The lack of U.S. economic data this morning did not minimize
volatility in the currency market. A flurry of bad news has weighed
on risk appetite, driving low yielding currencies such as the U.S.
dollar and Japanese Yen sharply higher against the euro, British
pound and commodity currencies. There has been no shortage of
reasons for why risk is being sold and even though most of the
problems stem from Europe, developments in the rest of the world
are also causing trouble for the markets.
Here are 8 of the main reasons why risk is being sold:
1. Dutch Government at Brink of Collapse
Over the weekend, discussions of austerity measures in the
Netherlands fell apart with the leader of the Freedom Party walking
out. Most likely this will force Dutch Prime Minister Mark Rutte to
resign as quickly as this afternoon and call early elections
shortly thereafter. Even though the Netherlands account for only a
small amount of Eurozone GDP, this is a big deal for Europe because
a political crisis in any Eurozone country, large or small is bad
news for the euro. Investors are demanding a premium for holding
any non German debt with the spread between Dutch and German 10
year bond yields rising to its highest level in 3 years.
2. France - Possible Leadership Change
France also held its first round of Presidential Elections on
Sunday and Francois Hollande received the 28.6 percent of the votes
versus Sarkozy who received 27.1 percent of the votes. He was
expected to win the first round and is likely to win the second
round in May. The reason why this is bearish for the euro is
because Hollande is a big advocate of renegotiating the European
Treaty to emphasize growth over austerity. It took Europe a very
long time to get where they are at now and to have to start from
square one again would cause more problems than solutions.
3. Disappointing Eurozone Data
Disappointing Eurozone economic data added pressure on the euro.
Economists had expected the Eurozone's composite PMI index to rise
but instead, it dropped to 47.4 from 49.1 in the month April.
Slower manufacturing and service sector activity weighed on overall
economic activity with a particularly steep slide seen in
manufacturing production in Germany. In fact, the manufacturing
index fell to its lowest level in 33 months.
4. IMF Funds Falls Slightly Short of Target
The IMF raised $430 billion this weekend which was in excess of
Christine Lagarde's $400 billion goal but less than the $500
billion that the market had anticipated. This is not a big deal but
it means that the firewall for any future European crisis is
smaller than what everyone would like have liked to see.
5. Chinese Manufacturing Activity Contracts for the Sixth
According to HSBC, who tends to have a more accurate read of the
Chinese economy, manufacturing activity contracted for the sixth
consecutive month. Although the contraction was less than the prior
month, the pullback in manufacturing indicates that China will lend
less support to the global economy.
6. Decline in Australian PPI Points to Rate Cut from RBA
Any weakness in the Chinese economy is bad news for Australia,
particularly since inflationary pressures are easing. Producer
prices fell 0.3 percent in the first quarter which means consumer
price growth most likely slowed in Q1 as well. The RBA stands ready
to cut interest rates as soon as there is evidence of softer
inflationary pressures. With the Chinese economy slowing and
domestic conditions weakening, the latest PPI and CPI numbers
should be enough to push the RBA to take action.
7. 11 S&P 500 Companies Reporting Earnings Today
The earnings season is in full swing with 11 companies scheduled
to report today. A downgraded outlook from Kellogg Company and
corruption claims for Wal-Mart are weighing on equities and risk
8. Expectations for Dovishness from the Fed and BoJ
Finally, given the recent trend of US and Japanese economic
data, we are looking at the possibility of dovish comments from the
Federal Reserve and Bank of Japan. The BoJ may even raise asset
purchases this week. Both central banks are expected to express
concerns about growth and their cautionary commentary could keep