's kinda same old, same old. People are dying in Lebanon and now Tony Blair is suggesting that a cease-fire could happen sooner rather than later. Certainly Bush and Blair could do with the boost in the polls that any kind of solution in Lebanon would bring. So maybe they will engineer something. Israel, despite denials to the contrary, is in no position to cross Uncle Sam. Don't know where that would leave the "Neo-Cons" and their bizarre plans for world domination. But you know, you win some you lose some. A boost in the polls in time of the November elections in the States might be worth delaying Armageddon for. Though I wouldn't count on it.

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Words for these LOSER times.


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