Currencies Rally With Aid on the Way

If the equity market managed to rally despite news that 533k jobs were lost from the US economy last month, then Obama’s pledge to increase spending this weekend and the developments for the Big 3 automakers will only help. Risk appetite appears to be slowly returning to the markets with the low yielding US dollar and Japanese Yen losing ground to higher yielding currencies such as the Euro, Australian and New Zealand dollars.

Aid is on the Way

The market’s immunity to bad news suggests that everyone is tired of hearing the obvious, which is that the US economy is in bad shape and will worsen before it improves. It appears that all of the weakness in the first half of the 2009 is priced in and instead investors are latching onto the stimulus plans for hope that they will help to trigger recovery in the second half of 2009. This weekend, President-elect Barack Obama laid out his plan to create or preserve 2.5 million jobs . His focus is on infrastructure – upgrading public buildings to make them more energy efficient, building roads and highways and modernizing school buildings. He is hitting the ground running and is expected to announce a $500B to $700B stimulus plan in the first days of his administration.

At a time when uncertainty about the US economy is at elevated levels, the prospect of a major stimulus package and a decision on aid for the Big 3 automakers is helping to improve investor sentiment. The Big 3 automakers have dominated the headlines for the past few weeks and regardless of whether GM and Chrysler will be forced into bankruptcy, the markets will be relieved that there is a resolution.

Of course, there is still plenty of reasons to be skeptical about the rally in currencies and equities. The layoffs keep coming in as Dow Chemical announces an 11 percent reduction in their workforce, which translates into 5000 jobs. Bonus cuts, salary freezes and warnings about earnings have also become the norm.

But it is important to realize that equities and currencies have become extremely oversold in the past few weeks and the lack of any major US economic data until Thursday is helping to fuel the recovery. I think that we are witnessing a bear market rally and that we have yet to hit a long term bottom.

Here is the video of President-elect Barack Obama laying out key parts of Economic Recovery Plan:
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The Sun is Shining on Wall Street

This morning, the sun is shining on New York City and on Wall Street.

President-elect Barack Obama was one of the few people that could have restored confidence in the financial markets through the appointment of a Cabinet members that the market trusts and a clearer plan of action for tackling the economic crisis. On Friday, his appointments for Treasury Secretary and the Secretary of State were leaked, sending stocks soaring and according to the Washington Post, Obama and leading Democrats are planning a 2 year fiscal stimulus package that could amount to 5% of GDP. He also named former Treasury Secretary Larry Summers to head the National Economic Council. Summers is Geithner’s mentor and was one of the leading candidates for Obama’s Treasury Secretary post.

With 2 well respected powerhouses on his Economic Team, Obama has a good chance of turning the economy around in late 2009, early 2010. The new Administration is beginning to grease the wheels and the market is liking it.

Q3 GDP Could Fall as Much as 1%

However in order for the gains in the equity and currency markets to be sustained, hope needs to supersede reality because as of Tuesday, the US economy should be in a technical recession. Third quarter GDP numbers are due for release and after contracting by 0.3 % in the second quarter, first quarter GDP growth could fall as much as 1% (consensus is -0.5%). The US economy would not be a stranger to such a deep contraction as growth fell by 1.4% in the third quarter of 2001, 3% in the fourth quarter of 1990 and a whopping 6.4% in the first quarter of 1982.

Existing Home Sales Drop 3.1%

It is no secret that the housing market is in trouble and the latest existing home sales numbers confirm that. Resales dropped 3.1% to 4.98 million rate, which is the lowest since June 2008. The big story however is the drop in house prices, which was the largest on record. The combination of a slowing economy and tight credit markets has prevented real estate from recovering and with the recent layoff announcements, I expect demand to slow even further.

Another Big Bank Will Not Fail

Citigroup was another major uncertainty that made the markets nervous. The US government has announced that Citi will be receiving $20B in cash from the Treasury and $306B of asset guarantees. In return, the US government will receive preferred shares in the bank. This step indicates that the Bush Administration believes that the financial system could not afford another big bank failure which is probably right.

For those of you that are interested, here is a quote from Obama’s radio address on Saturday outlining his Economic Recovery Plan:
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Dollar Hangs Tight on GM Risk, Recession Trades Still On

Signs of stability in the US manufacturing sector has failed to turn around the market’s risk appetite. Although the US dollar has weakened marginally against all of the major currencies, if US stocks continue to sell off, we could see the dollar regain strength.

Will the US government allow GM to fail?

The fate of General Motors will be the biggest event risk until the end of the month. In my opinion, the US government will not allow GM to fail. President elect Barack Obama has already pledged on numerous occasions to support the auto and retooling industry. To back off his promises so early in the game would be a reputation killer and not something the world expects from Obama. House Speaker Nancy Pelosi has also called on Congress to pass an emergency rescue package for the industry. Given that 1 in 10 jobs in America deals with the auto industry (from dealerships, auto parts etc), there is no question that the US government will extend life support to General Motors.

Nonetheless the longer the US government stalls, the more strain it puts on the financial markets, because investors don’t like uncertainty.

G20 Holding Out for Obama

The G20 meeting this weekend was also a big disappointment. With slightly more than 2 months to go before the US Administration changes, this was hardly a surprise because President Bush was not expected to commit his successor Barack Obama to any initiatives that he does not support. Since the group set an action plan for March 31 and another meeting for April 30, the G20 is clearly waiting for directions from Obama’s new Administration before putting the pedal to the mdeal. . The only problem is, the global economy may not be able to wait that long.

Recession Trades Still On
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The Financial Markets’ Reaction to ObamaNation

Barack Hussein Obama is the 44th President of the United States, the first African American and the second youngest President.

In reaction to his election, the US dollar is marginally higher and the US stock market has opened lower. Regardless of the overwhelming support for Obama domestically and internationally, the equity markets tends to sell off when Republicans lose the election.

The only minor negative is that the Democrats did not secure the 60 seat majority that is needed to push reforms through easier.

Based upon a previous study that we have conducted, over the past 30 years regardless of what party wins the elections, the US dollar tends to appreciate in the 6 months following the election. However the US economy is in the worst shape since the Great Depression, which was nearly 80 years ago.

Like many of his predecessors, we expect Obama to do no more than pay lip service to the strong dollar policy. The dollar has already strengthened significantly and it would be counterproductive to engineer further strength in the greenback. In order to turn the US economy around, a weaker and not stronger currency is needed.

In this economic environment, Obama will have no choice but to boost government spending and adopt more protectionist policies, which could hurt the US dollar. Even though Obama has given the country renewed hope, he won’t be able to deliver any change for the financial markets until he becomes President on January 20th and even then, it will take time for him to implement new policies.

Therefore the recessionary trade is still on and US interest rates are headed lower.

Here are some of Obama’s financial related promises (from Obama’s editorial in USA Today):

1. I’ll give a tax break to 95% of workers and their families, and eliminate income taxes for seniors making under $50,000 a year. If you work, pay taxes and make less than $250,000, you won’t see your taxes increase by a single dime.

2. I’ll end tax breaks for corporations that ship our jobs overseas, and give them to companies that create jobs in America.

3. I’ll eliminate capital gains taxes for start-ups and small businesses, the engines of our job creation.

4. We’ll create 2 million jobs by rebuilding our crumbling infrastructure and laying broadband lines that reach every corner of the country.

5. I’ll invest $15 billion a year over the next decade in renewable energy, creating 5 million new green jobs that pay well, can’t be outsourced, and can help end our dependence on Middle East oil.