Collinson FX Market Commentary: September 28, 2012 - Risk appetite up

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Collinson FX market Commentary: September 28 2012

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Risk appetite rallied strongly but not for all the right reasons! Equity markets surged with news from Europe and Asia.

China added monetary stimulus to the tune of $57.9 Billion with the promise of further stimulus to support a flagging economy. The stimulus does indicate increasing pressures within the Asian powerhouse that is not always revealed in the stellar economic data provided.

In Europe the Spanish Budget was released confirming further austerity measures to address the desperate economic situation. The markets loved it but the extension of hardships may see further social upheaval as has been experienced in the last few days. The sacrifice reduced the deficit from 6.3% of GDP to 4.5%, but this is still a deficit and thus continues to add to the debt that is overwhelming the nation. The US equity markets rallied strongly on the news from Europe and Asia with risk sentiment jumping sharply.

This was despite continued poor economic data. Durable Goods Orders fell to a 3 1/2 year low falling 13.2%! GDP has collapsed to 1.3% reflecting the dire state of the worlds largest economy. GDP growth has continued to beat expectations to the downside and destroy any argument that fiscal policies of the Obama regime are in any way working. This economy only survives on the incredible expansion of the Fed's balance sheet with little in the way of investment and growth. Pending Home Sales fell 2.6% denting claims of a recovery in the housing sector.

The Bulls remained in ascendancy but fundamentals point to the dire state of the economy and enormous downside risks. Commodities had further gains boosting the associated currencies with the AUD moving back to 1.0450 and the KIWI burning up to 0.8300. These fundamentally flawed rallies fueled by Central bank largesse will come to a sticky end if the polls are correct in America!

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Europe again seems to be on the brink, with riots in the streets of Greece and Spanish civil upheaval. The drug addicts are rising up with the threat of reduced or cancellation of their fix. It appears that the socialist nations have built a dependency on the state which has been funded by debt and has now overwhelmed their domestic economies and is about to overwhelm the EC!

The expansion of the Money Supply, through printing more EUROs, has taken the ECB balance sheet beyond ridiculous and destroyed wealth. There is no further option and Super Mario has gone all in! Risk aversion has now tipped the balance and despite QE Infintiy, the Dollar has risen with the EUR dropping to 1.2850 and the GBP 1.6150. The crises in Europe is in a death spiral with Politicians unable to solve the problems due to lack of national support. They need to balance budgets and attack the debt but the citizens have become dependent on the Government who does not generate any income.

Austerity has resulted in civil disobedience which now acts as a deterrent to fiscal action. In the US, New Home Sales disappointed falling 0.3% popping the wave of optimism in the Housing sector. Commodities drifted lower and risk aversion hit the AUD which dropped to 1.0350.

The poorer cousin continues to hold above 0.8200 defying gravity and enjoying relative gains despite the fall in risk appetite. Europe is driving the fear markets are experiencing as confidence in Monetary solutions wain and leaders fail. We need a quantum change politically and this must start with the worlds largest economy!

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ECB President, Draghi, met with German Chancellor, Merkel, today and promoted the ECB Bond Buying Bailout plan as a sucess pointing to the relative stability experienced recently.

The worries still remain as fundamentally all they have achieved is a temporary reprieve in the form of lower short term interest rates. The fundamental crises not only remains but grows with individual nations deficits. Spain remains under pressure with protests and civil upheaval sparked by the introduction of further austerity measures. IMF President advises a write-off of unmanageable Greek debt setting a wonderful blueprint for other trouble member nations. Unsustainable deficits lead to unsustainable debt. Solution:Lend more money and artificially lower rates through monetary intervention to allow sustainability.

Debt continues to rise as deficits remain so write off the debt! Absolute lunacy! In the US, markets drifted lower after some uncomplimentary comments from Philly Fed Chairman Plosser. Plosser advises that QE Infinity will atificially lower short term interest rates and do little to lower long term rates. It will not, therefore, do much to boost growth or employment.

A fail from Plosser does little for the Fed's credibility!.The EUR dropped below 1.2900 with the news although stronger economic data pushed the single currency above the big figure. S&P Home Prices rose for the seventh straight month and Consumer Confidence hit a new high propelled by QE3.

Commodities tread water supported by a weak Dollar but undermined by risk appetite.The AUD held 1.0400 and the KIWI moved to .8240 showing some local support after a slow start to the week. Europe will remain the focus with US economic data driving sideway market direction.

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