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
The global recession is underway and that is going to continue to weigh on all risk trades. Japan has officially hit recessionary conditions, joining the Eurozone and New Zealand. Next week, the US and the UK will be releasing their third quarter GDP numbers and I expect growth to contract in both countries, pushing them into an official recession.
I continue to believe that the US dollar and Japanese Yen will outperform all of the major currencies in a global recession as investors see the low yielders as low risk. Going forward, central banks like the ECB and the BoE will be forced to engage in more aggressive monetary easing going, which would hit the Euro and British pound.
My favorite trades continue to be short USD/JPY and EUR/JPY.