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US Federal Reserve Delivers The Goods
Market Highlights
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Market Rally Builds Momentum Despite Poor Q3 GDP Report
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Currency Market Correction Continues
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Market Rally Builds Momentum Despite Poor Q3 GDP Report
Well it's finally official, the US economy is indeed contracting according to the Commerce Department. The economy shrank at an annual rate of 0.3% in the 3rd quarter, the steepest contraction since Q3 2001. The downturn in economic activity was led by a 3.1% drop in consumer spending. This is the first contraction in consumer spending since 1991 and the severest decline since 1980. US Consumer spending accounts for 70% of US GDP and 14% of global GDP, so it is the most important component of economic growth. Spending on durable goods items like vehicles and furniture was especially soft, falling 14.1%. With consumers cutting back purchases, businesses cut investments by 1.0% as inventories of unsold goods remain high at $38.5 billion.
Although the GDP report confirms that the economy is in recession, the data was not as bad as analysts were expecting and US stock markets are poised to open higher this morning. S&P 500 futures are trading up 32 points (about 3.4%) as traders and investors are relieved that the data is finally out and are betting that the stock market has been oversold in expecting the worst for the US economy. Certainly the Federal Reserve's 50 basis point interest rate cut yesterday is also adding lustre to the attractiveness of stocks. It was odd that the US markets had such a subdued reaction yesterday when the Fed announced the rate cut. The S&P actually closed down 10 points yesterday as the markets pretty much ignored the Fed's offering. Well, it looks like stocks will be making up lost ground today, and with the markets having been hammered in panic selling over the past few weeks, we could see a really good rally over the coming weeks.
Stock markets overseas certainly appreciated the Fed's interest rate cut yesterday. Similar cuts over the past 24 hours by central banks in China, Hong Kong, Taiwan and Norway have restored investor confidence. Overnight, the Japanese Nikkei index jumped 817 points to close above 9,000. Japanese stocks have rebounded an amazing 28% since Tuesday's low. Emerging market shares have also roared back gaining 22% from four-year lows on Tuesday. An initiative by the Federal Reserve to provide dollar liquidity to Brazil, Mexico, South Korea and Singapore has helped stabilize emerging market stock exchanges and currencies. The sense is that emerging market economies remain in relatively good shape and could outperform European and North American economies for the next few quarters or even years.
Currency Market Correction Continues
Renewed investor confidence is providing support to commodity prices. Copper is holding above $2 and oil is holding on to gains north of $67. With the slide in commodity prices having been arrested, the Canadian dollar has rebounded sharply to more reasonable levels. The dollar has traded as high as 83 cents this morning, posting an incredible six-cent rally in three days. It would not be surprising to see the Canadian dollar back into an 85 to 90-cent range in the coming weeks.
Other currencies also continue to rebound nicely, particularly the Australian dollar, which is now back above 68 cents after having plunged as low as 60 cents on Monday. And the emerging market currencies have really settled down and have now recovered most of their recent losses. The Mexican peso is back well below 13 pesos to the dollar and the Brazilian real is up 17% in the past week. It certainly looks like we've seen the worst of the panic in the currency markets and there is room for these currencies to recover further ground against the US dollar in the days ahead.
The British pound and euro have also bounced back nicely against the dollar but not to the same extent as other currencies. The UK and European economies are expected to under perform in the coming months and the BoE and ECB are expected to announce further interest rate cuts next week. Just like in the US, parts of Europe (UK, Ireland, Spain) experienced massive housing market bubbles and consumers are dealing with huge debt loads. Many European banks are overexposed to risky assets and expectations are that Europe will have to go through a period of economic housecleaning just like the US.
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| Indicative Rates |
| USDCAD |
1.2053 |
1.2143 |
| CADUSD |
0.8235 |
0.8285 |
| EURUSD |
1.2900 |
1.3000 |
| USDJPY |
98.30 |
98.70 |
| AUDUSD |
0.6734 |
0.6784 |
| NZDUSD |
0.5859 |
0.5909 |
| USDCHF |
1.1315 |
1.1385 |
| GBPUSD |
1.6342 |
1.6442 |
| USDMXN |
12.57 |
12.97 |
| USDX |
84.32 |
| OIL |
66.30 |
| GOLD |
755.60
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