The World Bank says contraction will be greater than expected; the global economy will slow by 2.9% rather than 1.7%.
Enter risk aversion. The gloomier-than-expected forecast spooked markets yesterday. Most notably, the commodities got hit. Crude was down; gold was down; copper was down. There was no love for stocks either.
The Japanese yen and the US dollar were well bid. The commodity dollars were hit hard. The European currencies also slumped. And emerging market currencies rolled over.
But not too fast – we can’t put too much emphasis on this one report when we don’t know what the headlines might say the next day. Hence, the euro and Swiss franc are leading the charge against the dollar today ... erasing all the ground the two gave up to the buck yesterday.
The thing is, though, it’s not an absolute reversal in yesterday’s risk-aversion move; not yet anyway. Stock futures aren’t doing much; commodities are stable. So what’s the deal? Why is the euro showing such strength this morning after such overall negative sentiment yesterday?
Perhaps it’s because the European Central Bank will unleash credit into the Eurozone financial system. They plan on offering up an unlimited amount of credit for 12 months at the current ECB rate of 1%. The offer is expected to draw huge demand because the ECB is expected to be finished lowering interest rates any further.
Not to mention, eyes keep turning to the better-than-expected business sentiment for the Eurozone and Germany over the next six months; a classic example of looking at the glass half-full.
So here we sit, watching the euro make a move that appears, to us, tenuous. Oh did I mention the German Ifo just downgraded German 2009 GDP forecast to -6.3% from -6.0%!
The $1.40 mark seems to represent a target level at which the euro has been hanging around. On its own, perhaps the euro can climb higher. But in this highly connected market, its going to need some confirmation from the risk-appetite entourage.
Of course, the Federal Reserve meets today and announces their policy decisions tomorrow. We wouldn’t expect too much activity before those juicy morsels hit the wires.
Unless of course someone knows something we don’t. (Not unlikely.)