Tuesday’s trade has a strange sense of drawing asset classes and global investors back on to the same page. A magnificent equity market rebound has come to a crashing end while the words and actions of many different sources give the impression that economic momentum has once again found an unambiguous central direction. The direction is sadly down, much to the chagrin of the optimists who had found their views translate into a storming market rally.
Equity markets are once again dancing to the voices of wise market sages who are sounding off about further declines for stocks. Hungarian billionaire George Soros, head of the Quantum Fund hinted that investors really don’t get it at present as he told Bloomberg television that the banking system is actually insolvent and that what we’re living through is a once in a lifetime event. Boom and Doom’s Marc Faber, who originally lit the blue touch paper sending stocks into the relative stratosphere when he recently predicted a bold new bull market, turned tail even if only temporarily, and now prefers a 10% decline before stocks can rally into July. The dollar once again took center stage as investors hunkered down preferring to sell euros.
So many investors we have spoken to, read about and heard comments from have cast a huge pall over the latest rally and this week appears to bring equity prices back on to the page. Few people are talking positively about the ‘green shoots’ that Mr. Bernanke noted on a 60-Minutes televised interview some weekends ago. More are quite rightly focused on the deceleration of the slowdown, an inevitable statistical fact when the tsunami of bad news gets so high that it can’t possibly get any higher. And as Mr. Soros points out, the turning point for the economy has not yet been reached.
London’s daily paper, The Times carried an article without referring to its source, in which it predicts the IMF will soon upwardly revise its estimate for U.S. banks’ writedowns and bad debt from $2.2 trillion to $3.1 trillion. In addition it will revise up its value of Asian and European sourced bad banking debts to $900 billion bringing the collective revision to about twice its original size.
While this story arguably puts the financial sector back at the epicenter of the economic storm, it also draws together and contrasts the views of banking analysts such as Meredith Whitney, whose prescient views have proved so accurate in this meltdown, with those of various banking CEOs who fed the market rally in February and March by pointing to strong quarter one revenues. The debate isn’t about revenues as much as it is about the morass that profligate lending has landed the economy in on a forward looking basis. Once again, we note that today appears to draw investors on to the same page.
The Reserve Bank of Australia cut its benchmark interest rate by one quarter of a point to 3% today and in explaining its rationale having adopted a wait-and-see approach in March, the central bank revised down its projection for 2009 GDP growth from 0.5% made in February, to a likely contraction. That would be the first annual contraction since 1991, and so justifies today’s rate cut to a 49-year low. With fourth quarter annualized GDP contracting and unemployment rising, the Australians are once again joining global investors on the same page.
The Japanese had no room to cut monetary policy at today’s meeting and while the cherry blossoms may be springing up across the nation, the same can’t be said about economic growth. The bank expanded the range of collateral it’s willing to accept in exchange for trying to force commercial bank lending. The yen attempted to rally in a sign that some investors view the recent revisit of carry trades as perhaps premature. The euro retracted by around four-yen and today buys ¥133.31. The dollar on the other hand, while lower, still buys over ¥100, while more investors point to strengthening momentum behind the cheaper yen.
Our final note of togetherness today comes unusually from the ECB, where executive vice president Lorenzo Bini Smaghi sounded off in unusual fashion about the potential for currency market intervention. We’re unsure of what the tone of the question he was asked was, but the bold-faced hint that the ECB could sell its currency raises questions, but again draws the ECB on to the same common page that shows a deteriorating rather than incrementally improving situation. At $1.3280 today the euro has given up two cents on Monday’s peak performance against the dollar. But we have to point out that the euro is still well off the $1.60 peak of last year, at which point the ECB was conspicuously quiet as the currency etched lasting slowdown into the face of the Euroland export sector. Why is Mr. Smaghi now discussing the ECB’s preparedness to sell euros other than faced with first quarter evidence that exports and trade in general fell off a cliff?