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China, Greece, and Germany Rattle Overnight Markets

Posted by Larry Doyle on February 12, 2010 7:11 AM |


No rest for the weary.

If you thought yesterday’s nice 1% upward move in our equity markets was a precursor for calmer and stronger markets ahead, think again.

Overnight developments in China, Greece, and Germany are clear signs that our economic landscape remains challenging and our markets remain fragile. Let’s navigate:

1. Looking eastward, China’s central bank raised reserve requirements (interest rates) by 50 basis points (.50%). Why?

>>Concerns of an asset bubble primarily in their property markets.
>>Expectations of an increase in inflation.

Bloomberg provides further insights this morning, China Raises Bank Reserve Ratio to Cool Economy:

The central bank said yesterday that it wants to gradually normalize monetary conditions from a “crisis mode” after gross domestic product expanded a more- than-forecast 10.7 percent in the fourth quarter from a year earlier, the fastest pace in two years.

“Liquidity continues to flood the financial system this year,” said Lu Zhengwei, a Shanghai-based economist at Industrial Bank Co. “The central bank needs to stay ahead of the curve by tightening before inflation starts to gain pace.”

This increase in rates is the second go round this year. Rest assured, it will not be the last. Expect a series of ongoing increases for at least the next few months.

The Chinese punch bowl is being taken off the table and their party is winding down. The party in Europe never truly got going. Let’s navigate westward . . .

2. The fiscal disaster in Greece continues to be an ongoing issue for the EU specifically, the Euro, and the global markets as a whole. This real life ‘Greek drama’ is anything but entertaining. The Euro dropped 1% versus the greenback overnight given the uncertainty as to how this mess will be addressed.

3. Meanwhile, the economy of the European Union as a whole and Germany specifically is showing signs of a potential double dip. The EU’s 4th quarter GDP registered a negligible .1% positive reading after having posted a .4% reading in the 3rd quarter.

Bloomberg reports, Europe’s Recovery Almost Stalls as Germany Stagnates:

The German economy stagnated in the fourth quarter after recording 0.7 percent growth in the previous three months, while Italian GDP fell 0.2 percent. France’s economic expansion accelerated to 0.6 percent from 0.2 percent. Greece today revised down its data for GDP for the first three quarters of 2009, indicating its recession was deeper than earlier thought.

Europe’s governments face a growing dilemma as they seek to fortify recoveries at a time when rising sovereign-debt burdens threaten to hobble expansion. EU leaders yesterday ordered Greece to get its deficit under control and pledged “determined and coordinated action” to protect the currency region in a statement that stopped short of setting out concrete steps.

What else does Bloomberg have to say about developments across the pond?

With governments phasing out incentives and unemployment at 10 percent, the highest in more than 11 years, Europe’s recovery is showing signs of waning. Expansion in service and manufacturing industries slowed in January and investor confidence fell for the first time in seven months in February.

Sound familiar. Might the Europeans look across the pond and say the same about the United States? I believe so.

How are our markets reacting to all these overnight developments? Futures on our major equity markets are indicating a lower opening by approximately .75%. The U.S. Dollar Index has rallied by an equal .75% in a flight to safety type move.

Risks remain abundant. Navigate accordingly.

….oh by the way, Happy Friday!!


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