All words and no action make Mario a dull central banker, perhaps this should be the opening sentence when teaching business 101 starting this fall. Proving once again that the ECB can make nice speeches and produce little in the way of substance, President Draghi showed that the European Central Bank has no bite. The EUR lost ground quickly to the USD on Thursday, Gold sank, and equity markets promptly plunged. Not a bad effect if you like horror movies, the audience was hoping for a different ending, but let’s be realistic – should they have expected one? The answer is no.
Mr. Draghi said the ECB could become active in the Sovereign Debt market but is that the solution to overspending and bad accounting by its member nations? Again the answer is no in most investors eyes. It is invariably throwing good money after bad and what some in other parts of the business and criminal world might consider a Ponzi scheme. In essence the ECB is saying it wants to take money that it does not ‘own’ and use it on something they know at heart has no value unless they find more money to prop up the Sovereign Debt’s value with more investment. If you are an investor in this particular type of scheme you are hoping you are one of the early entries into this type of lottery and will be first in line to get paid before the cow cannot produce milk anymore.
As if that prospect from above is not bad enough, other economic spheres have serious doubters too. The U.S. will produce their Non-Farm Employment Change numbers today and the expected target is a mere 101K jobs added. The official Unemployment Rate of 8.2% is expected to remain the same. The problem is that the U.S. is not creating enough jobs and confidence has once again began to erode regarding the ability of the public – read consumers – to go out and make big purchases when they have reason to suspect that their job security is not outstanding.
The U.K. will release Service PMI data today, the Spanish and Italians will also release similar reports. But as for the Spanish and Italian reports the readings are most likely going to remain recessionary. But it is the U.K.’s report which could prove chilling, a reading of 51.6 is estimated, and recent British data has been almost exclusively negative. London might have Olympic fever but two weeks of international sporting events will likely not be enough to produce any economic gold medals long-term. Just ask Greece who hosted the 2004 games.
Wall Street took a pounding on Thursday. It is as if all the cautious investors suddenly saw a preview of things to come when looking across the Atlantic and decided that they could not wait for another horror movie to begin ashore. While all three major indexes, the Dow, S&P, and NASDAQ managed to pull back somewhat later in the day it was not enough to disguise what has become a very fragile marketplace. Factory Orders provided further bad news for investors yesterday with a minus -0.5% outcome, missing the forecasted gain of 0.4%.
Crude Oil essentially traded in place on Thursday. Other commodities such as the grains declined for the most part. The FX market was transfixed by the ECB yesterday and now investors once again will have to deal with their own sentiment after another round of ‘the confidence game’ has come to an end. We are now into August and while many folks may be thinking about summer holidays, if you are a player who plans on staying active in commodities, forex, and equities a dose of perspective both short-term and long-term is needed. While trends are your friend as they say, finding real value should also be part of your diet.
The EUR remains unattractive in our eyes, the USD remains a safe haven. The GBP remains unappealing against the USD, but Sterling could be an interesting buy versus the EUR. The AUD also looks to still be overvalued at this juncture against the USD. The JPY remains in its well known dance of consolidation. The CHF which we believe is attractive long-term still has questions surrounding it because of its unholy alliance with the EUR that has been created by the SNB.