Stock markets are up, causing investors to exit their safe havens...
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In This Issue.

* Stock markets rebound and send the $ lower...

* Jobs data is positive, but consumer confidence is lower...

* A slowdown in France puts more pressure on the euro...

* India's exports rise 82%...

And, Now, Today's Pfennig For Your Thoughts!

Stock markets are up, causing investors to exit their safe havens...

Good day. Another pretty wild day on the markets yesterday kept the phone volumes high on the trading desk. I'm pretty sure I'm not the only one who is thankful to see Friday roll around, the weekend can't get here soon enough. The big jump in the stock market yesterday caused the dollar to fall a bit vs. most of the currencies as investors moved out of the temporary shelter of US dollars and put their funds to work in the currency markets.

The equity markets were helped by an unexpected drop in weekly jobless benefits here in the US. The number of applications for unemployment insurance payments fell below 400k for the first time since April 2, coming in at 395,000. The 400k is a fairly big psychological barrier, and the markets will be eagerly waiting to see if next weeks claims can continue to fall.

Recently revised growth projections certainly don't give the unemployed much hope. According to widely used assumptions, the economy needs to grow by 5% for an entire year to bring down the unemployment rate by just one percentage point. Economists at Goldman Sachs have slashed their growth estimates to just 2.5%, and economists at JP Morgan Chase are even more pessimistic, revising their estimates to just 1.5% from as high as 3% several weeks ago. Hardly enough to decrease the unemployment rate by any meaningful amount.

Another report released yesterday showed the trade gap in the US widened in June to the highest level in nearly 3 years and consumer confidence dropped last week. The Bloomberg Consumer Comfort Index dropped to minus 49.1 which is only 5 points away from the record low of minus 54 reached in 2008 during the depths of the last recession. A different poll of Americans which was conducted by McClatchy-Marist showed pessimism regarding the economy is at its highest this year. 68% of Americans thing the worst is yet to come for the US economy. Bad news for any hope of a consumer driven recovery.

With the US stock market rising, the euro was able to attract some buyers and managed to bump up a cent. The move was small, and certainly not due to data released in Europe as a report showed European industrial production unexpectedly fell in June. Another report showed France's economy stalled in the second quarter indicating that the economic recovery of the big 2 countries in Europe is losing momentum.

Gross domestic product in the euro region's second-largest economy was unchanged from the first quarter when it rose .9%. Economists had forecast a .3% gain, and Sarkozy's target growth rate of 2% for the year no longer seems like a 'lock'. Sarkozy's plans to reduce the French governments deficit is reliant on growth of at least 2%. Concerns about the debt and slow growth had sent credit default swaps on French government bonds soaring in the past few weeks.

Even after pushing up a bit vs. the dollar in overnight trading, the euro is headed for a second straight weekly decline vs the greenback.

I saw clips of UK Chancellor of the Exchequer George Osborne's pessimistic (but realistic) address to the parliament yesterday. Osborne told lawmakers the UK has an 'unwavering commitment' to fiscal stability. Words like these have caused some to begin looking at the UK as a safe haven from the sovereign debt crisis of the euro region. But the quantitative easing which the UK undertook makes me question just how serious they are regarding fiscal austerity. The UK bond buying program which was copied by our own Federal Reserve is still in place and has bought some time for UK lawmakers. But real cuts are going to have to be implemented. I think Osborne was trying to make sure the UK lawmakers know they can't waver on their commitments to make cuts even in the face of the social unrest in London.

The Swiss franc weakened for a second day as the stock market rallies eased investors need for safety. The Swiss currency depreciated vs. all of its 16 major trading partners amid optimism that European leaders will be able to stem the debt crisis. France, Italy, Spain, and Belgium all banned short selling in an effort to stabilize markets. We have seen this in the past, and while it may be necessary in the short run, I never like officials trying to 'control' markets. Hopefully these countries will lift these bans soon.

As I wrote yesterday, Norway surprised the market by leaving their rates unchanged, and now Sweden looks like it could follow suit. The Swedish central bank had pledged to raise interest rates in the euro-region's fastest growing economy. But Sweden relies heavily on exports of machinery and the signs of a stalling global economic recovery may cause the central bank to pause. Markets had priced more rate increases into the value of the Swedish krona, which could suffer if the central bank decides to leave rates where they are.

The Canadian dollar rose from a six month low yesterday as stocks rallied and crude oil ticked higher. The surprisingly good US weekly jobs report helped rally the loonie, as the US is by far Canada's largest trading partner. Our neighbor to the south also benefitted from the same factors, as Mexico's peso rebounded from the worst decline in almost three years.

The commodity currencies of Australia and New Zealand have been on a bit of a rollercoaster lately but both managed to hold on to the higher levels they reached yesterday. The rallies in the stock markets pushed investors back into the higher yielding currencies, and the Aussie and Kiwi both moved higher.

India's exports grew at the fastest pace in at least 16 years, climbing an amazing 82%. The big increase is justification of India's decision to develop closer trade ties with Africa and Latin America. As the global economic slowdown in Europe and America decreased exports to those regions, exports into the emerging economies of Africa and Latin America have surged. India continues to post impressive growth numbers, and while we probably won't see the double digit numbers we have seen in the past, emerging market growth looks to keep India on a good growth path.

Singapore is the only economy in Southeast Asia with a top rating from all three of the rating agencies. We have long suggested that investors should look at the Singapore dollar as an good place for Asian exposure due to their good economic fundamentals. Singapore also has a policy of using their currency strength as a means to control inflation, so higher prices are actually a good thing for investors in the Singapore dollar.

And then there was this: The US Postal Service posted a notice to employees yesterday stating "We will be insolvent next month due to significant declines in mail volume and retiree health benefit pre-funding costs imposed by Congress." The Postal Service wants to break union contracts, slash its payroll by 20% and stop contributing to health and retirement plans. The big boss, Frank Trotter, has suggested we are going to have to start looking at privatizing certain government run enterprises in order to get our financial house in order. Fannie Mae is certainly one of the first which should go, but the Postal Service is another one which is always brought up. I'm not sure we can find many who will want to buy it though, with the whole world looking to go 'paperless' and the popularity of emails and electronic statements.

To recap. Good weekly jobs data in the US sent the equity markets higher and US$ lower. Growth in France was flat and the euro is headed for a second weekly drop vs. the US$. Sweden may follow Norway's lead and keep rates unchanged. The good employment numbers helped the currencies of our neighbors. Commodity currencies have been volatile, but ended the day higher. India booked a tremendous 82% increase in exports mainly to Africa and Latin America. Singapore is the sole AAA rated economy in Southeast Asia and the US Postal Service is wanting to make some major cuts.

Currencies today 8/12/11 American Style: A$ $1.0334, kiwi .8262, C$ $1.0128, euro 1.4256, sterling 1.6269, Swiss $1.2982. European Style: rand 7.2017, krone 5.4934, SEK 6.4783, forint 192.19, zloty 2.9119, koruna 16.999, RUB 29.1934, yen 76.57, sing 1.2115, HKD 7.7960, INR 45.36, China 6.3898, pesos 12.3016, BRL 1.6257, dollar index 74.496, Oil $85.50, 10-year 2.29%, Silver $38.3175, and Gold $1,751.10

That's it for today. The weather has finally cooled off, and I left here a bit earlier than usual last night and took my wife to a nice dinner on the outdoor patio of our favorite restaurant. It sounds like the weekend weather will be just as nice, and I plan on spending as possible relaxing on my new deck. I appreciate the opportunity Chuck gave me to share my thoughts with all of you over the past few weeks. Thanks for putting up with the late deliveries, and for reading the Pfennig! I hope everyone has a Fantastico Friday and a Wonderful Weekend!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 08-12-2011 1:29 PM by Chuck Butler