Some analysts are beginning to argue that the equity markets have bottomed, and are currently in a bull-run that will continue in the coming periods, while the economy has reached a vital turning point. The main arguments for these claims are recent reports, which, overall, have beat analysts’ expectations. However, an overview of the vast majority of these reports will only suggest that the economy has merely bounced from its low, and the overall economic data is still not very encouraging.
Friday gave us another example, when the European equity markets and the euro rallied after the German Ifo Business Climate rose 1.5 point from a 26-year low.” It depends on what the market is focusing on, either, that the index is at a record low, or that the index rose 1.6 points,” TheLFB-Forex.com Trade Team said.
However, these so-called “positive reports” come at an expensive cost. In order to see the pace of economic contraction slow (as is being suggested in some circles), the government will run a huge deficit over the medium to long term. “This means that the government will cut costs as much as it can once the economy is in a recovery phase or in some cases even before, and will probably raise taxes to raise additional cash,” TheLFB-Forex.com said.
According to government projections public deficits are likely to stay at very high levels for years to come from now, something that will be reflected in consumers’ wallets, and their lack of action in pulling out cash. The administration is looking at a 12% budget deficit, something that will require more promisory notes to be printed, bound, and issued, with the likely outcome being that they are then bought back at a huge forward cost by the Federal Reserve.
The Debt/GDP ratio in the U.S. is also likely to weigh on market sentiment, but so long as equities are held in their current range the Usd will continue to get bought. A break higher in equities however will send the dollar lower, the positive side of economic stories will be all that are heard, and consumer wallet action will increase. A short equity market break will lead to a continuation of the last twelve months of scambling to find fair value, both on the dollar and on consumer wallet action the Trade Team said.