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Over the weekend, the emergence of a concrete plan to recapitalise European banks gained greater momentum. The French and German leaders pledged that a plan will be in place within three weeks, ready for the G20 summit early in November.   While in 2008, nation states were able to deal with their own banking issues, it is not necessarily the case this time around and Germany’s ‘no bailout’ stance is likely to be tested even further.

Today potential losses are greater, the risks of contagion are far bigger and public finances are in a much more precarious state (for most).   Meanwhile, Belgian Bank Dexia was dismantled over the weekend, highlighting the reality of the vulnerabilities of the European banking sector.   Markets are starting the week on a positive footing, with the dollar weaker across the board and those stock markets open in Asia mostly trading to the upside.

Guest post by FxPro

Commentary

 

US near-term recession not inevitable.  During the summer there was a genuine fear that the US economy was sliding back into recession. Indeed, in response to “significant downside risks to the economic outlook”, the Fed decided two weeks ago to undertake a significant lengthening of the average maturity of its portfolio of securities (better known as a twist operation).   Interestingly, since that decision was taken, there have been signs that, although the economy has definitely slowed, it is still sedately chugging along. 1) Consumer spending is soft, but not declining. Auto sales jumped another 6% last month, up 13.5% since mid-year. 2) Jobs’ growth remains tepid but still positive. According to ADP Employer Services, private payrolls rose 91K last month after a similar increase in August. Non-farm payrolls for September will be released later today; the unemployment rate will remain elevated and jobs are hard to find, but some people are finding new work. 3) Both the manufacturing and non-manufacturing ISM readings for September were above 50 (suggesting ongoing expansion). 4) Rail car-loads reached a high for the year in the week ended October 1st. Warren Buffett confirmed that rail traffic for Burlington Northern Santa Fe rose to a three-year high last week. 5) Investment in new plant and equipment remains buoyant.   It may not be very exciting growth, but at least the economy still appears to be moving forward.

 

The financial wolves will be back.   With the calendar year-end approaching, European policy-makers finally convinced of the need to undertake urgent recapitalisation of their banks, global central banks again prepared to resort to the printing press, and with hedge fund managers having already made a fortune shorting risk assets, there is a significant possibility that the recent short-covering rally will continue over coming weeks as managers gradually reduce the degree of risk on their books.   If this prognosis is correct, we can expect reduced volatility in markets, a continued recovery in risk assets (higher equities, higher bond yields, rising high-beta currencies) and a softer dollar. Already this week, some of the emerging currencies have recorded a significant bounce – the Brazilian real has jumped 6.8% from Tuesday’s low while both the Mexican peso and the Aussie dollar are up more than 4%. For the dollar, which has been in the ascendancy over recent weeks, this scenario would imply that it may give back some of those gains. We have already seen some slippage in the dollar this week. Potentially good news for the single currency, then. However, this may only be a brief window where the financial markets take their collective foot off policy-makers’ throats. Nevertheless it is critical that the latter make rapid and sustained progress to fix Europe’s serious ills, or else the financial wolves will circle anew in the New Year.

 

US jobs data shows stabilisation.   The latest US employment report showed things aren’t as bad as we are sometimes led to believe. The zero increase in non-farm payrolls of August was revised up to a 57k gain, with September’s increase put at 103k. The 137k gain in private sector payrolls sits comfortably with the 3 and 6 month averages and so doesn’t suggest things are getting worse. However, the unemployment rate remains steady at 9.1%, the third consecutive month at this level. Furthermore, the work-week also remains subdued with the average amount of hours being worked well below that prevailing ahead of the crisis, so even those in work are not being stretched. The data served to soften the dollar against most currencies, the yen being the main exception as risk appetite received a lift into the end of the week.