Key News
- The MSCI World Index of 23 developed nations sank 1.5 percent at 11:12 a.m. in London, the biggest retreat in a month. Futures on the Standard & Poor’s 500 Index slid 1.9 percent, while China’s Shanghai Composite Index slumped the most since November. (Bloomberg)
- Ukraine’s economy shrank an annual 18 percent last quarter. (Bloomberg)
- Foreign direct investment in China fell for a tenth straight month in July as companies stalled expansion plans amid the global financial crisis.
Quotable
“I met about twenty to thirty institutional investors in small meetings, and those meetings were very instructive. There is a real mix out there it seems to me of tentative optimism about Chinese prospects on the part of the majority of investors and deep pessimism on the part of a minority, which included both Chinese nationals and foreigners.
“Perhaps this is because of my own prejudices as a former bond-markets trader, but the pessimistic minority seemed much more experienced and literate to me. They were also generally a lot more senior. That might not mean much but it does suggest to me that there is a risk of bad news in the future causing a stampede of pessimism. Of course the majority is not necessarily wrong (in spite of the claims of contrariarans, who paradoxically enough include nearly everyone, it seems), but the volatility impact of information that confounds their expectations is much greater than that of information that reinforces their expectations.”
Michael Pettis
FX Trading – British pound in the cross hairs?
The old “risk aversion” is back so far this morning, as stocks get hit. And in lock-step the US dollar, US Treasuries, and Japanese yen are bidding higher. Other losers are gold, oil, and the rest of the currency pack. Among the major dollar pairs, the Aussie-US$ is down most at 1.96%, followed by the British pound at 1.49%. It seems traders may start to believe the pound’s recent rally was a bit of overshoot, at least based upon recent market commentary, especially this from Bloomberg this morning:
“The pound’s biggest five-month rally in 24 years is ending as the Bank of England floods the shrinking U.K. economy with newly printed cash and slowing inflation precludes higher interest rates to lure investors.
“…The U.K. economy shrank 5.6 percent in the second quarter from a year ago, faring worse in the deepest global downturn since World War II than the U.S. and the 16-country euro zone, which declined 3.9 percent and 4.6 percent, respectively.
“I’m super-bearish on the pound,” said Hans-Guenter Redeker, the London-based global head of foreign-exchange strategy for BNP. “The Bank of England has made it clear it can’t afford a stronger currency.”
The key question: Have the recent “better than expected” news releases already been factored into the pound’s big rally against the dollar since bottoming in February? Will the weight of UK funding sink the pound? Will the UK economy be the weakest of the pack? Or will the additional stimulus in the UK help its economy gain traction relative to the somewhat stingier European Central Bank—a thought by some traders who believe there is more upside for sterling?
Today’s news that “UK home sellers lowered asking prices in August by the most in eight months,” as reported by Bloomberg, sure didn’t help the pound…
GBPUSD Daily:
Big break or head fake? Mr. Market is likely to share that very soon.
