01/24/2010 – Risk is at a tipping point

* Risk is at a tipping point
* Fed meeting could prove market moving, for a change
* Greece bond sale could be a test for the EUR
* IFO may confirm or dispel fears that pace of German recovery has lessened
* GDP data set to confirm UK finally shook off recession in Q4
* Key data and events to watch next week

In last week’s update we cautioned that risk was in retreat, and that more downside was likely to develop. This past week saw risky assets (stocks, commodities, and JPY-crosses) slide further as new Chinese lending restrictions undermined the outlook for the global recovery generally, and for commodities especially. Softer ZEW surveys and European debt concerns centered on Greece continued to drag on the EUR, and there were some signs of deficit contagion spreading to other nations as well (see more below). Mixed 4Q corporate earnings reports were already weighing on stock market sentiment when late this past week US Pres. Obama announced plans to rein in banks’ trading operations and overall size. The plans sparked fears of capital flight from the US and led to steep losses on individual banks’ shares and pressured broader markets further. On Friday, concerns over the fate of ‘Helicopter Ben’ Bernanke’s re-confirmation to a second term as Fed Chair appeared to add to market fears. (Bernanke is viewed as a friend to markets.) The USD has broadly benefitted, but the real FX movers in the current risk sell-off have been the JPY crosses, which we expect to continue to be the primary reflectors of risk sentiment. We are skeptical about the fallout on the USD from the Obama bank plans, but we can’t completely ignore it either. Full text »

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