Abenomics and other Drivers of Holiday Markets

Marc To Market's picture

The main feature in the foreign exchange market continues to
be the yen’s weakness.  This weakness,
based on expectations that the new Japanese government will succeed in driving
the dollar to JPY90 with a combination of more aggressive monetary and fiscal
policy (“Abenomics), is offering support to the other currencies.  The yen sales are a combination of momentum
and carry strategies. 

 

There are two other forces in the market as well.  First, the market is anticipating a further
reduction in tail risks in Europe.  Of
course the large moves away from the abyss this year are clearly the doing of
the ECB with its long-term repos and offer of (conditional) outright
purchases.   

 

However the European
Commission will reportedly do its part by granting several countries, including
France and Spain, an extra year (and maybe two for Spain) to reach the 3% deficit
target.  An official announcement has not
been made, but the signals from the EC and the Commissioner for Economic and
Monetary Affairs Rehn are unmistakable.

 

The other driver is the looming US fiscal cliff and debt
ceiling.  Yesterday the Treasury Department
indicated that it will begin taking special measures to avoid violated the debt
ceiling.   After last week’s failure in
the House of Representatives, attention turns to the Senate.   With the Democrats enjoying a slim majority,
it is possible that they vote on a bill along the lines that Obama
outlined. 

 

There are a couple of other developments to note.  In Italy, “Agenda Monti” is drawing some
support from the UDC, some current cabinet members and some breakaway politicians.  A poll suggests such support may translate
into 15-20% of the vote in the late Feb election.  Berlusconi at one and the same time wants to
maintain that Italy is the second strongest economy in the euro area behind
Germany and that Monti has driven the economy into the ground.    

 

Although it is hard to maintain both
simultaneously, the unity of opposites during a campaign seems all too
common.  Perhaps the most important character
in the Italian drama is neither Monti nor Berlusconi at the moment, but the
center-left leader Bersani.  He already
made the most sensible response to Monti’s manifesto, saying that he agrees
with some, others a bit less so and other are open for discussion.  Bersani has his own ambitions and seems
reluctant to move over for Monti. 

 

In the US, we are also monitoring the labor dispute at ports
on both coasts.  The eastern seaboard and
gulf port dispute is the most pressing at the moment.  A last ditch effort to meet with federal
mediators was agreed upon, but time is running out.  The current contract extension expires Saturday
night.   The ports handle a great deal of
consumer goods and a labor dispute would disrupt the retail sector as well as
distort trade and employment data.  Only
container traffic would be impacted (so autos and some perishable items are not
included nor is  military cargo). The National Retail Federation and various other
industry associations are calling on Obama to invoke his authority to order a
cooling off period.