Risk Aversion and Rate Expectations Behind the Wheel...
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In This Issue.

* This Week in Data...

* What happens in Davos...

* Brazilian Damage Control

* Carney's Party Foul...

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

Risk Aversion and Rate Expectations Behind the Wheel...

Good day.and welcome not only to Monday morning but also to the last week of January. I thought it was just last night when I was watching the ball drop in Times Square and toasting to 2014 on New Year's Eve, but we're almost a month removed and still trucking. Anyway, it's the same lineup this week as I'll be with you today and tomorrow while Chris finishes out the week, then Chuck should be back at it on Monday. Well, Friday turned out to be a tough one for many of the markets so let's take a look.

The fate of the currency market was already sealed by the time I fired up the computers on Friday morning, so the general selloff Chris explained didn't fade as the day progressed. Since the data department was empty, there was nothing to move the markets after Europe shutdown for the weekend. This week, however, should be interesting as we'll have plenty of data and news to wade through, both domestically and globally. While the markets had to largely rely on foreign data to get direction last week, the tables will be turned and most of the air time should be focused on the US.

We ease into it this morning with December new home sales and the January Dallas Fed report, but things really heat up from there. The experts are expecting a slight pullback in the housing number but they're calling for manufacturing in the Dallas region to remain steady. We get more traction heading into tomorrow with last month's durable/cap goods orders and some old data with the November home price index. If we include the January consumer confidence index and the Richmond regional manufacturing report, Tuesday's gone with the wind.

The markets will be holding their breath until Wednesday as we'll get the conclusion of the FOMC meeting and the associated taper announcement. Thursday should be another big day as we not only get the usual weekly jobs report but also the first reading of fourth quarter GDP. At this point, the consensus is for growth to fall a bit to 3.2% from 4.1% in the third quarter. I'm sure there will also be a lot of attention given to personal consumption in the final quarter of 2013, but with the holiday shopping season, we should see a decent pop compared to the previous reading.

The magnitude of the data loses some steam heading into Friday when December personal income/spending and PCE numbers are released. We get a couple more regional manufacturing reports and the final printing of January U. of Michigan consumer confidence to conclude This Week in Data. In other news, the World Economic Forum in Davos, Switzerland usually gives us a few sound bites but we rarely see anything substantial emerge from the aftermath.

For example, Mario Draghi said that he didn't see deflation in the euro area and the accommodative policies that have been in place since 2011 are finally being passed through to the real economy. We also saw the head of the BIS (Bank for International Settlements) talking about global monetary stimulus when he said unwinding expensive policies would likely be more complicated in the future than now and we shouldn't assume that next year would get any easier. I agree with him but we've become so reliant on stimulus, I'm not sure if the markets know how to stand on their own two feet.

Moving on to the currency market, we had a pretty good bout of flight to safety. As Chris mentioned on Friday, uneasiness in the emerging markets spilled over really into everything as equities took another one to the chops. With that said, there were only a few currencies that ended the day in positive territory as the yen, Swiss franc, and CAD in that order finished in the black. Gold was also able to hang onto a slight gain, but silver wasn't so resilient. It turned out to be a volatile week with currency returns all over the board, but this week could be just as volatile depending on what we see and hear from the Fed.

Speaking of all over the board, the Brazilian real had a wild ride on Friday as it was sitting on some pretty big losses in the morning, but managed to get within reach of breakeven. The events in Argentina set the wheels in motion to sell this currency but was later perpetuated by the fact Brazil's current account deficit increased in 2013 to the largest since 2001. President Rousseff was actually in Davos when all of this went down, so she had to scramble around and do some damage control.

She stressed that keeping inflation in check is a top priority and that fiscal responsibility is a basic principle of their vision for economic and social development. The speech sounded great and everything, but it didn't really do much for me. The markets liked it, so I guess that's what counts but I think the main takeaway is the central bank will continue intervening in order to support the currency. At the end of the day, that's all people wanted to hear since Argentina has gone with the opposite strategy.

Up next, let's take a look at the Canadian dollar. As you know, it has fallen from grace over the past couple of months but it turned in a positive performance on Friday. Support came in the way of a higher inflation report in December. While it didn't rise as much as expected, it's 1.2% increase from 0.9% in November was enough to put thoughts of a rate cut on the back burner for the moment. After the central bank said last week the downside risks to inflation have grown in importance, the markets will weigh on the data as the odds maker for any interest rate moves.

Two of the currencies that have been en vogue, the pound and the kiwi, both took a step back on Friday. The NZD sold off in sympathy to the emerging markets, but it looks as though central bank leader Mark Carney threw cold water on the idea that interest rates would rise somewhat soon in the UK. He said even though unemployment is falling faster than expected, the recovery has some way to go before it would be appropriate to consider moving away from the emergency setting of monetary policy. If you recall, the BOE's forward guidance indicated that rates would be on hold until unemployment fell to 7%.

Well, the unemployment rate is currently sitting at 7.1% so the markets were hoping for and ultimately pricing in a rate hike at some point in the not so distant future, but it looks like that may have changed. Carney referenced low inflation, the pound strength, and relatively high debt as reasons to stay on hold indefinitely. The question now becomes whether all of those long positions that were betting on a rate hike will begin to unwind or if they will stay put. I'm sure the BOE wants to see them reverse and lead to a weaker pound.

The euro was able to remain buoyant with only a slight loss on the day, but the Swedish krona couldn't follow suit. The Swedish Finance Minister was also in Davos and was talking about the strength of the currency. He said the krona is not a major issue today, but he didn't want to see it rise excessively from where it is now. He went on to say the economy is showing signs of bouncing back and that he expects to see between 2.5% and 3% economic growth over the next couple of years. Really, I don't see those as damaging comments, so I'll call this a byproduct of the general selloff.

As I came in this morning, it's a bit of a mixed basket with the bias leaning toward sell the dollar. The Aussie is on top so far with just over a 0.75% gain while the yen is having a rough morning. I haven't seen too many headlines pointing to specific news, so it looks as though the risk aversion from last week is beginning to wear off. I saw a report where leveraged funds increased their net short positions on the Aussie to the most since June 2006 last week, so it may just be a case of being oversold. We also had German business confidence rise to a 2 ½ year high and the Bundesbank saying growth in the country will rise in the first quarter, so both would support an easing of risk off trading.

Recap.This week is shaping up to be a big week in the data department as we have both the FOMC meeting as well as 4th quarter GDP, so all eyes should be focused on the US. We have the annual World Economic Forum in Switzerland, so it was interview after interview and presentation after presentation. We did see Brazil's president scramble to give the markets reassurance they will still support the currency and keep inflation in check. Canadian inflation came in a bit higher so rate cut chatter has slowed a bit, but BOE governor Carney snuffed out the chances of a rate hike in the UK at any point in the foreseeable future.

Currencies today 1/27/14... American Style: A$ .8746, kiwi .8249, C$ .9054, euro 1.3659, sterling 1.6545, Swiss $1.1138. European Style: rand 11.0780, krone 6.1740, SEK 6.4433, forint 223.04, zloty 3.0718, koruna 20.099, RUB 34.5080, yen 102.75, sing 1.2760, HKD 7.7641, INR 63.10, China 6.1022, pesos 13.3869, BRL 2.3965, Dollar Index 80.49, Oil $97.02, 10-year 2.75%, Silver $19.85, Platinum $1,418.99, Palladium $729.75, and Gold. $1,264.26

That's it for today...we finally had a reprieve from the single digit temperatures over the weekend, so it was nice to walk outside and not regret it, but we fell back into the frigid air this morning. Other than that, I had a relaxing weekend and got a few things done around the house since everyone has gotten rid of their colds. I'm trying to get back into the fitness routine after taking last week off, so I was able to get a couple workouts in as well. We have a full week ahead of us, so that does it for me today. Until tomorrow, Have a Great Day!

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 01-27-2014 1:36 PM by Chuck Butler
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