Eurozone worries boost dollar
By Jamie Chisholm, Global Markets Commentator

Published: November 15 2010 03:56 | Last updated: November 15 2010 14:49

Monday 14:40 GMT. European fiscal woes are battling with Asia growth hopes and more M&A, leaving investors cautiously pecking at riskier assets following last week’s wobble.

The FTSE All-World index is up 0.2 per cent, the performance of commodities is varied, the dollar is stronger and benchmark Treasury yields are higher.

EDITOR’S CHOICE
Economic Outlook: Debt concerns to dominate - Nov-14Commodity super-cycle seems to be a runner again - Nov-12On Wall Street: Time to beware sound of trumpets - Nov-12Concern grows as Dublin spurns help - Nov-15Japanese economy grows after stimulus - Nov-15Nervousness as bonds braced for Greek tests - Nov-14The S&P 500 on Wall Street has opened with a gain of 0.4 per cent, with investors buoyed by news of an $7.6bn offer by Caterpillar to buy mining equipment maker Bucyrus.

Investors love the sweet smell of M&A on a Monday morning, particularly when it shows sentiment within the resources sector – a crucial bellwether of global demand – remains upbeat.

Help is also at hand from better-than-forecast US retails sales data in October, though a weak reading of East coast manufacturing has tempered the macroeconomic optimism.

Highlighting the vagaries of a mixed session, Chinese stocks were initially still suffering from worries about possible interest rate rises – though they managed to rebound from early losses – while Tokyo was higher after third-quarter gross domestic product exceeded forecasts.

The euro remains under pressure as traders continue to be concerned about the debt difficulties of Ireland and other so-called “peripheral” eurozone nations. Indeed, the single currency is struggling despite peripheral sovereign spreads moving slightly tighter after an European Union report on the Greek budget deficit contained no big surprises

The China and eurozone worries were the main factors behind last week’s 2 per cent fall in the All-World and the Reuters-Jefferies CRB indices.

The stock and commodity benchmarks retreated from two-year highs that had been reached primarily on hopes for the rejuvenating properties of the Federal Reserve’s $600bn quantitative easing programme.

The Market Eye
Traders like identifying a performance shift in an asset that may signal a broader change in investors’ mindset. One such catalyst could be the yen/dollar cross. The yen has been strengthening since the beginning of June, participating in the dollar’s general decline over that period.

However, there are signs in the past week that the dollar is finding its feet after the yen failed to breach the record Y79.75. It is now Y82.82. The reason why the buck’s improvement relative to the yen may be particularly pertinent is that, along with the Swiss franc, the currencies are considered to be fairly closely correlated because of their perceived haven status.

The relationship has been asymmetric, however, with the yen apparently enjoying a greater haven cachet of late. Thus, if the buck can start gaining ground against an otherwise stable Japanese unit it may signal a period of broad dollar strength is on the cards. Given that advances for stocks and commodities have recently required a falling dollar, this may have implications for riskier assets.



But it appears that the wash from QE2 is no longer lifting all boats. Certainly the dollar’s strengthening since QE2’s confirmation suggests the programme may have been discounted by the market.

This may mean more fundamental catalysts – corporate and macroeconomic – carry greater heft than they have in recent weeks. In this regard, the auspices are, again, mixed.

The European and US third-quarter earnings seasons have been well-received, and the latest US jobs data have shown signs of improvement.

The problem for bulls is that the Fed has made clear that continuation of QE2 will be dependent on data. It is therefore possible that those traders who feel QE2 is an important crutch for assets will start to perceive good news as “bad news”.

That’s a difficult circle to square if investors are to engineer a Santa Claus rally.