So What Was It That Spooked the Markets

As I checked the currencies throughout the day yesterday, I noticed that as the day went on, the non-dollar currencies were stronger, led by the Big Dog, euro (EUR)… But then late last night, and I mean late last night, I checked them, and those gains had been wiped out.

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was to find out what happened… Come on, I said to myself, it had to be more than the “risk on, risk off” stuff that’s been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that’s all it was… For once again, there was some data, or story, or rumor, that spooked the markets into believing the global recovery isn’t going to happen, and the “risk off” came into play.

So what was it that spooked the markets… Well… The only thing I can find was the report yesterday about falling Housing Starts that Chris told you about… Did you know that about 14% of US homeowners were either delinquent on their mortgage or in some stage of foreclosure? That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else… And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK… More deficit spending for sure, and I’m positive that this was “hung on this bill” to audit the Fed as the only way it would get through the gauntlet.

Why would this bill “spook the markets?” Ahhh grasshopper… To audit the cartel, is a step toward getting a peek behind the curtain, and that’s scary, folks… But it’s what is needed! And so I applaud the panel’s vote… (Too bad they had to hang that $200 billion deficit spending package onto this, but that’s how the dolts in DC work…)

So… When things get spooky, traders crawl back into the dollar’s corner… And when traders crawl back into the dollar’s corner, the currencies that have booked the best performances against the dollar, see their fortunes reversed the most… So… In this case, it’s the Aussie dollar (AUD), New Zealand dollar (NZD), Norwegian krone (NOK), and Brazilian real (BRL)… These three will most likely put a losing week into the books, which hasn’t happened very often during this rally that began in March. I say “most likely” because we’ve seen swings in these currencies that could easily wipe out these weekly losses in a NY minute! But with today’s data cupboard as empty as my stomach feels, right now… I doubt we’ll see any “swings” to bring these currencies to the positive side of the ledger this week!

The Weekly Initial Jobless Claims here in the US printed yesterday at 505,000, same as the week before… I heard one airhead TV commentator say that at 505,000, it shows that employment is on the mend… Ahem… Did you do the math? That’s over 2 million new jobless people per month!

Yes, I know it doesn’t net out the jobs that were created… I’m strictly talking about jobs that are lost on a weekly basis… You can’t in your wildest dreams think that we’re creating more than 2 million jobs a month during a depression!

So… That data wasn’t good for the “recovery campers”.

I was writing some notes for my latest video on Wednesday, and noted that Japanese yen (JPY), gets the best of “risk on, risk off” trading. For some strange reason – and yes, I’m well aware that Japan is the second largest economy in the world – Japanese yen is considered a “safe haven” when the “risk off” is in play… And when the “risk on” is in play, spanking the dollar, Japanese yen doesn’t sell-off!

Now… I’m not a HUGE fan of Japan, as their government deficit is tremendous in size, rivaling the doubled in size national debt of the United States. And I personally feel that the yen at 88 and change is bumping the ceiling… But, the markets can be irrational, right? And with yen, they are really irrational!

Hey! Did you see that there’s pressure on US Treasury Secretary Tim Geithner to resign? Personally, I don’t know that he’s done any worse than Hank Paulson… But then, is that what we’ve come to accept? Bad leadership? I’ve said this before, and I know it really gets under some people’s skin… But, besides the national deficit and the trade deficit, we have a leadership deficit… I’m talking about the lawmakers, the Fed Chairman, and Treasury Secretary… I guess the administration should be thrown in there, as well.

The European Central Bank’s President, Trichet, and the Swiss National Bank’s Governor Roth, both spoke last night, and neither referred to the currencies in any way; but Trichet did add to the “risk off” mood of the markets by saying, “it is too early, as of today, to declare the crisis is over.” The People’s Bank of China’s Governor, Zhou, said that China was “passive on the direction of the dollar”… Hmmm… I have to wonder if he was truly speaking from the heart there, or just stating that to keep the dollar from falling into an abyss.

You know about the stock sell-off that I’ve been warning you about for a couple of months now, that could very well drag the currencies and commodities along for the ride? Well… I know that you all think that I’m playing the boy who cried wolf, here… But, recent trading days have me worried a bit about this taking baby steps right now.

My trader/chartist friend sent me a note and told me to watch the Aussie, for it is very close to its 9-month trend line support of 0.9093 (it’s currently at 0.9110), for should it close below that number it would signal (according to him!) a correction to 88-cents. Not a huge drop, but it’s not like these charts can pinpoint a level that a currency will turn around… Or maybe they can! I’m lost when it comes to charts… I look at them and unless they are as obvious as a man with a hatchet in his head (like the US dollar chart since 1971) then I could make a case for an asset that’s being charted to go either way!

That’s why charts are not “fundamentals”… Fundamentals are what put an asset into a trend, either weak or strong, and charts tell you what happened in that trend.

And then there was this… According to The Wall Street Journal, “Some of Goldman’s largest shareholders have urged the firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors. The investors hold tens of millions of shares in the Wall Street firm, which is on track to make the biggest employee payout in its 140-year history.”

Where have these “largest shareholders” been all these years? Why make a big deal about this now? Oh, that’s right! The government has made it look “dirty” to give bonuses.

Oh… And I heard that the Senate’s version of the Health Care Bill would cost $849 billion… Just keep spending money we don’t have, Congress… I’m reminded of a saying by Voltaire… “Common Sense is not so Common.”

To recap… The “risk off” wax is being applied by Mr. Myagi again this morning, as the non-dollar currencies, other than yen, have given back recent gains versus the dollar. The “audit the Fed” bill has been pushed through the gauntlet for a vote after Thanksgiving. The Aussie dollar is near its 9-month trend level, and shareholders want “some of the action”!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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