August’s swings and roundabouts

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There’s no doubt that August has been a pretty treacherous and volatile month in markets and there’s a decent push to end the month on a modest high.  Some of this came on the back on the stronger spending numbers from the US yesterday, with this providing a modest antidote to some of the weaker numbers of the past couple of weeks. 

But before we get carried away we must not forget that August will go down as the month in which serious talk of a return to recession emerged and stocks globally are still some 8% lower vs. the start of the month.  Furthermore, there is a chance that US jobs data could reveal a fall in overall non-farm employment when released on Friday, something which will re-ignite recessionary fears.  In FX, the Swissie remains the stand-out, weakening further yesterday on fears that the government may introduce further measures to soften the currency, but the limited options available don’t look very appealing.

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Commentary

Swiss franc still decidedly nervous.  The Swissie continues to suffer under both domestic and also international developments.  The better tone to equity markets at the beginning of the week has seen the Swissie push lower vs. both the dollar and euro, EUR/CHF back above the 1.18 level yesterday.  Furthermore, the latest data from the SNB have shown that the desired increase in sight deposits has largely materialised, standing at CHF 189bln at the end of last week.  There are also reports that the government has once again been in discussions regarding the currency situation and is due to announce any further developments on Wednesday.  On this basis, investors are rightly fearful of further punitive measures designed to weaken the currency, such as taxing deposits of overseas investors, which would in effect push interest rates even further into negative territory for this group.  The prospect of a peg with the euro has fallen off the agenda and rightly so in our view.  As such, with the SNB’s balance sheet still hurting after the last bout of intervention, it’s only these more ‘interventionist’ measures on overseas investors that are left.  However, they won’t go down well in the international community for the message they give to other nations and the fear that they could be revised and replicated by far less fiscally astute countries than Switzerland.          

Trichet hinting at shift? The ECB President, appearing before the European Parliament yesterday, stated that “risks to the medium-term outlook for price developments are under study”. The latest staff projections are published this week and the ECB previously stated that inflation risks were on the upside, this prompting the two increases in rates that have been seen this year.  In all honesty, it would be remarkable if the ECB maintained this stance in light of recent global developments, together with the slower growth reading seen in the eurozone itself.  All will be revealed at Thursday’s meeting and press conference.

Japan labour market data weakening further. The labour market data for July revealed the second consecutive monthly increase in the unemployment rate to 4.7%, with totally unemployment also rising for the second month in a row.  The impact of the earthquake and Tsunami earlier in the year likely had some influence on the figures, which take the unemployment rate back to level see towards the start of the year.

New leader but same problems for Japan.  The only positive to emerge from the appointment of Noda as the new PM is that he has a decent grasp of the fiscal dynamics and currency, having come over from the Finance Ministry.  Otherwise, the political system that is more based on patronage and appearances, rather than policies, has time and again proven to be ill-equipped to deal with the structural issues of public finances and population aging that Japan faces.  But with investors now becoming more and more wary of sovereign risk, time may be running out for Japan.  High savings and a structural preference for safety and the low returns that go with it have cushioned Japan, and indeed the yen, from the impact of a debt/GDP ratio of 200%, with no requirement to rely on foreign investors for the financing of its debt burden.  However, there’s no standing in the way of demographics and, at some point, the turning tide will start to drain the current pool of funding, especially with the OECD seeing the debt/GDP ratio of nearly 220% by the end of next year. The main thing markets are going to be looking for is any recognition that politicians are going to move ahead of the markets on this one, dealing with the fiscal demands (such as raising consumption taxes) before falling savings requires Japan to seek overseas funds, which will demand a lot more than the 1.00% currently on offer.

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