Economic look

11 Feb

imagesRisk trends collapsed in 2000 and 2007 although the foundations were perceived as excellent, with economic growth (speculative) in the U.S. and Europe. Current trend is not a creation of wealth  (everybody get a loan) or expectations in this regard but the creation of  coordinated central bank interventions. Creation of paper money out of thin air led this to historically low interest rate levels forcing investors to protect themselves from negative real interest rates and seek higher returns in safety and risk assets (stocks, commodities, currencies like NZD, EUR, GBP, CAD which tend to appreciate in periods of optimism, against  USD, JPY, CHF, which is appreciated in times of panic).

Economic picture is Bearish, but will it  count?

Except China and Germany, major economies are slowing or stagnates. GDP in the Eurozone is on the brink of negative area and in the U.S. it shrunk in the last quarter of last year. Last year, the U.S. economy grew about 1.5%. From 1948 until today not once a modest economic growth like this has resulted in nothing more than a recession. Historically less than 2% annualized is a warning!

Political risk: the catalyst that will trigger panic?

Corruption scandal in Spain and the growing popularity of S.Berlusconi before elections in Italy generates uncertainty wich is a bearish effect, but felt more in region and less globally (when something negative happens too eurozone, EURUSD is decorrelating of risk trends SP500).

Pay attention to bond interest rates in Spain and Italy, they started to grow and this could be a warning that problems will continue or will intensify!

Last week was influenced by ECB meeting and political factors

Most financial markets and the euro recorded significant depreciation. The main factors for this move was to increase perception of risk in the European Union, mainly due to the political situation in Spain and especially Italy. From a macroeconomic perspective evolution from Europe is now stable but without significant growth prospects in the short term. This coupled with high unemployment in southern states creates a significant pressure into politics.

Another factor that contributed significantly to the depreciation of the euro was the press conference where President Mario Draghi spoke about the negative effects of a Euro to appreciated. Although he did not announced any concrete measure, just simply because he mentioned this, has led to decreases in Forex make.

This week  influenced by fears of financial crisis and political turmoil in the region

Tension will remain in the region and perhaps pressure on Euro:
Italy remains a sore spot for the EU, at least until on 24/25 February
Politicians say that the crisis has been overcome in the region (credibility and their morality is questionable – see scandal involving Prime Minister of Spain, also Berlusconi “shows“) but the bond market does not lie, is the most reliable indicator of risk insolvency.
the market will be facing with a number of economic indicators (much more than the previous week).

Additionally the market will be influenced by the Chinese New Year (China will be suspended from trading this week), also a series of summits of European finance ministers and G20 in the weekend. One of the topics expected to G20 conference is the so-called currency war, basically a currency devaluation race. It is possible that something about it to appear in the final release what could have significant effects on foreign exchange markets.

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