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Waking up to an interesting day!


The world has suddenly decided that “Risk Off” is the proper strategy, gold it $1,700 this morning – it was below $1,600 just a few weeks ago.  Euribor has decided to freeze up (the implication here is that European banks are declining lending to each other… think of Bear Sterns and Lehman Brothers period).

Obviously the problems that affected G7 countries 4 years ago are still largely present today, and investors have noticed that the attempt to sweep all these realities under the rug has failed.   The highlights:

  • Greece is still a mess, and despite all the ECB/IMF efforts its debt to GDP is greater today than it was 18 months ago.
  • Spain will have elections in October
  • Italy has finally woken up to the fact that after Greece it has Europe’s second highest level of debt to GDP
  • Swiss Franks has risen by nearly 50% in the past 18 months
  • Belgium has been without a government for more than 418 days (a world record)
  • America’s continued internal brinkmanship in resolving its excessive government deficit has reached its ridiculous conclusion with an 11th hour agreement to raise the debt limit (a fake issue), and confirming that there is no political will to find a solution to the debt problems.
  • Finally, this morning it is rumors of bank insolvency (SocGen and Unicredit are at the center of the storm).
Up here in the great frozen north we observe our largest export market (America) poised on the edge of the abyss of another recession.  As ISM numbers show a continued deceleration in economic growth.  QE3 cannot be too far now (although since 5y and 10y bond yields have already dropped dramatically… I don’t see that the feds have much value added here).  Canada is bracing for further capital inflows, averaging 7% of GDP for the past 2 years, it is beginning to worry policy makers.  Fast money was the bane of Asia in 1997/99 when the world decided that they could better the use the money elsewhere.  Policy makers will have to think of ways to channel these funds away from fast money instruments towards more productive uses, that would "lock-in" investors for many years -- and reduce the risk to Canada's economy of a mass Exodus when things settle down  again in a few months.

On fact for Canada that may slow down the cash inflow is the current weakness of the CAD, peaking at 1.06/.94 a few weeks ago, it is down nearly 5% to 1.01/.99 this morning.  Many, including me, have shown that the CAD is effectively a “petro currency” and with the WTI at 83bbl this morning, down from near $100 in early June has the predictable effect of reducing the value of the CAD.  Where do we go from here.  It has been widely stated that the Middle East premium was around $20/bbl – this has now been erased as the discussion moves on to economic slow down in Europe and America – these two markets account for 50% of world oil demand.  Could we see oil at $60 – sure maybe although as old oil hands will tell you predicting oil prices is a mugs game.

Anyway, the S&P 500 (in the futures market) is near its next support level of 1160 at 1172.  Interesting day ahead!

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