Forex Market Outlook 11/1/11

Do you remember last week when I said that with regard to the Euro debt crisis resolution, the devil is in the details? Well it looks like that prognostication was prescient as new information is coming to light. At the time I noted that while the plan sounded good, how they would actually enact it would be more important. Now there is sentiment that the process could be derailed as unforeseen issues are starting to materialize.

Case in point; in Greece yesterday the government announced that they would be putting the debt deal to referendum and would be holding a confidence vote for Parliament. This is dangerous for two reasons, as for starters this unpopular deal could be unwound by a public vote and then secondly, the majority who voted for it could be replaced by those who are against it thereby rendering it ineffective. While this is a nice idea by the government to be democratic, it is very bad for the markets as now there is increased uncertainty about the deal. If politicians put every unpopular decision to referendum, nothing would ever get accomplished.

The second potentially disruptive news from the Euro debt deal is that China is publicly stating that they will not bail out Europe so their participation in the expanded EFSF and the SPV may be limited which would reduce the firepower the Europeans thought they had. This is not a good thing as bond yields continue to rise, most notably in Italy.

Speaking of China, they reported lower than expected PMI manufacturing figures posting a reading of 50.4 vs. an expected 51.8. This could mean that China is slowing and if they continue to slow, where will global growth come from?

This feeling was not lost in Australia, as the RBA took action by lowering interest rates by 25 bp citing, you guessed it, slowing global growth and a reduced outlook for inflation. Australia has a keen insight as to the health of China as China is the largest importer of Australian raw materials so the Aussies get a little bit of an advance warning.

However growth is not slowing everywhere as in the UK, GDP figures came in better than expected posting a gain of .5% for the quarter vs. an expectation of .3%. While this is definitely not robust growth by any means, the repairing of the UK balance sheet through government austerity may be better in the long run. PMI figures however came in lower than expected posting a reading of 47.4 vs. an expected 50 with index of services lower as well.

So there is massive risk aversion taking place in the market in a continuation of yesterday’s afternoon sell-off. Stocks are down around the globe, with the German index off some 4%. US stocks are set to open markedly lower, and commodities are selling off as well with gold crashing through $1700 and oil retreating below $90.

Japanese yen intervention appears to have had little effect vs. the Euro as it is trading back to pre-intervention levels, though it is maintaining weakness vs. USD just above 78.

US ISM manufacturing figures are due out later this morning though they are unlikely to produce enough gains to reverse this market.

Today’s selling may make tomorrow’s FOMC meeting interesting as Bernanke yet again attempts to jaw-bone markets higher with his free-money pump. But will it work this time? Is the hint of QE3 enough to overcome all of the global turmoil and slowing growth?

At some point, Bernanke’s rhetoric is going to backfire horribly and it is just a matter of time before the markets realize that free money isn’t the answer. The global economy is in jeopardy of a major slowdown and every threat of this occurring send the market spiraling lower.

The Euro debt crisis resolution was supposed to calm the markets, not inflame them further so someone needs to tell Greece to get their act together. Will Bernanke save the day tomorrow or exacerbate the crisis further?

Stay tuned!

By Mike Conlon,