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from Global Investing:

Strong dollar, weak oil and emerging markets growth

Many emerging economies have been banking on weaker currencies to revitalise economic growth.  Oil's 25 percent fall in dollar terms this year should also help. The problem however is the dollar's strength which is leading to a general tightening of monetary conditions worldwide, more so in countries where central banks are intervening to prevent their currencies from falling too much.

Michael Howell, managing director of the CrossBorder Capital consultancy estimates the negative effect of the stronger dollar on global liquidity (in simple terms, the amount of capital available for investment and spending) outweighs the positives from falling oil prices by a ratio of 10 to 1. Not only does it raise funding costs for non-U.S. banks and companies, it also usually forces other central banks to keep monetary policy tight, especially in countries with high inflation or external debt levels. Howell says:

If you get a strong dollar and intervention by EM cbanks what it means is monetary tightening...The big decision is: do they allow currencies to devalue or do they defend them? But when they use reserves to protect their currencies, there is an implicit policy tightening.

The tightening happens because central bank dollar sales tend to suck out supply of the local currency from markets, tightening liquidity.   That effectively drives up the cost of money, as banks and companies scramble for cash to meet their daily commitments.  Central banks can of course offset interventions via so-called sterilisations - for instance when they buy dollars to curb their currencies' strength, they can issue bonds to suck up the excess cash from the market. To ease the tight money supply problem they can in theory print more cash to supply banks.  But while many emerging central banks did sterilise interventions in the post-crisis years when their currencies were appreciating, they are less likely to do so when they are trying to stem depreciation, says UBS strategist Manik Narain.  So what is happening is that (according to Narain):

from Morning Bid with David Gaffen:

Ebola and market pressures

There’s a glut of various stresses operating in the markets right now: Europe’s inability to get out of its own way, the sharp fall in oil prices that probably says more about supply issues and lackluster demand in Asian markets than the United States, the uncertain path of the Federal Reserve and a nagging concern that weak inflation figures show the economy really isn’t healing all that much.

But make no mistake about it - Ebola is a pressure point for markets at this moment, and one only need look at the “scare” moments in markets to really see it.

from Anatole Kaletsky:

Why markets ignore good news from U.S. to focus on bad news from Europe

A trader watches the screen at his terminal on the floor of the New York Stock Exchange in New York

What’s spooking the markets?

One thing we can say for sure is that it is not the slightly weaker-than-expected retail sales that triggered the mayhem on Wall Street on Wednesday morning. Most U.S. economic data have actually been quite strong in the month since Wall Street peaked on Sept. 19.

So to find an economic rationale for the biggest stock-market decline since 2011, we have to consider two other explanations.

from Breakingviews:

Rampant market fear clarifies global divide

By Richard Beales

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. 

Suddenly, fear has overwhelmed greed. Yields on 10-year U.S. Treasury bonds slumped below 1.9 percent at one stage on Wednesday, and the 2 percent slide in the S&P 500 Index erased what remained of this year’s gains, although the index ended the trading day down just under 1 percent. It all augurs poorly for the expected end next month of the Federal Reserve bond-buying program. Yet the domestic economy has been steadily improving. Slowing growth elsewhere presents the bigger worry.

from Morning Bid with David Gaffen:

Simple Tricks and Nonsense

Heading into the end of a violent week and ahead of a slew of earnings reports, the market has swung from one extreme to another, as the average daily move in the S&P 500 rises dramatically, as futures promise another big drop at the open Friday, and as investors try to take stock of what's happening here in their beloved stock market.

The U.S. economic growth situation hasn't changed all that much - after all, jobless claims continue to fall and the expectation again is for another strong earnings season. And, as awful as Europe is right now, there's only so much damage its economy can do to the U.S. The extent of that should be known before long if recent German data is any guide.

from Morning Bid with David Gaffen:

Speak softly, and carry a big helicopter

Days like Wednesday are the ones that remind investors why the Federal Reserve is what it is, and how some believe the other world central banks cannot compete, even as some expect the European Central Bank and Bank of Japan (to an extent) to take up the slack the Fed will leave behind when it ends quantitative easing in the next weeks and prepares for its first interest-rate hike some time in the third quarter.

The odds on that hike, by the way, shifted late Wednesday after the Fed's minutes showed there was concern about moving policy too quickly. It’s the pace of increases that worries the Fed, not the idea of doing it at all. The Fed is likely to push rates to about 50 basis points either in July or September (the market is betting on September now, the Fed is probably thinking July), but it’s important to keep in mind that the monetary policy committee is not going to then start doing the one-move-per-meeting thing they did in the last rate-hiking cycle back in the Pre-Cambrian Era.

from MacroScope:

A first for British politics

Nigel Farage, the leader of UKIP drinks a pint of beer in the Gardeners Arms pub in Heywood near Manchester

By this time tomorrow, the anti-EU United Kingdom Independence Party is likely to be celebrating its first member of the Westminster parliament. Polls have just opened in the deprived seaside town of Clacton where the sitting Conservative lawmaker switched to UKIP and called a vote.

A second member of the ruling Conservative party has now defected to UKIP and will force another by-election before long leaving the party on tenterhooks over who might be next. Many fear they will lose their seats at the May 2015 general election as UKIP splits their vote.

from Breakingviews:

Asset price disinflation may be next big thing

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The great divergence may be about to come to an end. For investors in almost everything but the safest bonds, that is bad news.

from Breakingviews:

Commodity bear market looks entrenched

By Swaha Pattanaik

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

The commodities bear market looks entrenched. Strong supply-side responses, or successful economic stimulus by the European Central Bank, would be required to reverse price falls. Neither looks terribly likely.

from Counterparties:

MORNING BID – Apres Fed, le Deluge

The Kremlinologists turned out to be right, and the Federal Reserve left its "considerable time" language in its statement to assure the markets that it would be around for a while longer with rock bottom rates. It's the divergent (to a point) reaction out of the markets themselves that is interesting to parse, and will be key to watch in coming weeks and months. The action in the stock market was to suggest the entire exercise was a snooze-fest, with stocks ending marginally higher (yes, the Dow at a new record) but not too far from where the major averages were trading just before the news. Which is to say the equity market, always the most optimistic of U.S. markets, has it in mind that low rates stay for now, and until "now" is "then," it's time to party.

Bond markets, inflation-protected securities and the currency markets saw things differently, and it's those markets that may be more instructive to watch as the days and months go on and on. The five-year TIPS note saw its yield break above zero for the first time in ages, a sign that investors are starting to worry more about inflation, or higher Fed rates, which is interesting as consumer price data showed year-over-year inflation fall to a 1.7 percent rate earlier in the day. The dollar put together another strong rally, meanwhile, with the dollar index hitting highs not seen in 14 months and big rises against its main companions, the euro and the yen. And this is where the dot matrix comes in.

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