Once again, a weekend makes all the difference. Last week we heard so many rumors about who might be buying out who that it felt like the global recession was a distant and cured reality resigned to the history books. Stocks accordingly rose and the word was that the 20% rally had ushered in a fresh and dapper new bull on the street. It took the auto task force to demand the resignation of CEO Rick Waggoner and a whiff of bankruptcy to sober the bulls from their sweet dreams. With the collapse of a major regional bank in Spain over the weekend, the events have culminated to reinforce both the role of a strengthening dollar and the fact that an American economy in descent is simply just the way it is.
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The Public-Private Investment Plan or PPIP, took center stage over the last week or so. The rebound in financial stocks, which in turn drove the stock market, ushered in a temporary bout of risk appetite, hurting the dollar. Secretary Geithner speaking over the weekend explained his strategy over the weekend. In broad-brush strokes the removal of an initial $500 billion in bad debts and securities from banks balance sheet would be the first step in removing the so-called ‘tainted assets.' The intermediate aim here is to allow banks to trim down and attract more capital. Finally, banks could then start to resume active lending.
What investors are starting to slowly realize is that the easy part is the first step. What they initially missed when reviewing the plan was not only that there would be time needed between the initial disposal of tainted assets and the attraction of private capital, but also that their post-disposal appeal and ability to attract fresh capital might be tainted. Mr. Geithner is now urging the banking system heavily medicated by government stimulus to be more assertive and risk-loving. They need to step up and lend to consumers and business.
The dawning realization that the PPIP is no panacea for economic ills was served a double-blow over the weekend when the auto-task force indicated that GM needs to try harder before it could possibly qualify for further taxpayer dollars. This setback practically puts GM into bankruptcy where the government feels the company and its employees first need to go through a form of rehab and to really think about where they are going. It's a harsh but fair reality.
All of this has mushroomed into a very notable equity market downturn across the globe. When the history books reflect on why there was a 20% rebound from the bottom, financial writers will point out that the coordinated measures were enough to spur on the bad-news weary investor sufficiently to temporarily bust the bear market for a month or so before the weight of further ailing economic data dragged equities back into the mire.
The burst of optimism for those currencies that thrive on a return of risk appetite has gone up like a poof of flames overnight. Both Aussie and Canadian dollars are once again on the backfoot against the U.S. dollar as commodity investors bank gains on a decent run for crude oil and other metal and mineral contracts. The Aussie today buys 67.96 U.S. cents and the Canadian buys 79.77 cents. The Australians will likely take up the missed opportunity from last month and cut rates. While the nation feels lucky to have dodged some of the global downturn, they are wise enough to know just how intricate the demand for their exports is and what it means for the domestic economy.
The fifth consecutive monthly decline in Japanese factory output announced today marks the worst string of declines since 2001. The Japanese and therefore Asian region will likely continue to flounder and that's a bad sign for local currencies including the Aussie dollar.
The pound has performed badly in light of the increased risk aversion today and is down to $1.4180 against the dollar and 92.95 pennies against its neighboring euro currency. The weakening British economy was again highlighted by a CBI survey predicting the loss of around 15,000 financial sector jobs in the second quarter. As we noted last week the pound appears to swing excessively at present on good or bad news. Today is another decidedly bad day for the pound.
While the European Central Bank will most likely cut rates this week, there is suspicion in the market that they will do what every other central bank has done and surprise with some deal of quantitative easing on Thursday. The premise that they would not tinker in fiscal affairs had supported the euro but now the weight of expectation is that a declining Eurozone and that of the area outside of its borders will make quantitative easing inevitable.