The summer of our discontent

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There’s a myth in markets that August will be quiet with little going on.  One of the reasons why this is often not the case is liquidity.  When liquidity is low, moves are more exaggerated.  Furthermore, on big moves, rumours then start to circulate as to what may be behind them. Tuesday was one of those days, with stock markets getting pummelled and bank stocks in particular. 

Many of the rumours surrounding France were way off the mark, with triple-A ratings affirmed from the main agencies and the 10-year bond yield hitting a new low for the year at the 3.06% level.  At the moment, the early prospects for European stock exchanges looks positive, but as recent sessions have shown, this offers few guarantees.  In the FX space, the Swissie is weaker overnight on comments from the SNB’s Jordan whilst the Aussie, and more so the kiwi, have recovered overnight, the former held back by disappointing jobs data.

Guest post by FxPro

Commentary

Australian jobs data disappoints.  The latest labour market data showed an unexpected increase in the unemployment rate, from 4.9% to 5.1% on July.  This is the highest rate since November of last year, with employment falling some 22k during the month.  Talk is again shifting back to possible rate cuts this year, although some of this looks a little premature in our view.  Nevertheless, the data does fit with some of the recent softening in business and consumer confidence, suggesting that softer growth may be here to stay for some time.

Yuan appreciation accelerates markedly along with rumours. There has been a marked acceleration in the pace of yuan appreciation in recent days, with a new low marked overnight below the 6.40 level.  The yuan is 1% firmer vs. the USD over the past month, with more than half of this move coming in the last week.  There are further rumours of a widening of the yuan trading band, so a formal appreciation, but right now they appear to have little substance.

SNB fights a losing battle. After yesterday’s expansion of Swiss franc liquidity, the SNB’s Deputy President suggest that this may not be the end of it.  In a newspaper interview, Jordan also says that the SNB’s measures to curb franc strength do not have to include intervention.  The SNB yesterday announced a further expansion of its liquidity operations, increasing sight deposits from CHF 80bln to CHF 120bln. Furthermore, the SNB has pledged to conduct franc swap operations. The last round of intervention from March 2009 to the middle of 2010 led to substantial losses on its balance sheet (CHF 21bln loss in 2010) which have been exacerbated this year by the franc’s continued rise (CHF 10.8bln in first half).  But, to date, flooding the market with liquidity has failed to curb the relentless rise of the Swiss franc, not helped by the fact that the yen is not looking as favourable as a safe-haven as investors are becoming increasingly averse to countries with high levels of sovereign debt. The SNB looks like it is fighting a losing battle.

BoE fails to acknowledge the reality. The latest Bank of England inflation report has seen the BoE stop short of acknowledging the realities of the current economic situation, despite the uncertainties caused by events in the global economy and also the latest disappointing GDP data. In contrast, the Federal Reserve on Tuesday evening acknowledged that growth had been “considerably lower than expected”, whereas the Bank of England doesn’t make any such statement, even though it was predicting Q2 growth of 1.4% YoY (actual was 0.7%). Instead, it notes that “output over the past year appears to have grown at a rate below its historical average”, which sounds like something of an understatement to say the least.  The common thread we’ve seen from three central banks over the past couple of days – the Fed, the SNB and the BoE – is that the policy options are becoming more limited and less effective. This is the most worrying aspect of the current slowdown in global activity and increase in financial market strains; the firepower that was in place three years ago is not available now. The term ‘policy paralysis’ could well be the buzzword of the coming few months as policy makers worldwide struggle to come up with effective measures to tackle the renewed global problems.

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