In This Issue.
* Italian elections springs the trap door on the euro...
* Bernanke sees little inflation risk...
* Canadian dollar drifts lower as oil prices drop...
* Mexican and Brazilian investors need to watch interest rates...
And, Now, Today's Pfennig For Your Thoughts!
The Italians spring the trap door sending the euro falling...
Good day. And a Wonderful Wednesday to you! I'm writing from home today, as I'm still very weak, with no energy. I going to attempt to not sleep so much today, I doubt it will happen, but I'm going to give it that old college try! I read a few of the Pfennig replies yesterday, and more than a handful of you commented that you like the shorter Pfennig of the past two days... Well, if that's the case, then that's it for today, see you tomorrow! HA!
Well, the Italian election sprung the trap door that the euro was standing on. You see, the markets wanted the austerity programs that PM Monti had implemented to continue. For any illustration that the markets liked the programs, simply look at the performance of Italian Gov't bonds. I told you the other day how Italian bonds had been one of the best performers. When bonds perform well, their yields drop (and prices rise). Well, one sniff of the election left the markets thinking that the Monti austerity programs were in trouble... Shoot Rudy, that wild and crazy Silvio Berlusconi, came close to winning!
You know, back in the days of the Pfennig at Mark Twain Bank (mid 90's) Berlusconi was getting into trouble in Italian politics, so, some things never change, eh?
Any way... Italy's bond auction this morning saw mixed results, as the markets still aren't sure that the pressure that the Eurozone is putting on Italian leaders to continue with the Monti programs will be enough. The euro, however, has recovered a bit, and did trade above 1.31 for a brief time overnight.
The Big News yesterday came from a Big Ben Bernanke testimony... Yesterday, Big Ben was out to let everyone know that the Fed meeting minutes didn't have his stamp of approval on them. Recall, that the minutes had revealed that a few Fed Heads had questioned the performance of Quantitative Easing (QE) which led the markets to believe that QE would end soon. Big Ben said yesterday that the Central Bank's purchases are supporting the U.S. economy with little risk of inflation or bubbles in stocks and bonds...
OK... we need to mark the date that those words were spoken, because I'm sure they come back to haunt him, like these: 7/1/05 - Interview with CNBC "We've never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's gonna drive the economy too far from its full employment path, though."
And with that Chuck had to call for the relief pitcher as he couldn't continue writing. And with Mike pinch hitting the past two days the ball was handed to me to finish today's Pfennig.. so I will take it from here.
Bernanke is obviously convinced the US economic recovery can't be sustained without help from the Fed. He also pointed out that the US is not actively engaged in a 'currency war' and that the Fed is working to insure none of the financial institutions will be considered 'too big to fail'. But the facts seem to differ with Bernanke's latest statement. By continuing with their $85 billion of monthly bond buying the FOMC is definitely pumping US$ into the markets, which has the perhaps 'unintended' consequence of driving the value of the US$ lower. And there is no evidence that the Fed is doing anything to reduce our economy's dependence on Wall Street financial institutions, in fact by continuing with QE Chairman Bernanke is in fact pumping more profits into the biggest financial institutions!
As expected, the equity markets certainly liked what Bernanke had to say, pushing the Dow to a triple digit gain. Currency traders weren't as excited though, and the dollar drifted lower through most of the day. These currency investors were worried about the Italian elections, and what that could mean for the euro region. A benefactor of this euro uncertainty was the Swiss franc which rose to a six week high vs. the euro. The possibility of a return to uncertainty in the euro area has investors moving back to risk-off trades and the Swiss franc, in spite of being pegged to the euro, saw buying.
Over on this side of the 'pond', both the Canadian dollar and Mexican peso fell vs. the US$. The loonie got sold as crude oil fell to a seven week low. This drop in the price of Canada's number one export, combined with worries about the sustainability of the US recovery scared investors. The Bank of Canada had been signaling the markets that they would possibly increase interest rates later this year, but worries about the US economic recovery have reduced this possibility. BOC governor Mark Carney said yesterday that some of the downside risks to the Canadian economy are materializing and that interest rate increases have become less urgent. Not good news for the loonie.
Down south, the Mexican peso fell to an eight week low on investor concern regarding a re-emergence of the European crisis. With an overall 'risk off' trading day, the high yielding Mexican peso was sold. Good news regarding the US housing prices had pushed the peso up momentarily, but the gains were reversed as currency traders re-focused on the Italian elections. Interest rate expectations will continue to drive the peso, and the future contracts indicate that traders currently are betting the Mexican central bank will announce a rate cut after it next meeting on March 8th. Investors in the peso need to circle this date on their calendars, as the peso will definitely be impacted by any rate decision.
Moving even further south, the Brazilian real continued to hang on to recent gains, even after the unemployment rose in January more than forecast. Much like Mexico, investors in the Brazilian real look to positive interest rate differentials to offset some of the real's volatility. The increase in the unemployment rate had some questioning whether or not policy makers would look to move rates higher over the next few months. The Brazilian central bank will be meeting next week to decide whether to hold rates at a record low for a third meeting. The recent increase in unemployment is being offset by inflation which has exceeded the bank's target of 4.5 percent for more than two years. So investors in the real will need to keep an eye out for the rate announcement next week, just as investors in the peso need to be aware of the central bank meeting in Mexico.
And Gold is drifting lower in overnight trading after surging higher yesterday. The price of precious metals moved higher yesterday after Bernanke's comments triggered worries about longer term inflation expectations. Chuck continues to suggest investors look to the precious metals as an 'uncertainty' hedge in addition to the more traditional view of gold as an inflation hedge. Bernankes assurances that the printing presses would continue to work overtime producing more US dollars was all that was needed for investors to take advantage of the recent fall in the prices of gold and silver.
To recap. The uncertainty caused by the Italian elections sent the euro tumbling as investors worry the euro crisis could jump back onto investor's radars. Chairman Ben Bernanke announced that he was in favor of continued QE, sending the equity markets lower but putting some pressure on the US$. Both the Canadian dollar and Mexican peso fell as investors worried about the global recovery and crude oil dropped. The higher yielding currencies are being sold as interest rate increases are now being questioned. And precious metals drifted lower after a sharp rebound yesterday.
Currencies today 2/27/13. American Style: A$ $1.0192, kiwi .8231, C$ $.97397, euro 1.3080, sterling 1.5155, Swiss $1.0741. European Style: rand 8.8797, krone 5.7052, SEK 6.4479, forint 226.33, zloty 3.1888, koruna 19.6050, RUB 30.6029 yen 91.58, sing 1.2390, HKD 7.7577, INR 53.8750, China 6.2270, pesos 12.855, BRL 1.9821, Dollar Index 81.673, Oil $92.62, 10-year 1.85, Silver $29.23, Gold $1,610.09, and Platinum $1,611.63.
That's it for today. As you all know, Chuck continues to struggle with the adjustment in his medications which occurred after his doctor's visits. I'm sure Chuck will pull through this as usual, but please continue to keep him in your prayers. Mike Meyer got some great news yesterday, as he and his beautiful wife Sarah found out they will be having a baby girl later this year. That makes 2 girls for the sales side of the desk with only Mike Harrell's baby still a question. With that I will get this out the door. I hope everyone has a Wonderful Wednesday and thanks for reading the Pfennig.
Chris Gaffney, CFA
SVP & Director of Sales
EverBank World Markets
8300 Eager Road, Ste. 700, St. Louis, MO. 63144
Chris Gaffney, CFA
EverBank World Markets
02-27-2013 11:05 AM