In a move few had expected, Sweden yesterday quietly fired another salvo into the escalating currency war by joining Denmark, Switzerland and the ECB in introducing negative interest rates.
I am hesitant to use the world “surprise” since such interest rate cuts are coming at a rapid pace. When will these reductions come to an end, an ending which appears does not have end in sight given various central banks’ statements of yet even bigger interest rate cuts?
Or better yet how will this defacto currency war/devaluations come to an end, a move designed to increase exports and play defense against its trading partners. It appears there is a race to the bottom.
I think it is extremely noteworthy the dollar is up about 16% against a trade weighted basket of its peers, the direct result of global monetary policy including the accepted belief the US central bank will raise interest rates by mid to late spring.
In the immediacy a rising dollar will hurt the profits of many of the multinationals. As written many times, approximately 48% of the S & P 500 revenues and 52% of the S & P 500 profits are generated by trade. Were fourth quarter earnings releases a harbinger of things to come as many multinationals commented about the impact of a rising dollar?
Commenting about yesterday’s market action, equities were higher on Greek and Ukrainian optimism. I cynically ask is this optimism mis guided?
Bloomberg writes the S & P 500 has traded for the last two months in one of the tightest ranges since 2007. Furthermore since the start of 2105, the index has experienced three declines of more than 2.7%, only to recover within a week each time.
What is this suggesting? Trading is being dominated by traders not investors, trading patterns perhaps influenced by the “machines.” Moreover a case can be made the sellers have been exhausted based upon current economic assumptions, assumptions however that can change radically in an instant.
Last night the foreign markets were up. London was up 0.61%, Paris up 0.56% and Frankfurt up 0.46%. Japan was down 0.37%and Hang Sang up 1.07%.
The Dow should open quietly higher ahead of a three day weekend. There appears to be the political will to deal with a bailout of Greece after the current agreement expires this month. Moreover Germany had stronger quarterly growth than expected. The 10-year is off 9/32 to yield 2.02%.