Economic Crisis - No country is immune from the gloom

After a volatile 5 days, world stock markets just managed to close last 5 days in the black. It was a week of two halves with the good work from the start of the week being undone in the second half as traders slipped into reverse gear on Thursday and Friday. At least markets managed to hold the gains from the previous week which in the context of the bear market is no mean feat.

The massive influx of money from the US Fed and UK Treasury led to a substantial increase in both crude oil and gold prices last week. Crude prices pushed through the $50 level for the first time since the start of 2009, while Gold endured a remarkable week, trading as low as $883 and finishing at $951. It is no coincidence that these two markets are trading higher in tandem as they are both linked with inflation expectations. Gold is traditionally seen as an inflation hedge, while oil is a barometer for global economic activity. With the Fed turning on the printing presses yesterday, inflation fears are once again creeping into investor’s consciences.

The Fed's plans have been described as a 'shock and awe' tactic, a phrase first used to describe the initial stages of the conflict in Iraq. There was certainly a shock last week, with the dollar registering its 3rd biggest single day decline ever. However, after an initial rally, there was no awe from equity markets as investors fret that like the Iraq conflict, there are no plans in place to tidy up the inflation mess that could be round the corner. The Greenback’s weakness has dampened what would have been an excellent week for oil majors such as BP, which derive much of their income in the form of US dollars.

This took the shine off the solid performance from other sectors such as financials. Although AIG sparked Obama’s ire with its bonus payments, it was on the whole a good week for the banks. Citigroup performed a reverse stock split, finishing down, but Barclays, Lloyds, RBS and HSBC all performed well. News that Barclays is planning to sell its shares unit has added fuel to the fire, with HSBC also benefiting from the ‘independence’ premium. The success of HSBC’s rights issue may have also encouraged financials.

The dollar wasn’t just punished because of the Fed’s action, though this was certainly a significant catalyst. There were also rumours last week that the UN may push for countries to diversify their currency reserves across a basket of currencies, rather than being so heavily weighted in the US dollar.

With China holding massive reserves of US dollars, diversification could lead to an oversupply on world markets, and a further depreciation in the value of the dollar. There were gains for the pound against the dollar, but sterling didn’t escape punishment against the euro. UK Plc was singled out for punishment on news that unemployment reached a 12 year high. There are concerns about the EU’s exposure to Eastern Europe, but this for the moment is being outweighed by the state of the UK and US economies.

This week’s economic highlights include US existing home sales on Monday and UK CPI on Tuesday. Wednesday is another busy day with German IFO, and UK CBI realised sales, US durable goods, and US new home sales to come in the afternoon. Thursday brings UK retail sales and US unemployment claims, and Friday sees the latest UK current account data released. Sometime in the week, Nationwide will release their latest UK house price index, and the MPC inflation report hearing is tentative for Friday.

With the economic crisis being a truly global phenomenon, no country is immune from the gloom. This makes picking a strong currency a tricky task which some analysts have termed ‘ugly contest’. Gavekal wrote last week that "away from the spotlight, some currencies either offer tremendous value because they have been oversold concerns about debt exposure or because they have sound-enough fundamentals which, in these panicked times, the markets are ignoring." Last week the commodity currencies such as the Norweigen Krona and Canadian dollar were highlighted as being overlooked and likely to benefit the most from any return to stability in the global economy.

A bull bet predicting that the USD/ CAD will be lower than 1.2300 this time next year (360 days), could return 105% at BetOnMarkets.com.