Will There be An Obama Bounce?

In my Daily Currency Focus for GFT, I talk about whether there will be a bounce in currencies on Obama’s Inauguration Day:

On Tuesday, the United States of America will swear in a new President. Unlike many other Presidents in the past, the Obama phenomenon spans the globe. This global support has spurred speculation that we may see an Obama Bounce in US equities and currencies on Tuesday. However based upon the past price action of the Dow Jones Industrial Average on Inauguration Day (Jan 20), investors should think twice about an Obama Bounce.

Taking a look at 50 years worth of data which spans 10 Presidents, Inauguration Day result in more down days than up. The Dow fell on January 20th 12 out of the past 16 Inaugurations. Although the trend was much more significant in the 60s and 70s, it has been relevant since then. The pattern also does not hold any bias to the party of the new President as exactly half of the positive days occurred during either parties new administration.

However it can be argued that the global adoration of Obama is unique. Many people call Barack Obama the John Kennedy of our times and it should be worth noting that stocks rallied on the day that Kennedy took office. History does not support arguments for an Obama Bounce but it is still a possibility. Since currencies are taking their cue from equities, if investors express their optimism towards Obama in equities, we could see a bounce in currencies as well.

For my Bank of Canada Interest Rate Preview, please read my Daily Currency Focus on GFT

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Currencies Soar on Reports that Obama Picks Timothy Geithner as Treasury Secretary

On a day when the market had nothing to be happy about, the leak of President-elect Barack Obama’s Cabinet announcements have erased one major uncertainty for the financial markets, helping equities and currencies recover. The NY Times reports that Hillary Clinton has accepted the post of Secretary of State and NBC reports that Timothy Geithner will be named Treasury Secretary.

When compared to the vast experience of Lawrence Summers and Paul Volcker, Geithner is definitely the more spirited choice. In order to command the same respect that Summers and Volcker may have instantly received from Wall Street, Geithner will have to hit the ground running at an unusual pace to reassure investors. The benefit of choosing Geithner is that he has been intimately involved with the current financial crisis from Day 1. There will be continuity and no need for any major transitions.

In order for the financial markets to hold onto their gains, Geithner will have to work with Paulson and Bernanke immediately to figure out the best ways of using the second half of the $700B bailout package.

Here is more information on Geithner:

Timothy Geithner has been serving as the President and Chief Executive Officer of the Federal Reserve Bank of New York since 2003. Up until the latest financial crisis, he has been relatively unknown especially when compared to Summers and Volcker. However he has been instrumental in helping Hank Paulson resolve the current financial crisis by first brokering the JPMorgan Chase acquisition of Bear Stearns. Since then he has called for overhauling the regulation in the financial industry, been intimately involved in the government’s decision to let Lehman Brothers fail and played a key role in the dispute between Citigroup and Wells Fargo over Wachovia.

Geithner is also a protégé of Lawrence Summers and has been involved in the bailouts of Brazil, Mexico, Indonesia, South Korea and Thailand in the 1990s as the Undersecretary of the Treasury. He has less far less enemies than Summers and works well with both Republicans and Democrats. Geithner is credited with warning Wall Street Banks in 2006 and 2007 to figure out what would happen to their portfolios if one their main competitors failed. He was worried about the smoke and mirrors that complex credit derivatives can have on balance sheets. Geithner’s only shortfall is that he has worked too closely with Paulson in resolving the current financial crisis which has both strong supporters and critics.

This is an incredible opportunity for Geithner because the challenge that lies ahead is one that will cement a reputation for decades to come and we wish him good luck!