It was a jittery start of the month. On Friday, US Regulator, Federal Housing Finance Agency (FHFA), sued major banks and financial institutions over sub-prime bonds for misleading Fannie Mae & Freddie Mac about the soundness of mortgages, as the values were overstated and, in many cases, excess loan was given to the borrowers. They are now seeking compensation worth billions of US dollars. To meet the Fannie & Freddie losses, tax payers' money was used after US government decided to step in for a bailout. In all, 17 banks are charged with selling securities that were not meeting investors' criteria.
This seems to be a very complicated issue, which started in 2007-08, as then the banks had minted hefty profits for their shareholders. In return, banks' CEOs, CFOs and executives were blessed with high salaries, and were rewarded with huge so-called performance bonuses. It was purely Risk Management issue. Banks and financial institutions (FIs), credit rating agencies and regulators are equally responsible for providing uninterrupted clearance for transactions.
Better late than never, it is time now that the authorities should seriously consider punishing all parties involved, as penalising shareholders is not enough unless the management of banks and FIs, and all those responsible for allowing to transact "high risk shadow banking transactions" that are of balance sheet products free from most regulations and are hidden from accounting exposure and regulations, should also be held equally responsible for the financial market mess. Authorities should also consider imposing a 5 to 10 years ban on working in a bank or financial institution on those found guilty, or else it would be a futile exercise.
The timing is very awkward when there is so much of economic uncertainty. Ben Bernanke in his Jackson speech has said that housing and construction boom is needed to jack up US economy. News of litigation will discourage mortgage lending, as the money involved is huge and hence, banks and FIs facing litigation could come across liquidity problem and capital issues and thus the banking system may risk overhang.
Friday's US employment report was disappointing, as Labour Department reported zero growth in non-farm payroll last month, which means that the number of unemployed persons remained unchanged at 14 million. Weak job data further strengthened FED's case of monetary stimulus at their September 20-21 meeting, though FED could delay QE-3 until November meeting.
Instead, there is a high probability that it could use two, or both, of its monetary tools: one is by lowering the interest rate it pays on banks' excess reserves; and there is lot of market talk of second possible option that could be repetition of "Operation Twist", a monetary option used in the 1960s in which FED purchased long-dated maturities Treasuries by selling short-dated Treasuries from its own portfolio, as this move will not impact FED's balance sheet, but will help in flattening the yield curve to stimulate economy. Therefore, it is expected that two simultaneous auctions are possible on the same day--first by selling short-dated securities, and second by purchasing bonds of longer maturity with same day settlement. Selling of short-dated securities could push yield higher.
Another important event is due on the coming Thursday. Obama will be addressing a joint session of Congress and is expected to deliver proposals for long-term growth so that it can produce more jobs. After weak job data it will be a challenging task for the deficit reduction plan of Congress, as growth and job creations are the top priority. Ben Bernanke in his Jackson speech has already said that monetary policy has its limitation and FED alone can't keep the going. He reminded that MPS can become more effective with fiscal policy support that can help in bringing the desired changes.
Meanwhile, the mood in Europe is grim, as economic slowdown is fuelling negative sentiment. Germany's growth, that was helping the European block, is showing imminent signs of sluggishness. Market will be keenly looking for the global economic data for more clues to assess that if this phase is temporary, or is going to linger on for longer period of time.
European Central Bank (ECB) shadow council members-15 eminent economists-and portfolio manager that watch the Euro zone's development and monetary policy regularly on monthly basis, have recommended 50 basis points cut, as they fear sharp slowdown and plunging business confidence. This is a very precarious situation as quite a few European economies are struggling with high deficit and inflationary pressure and yet striving for higher growth, fearing recession.
GOLD: With so much of global uncertainty and recessionary fear once again looming all over, in last couple of days the investors fled from riskier markets to gold, considered a safe haven. Initial reaction should be another surge in gold. So, buying on dips remains a preferred strategy.
In the foreign exchange market, currency move is quite in line with my expectation. Despite economic uncertainty in US market, dollar gained mostly due to weak European fundamentals. The European integration appears fragile and the crack is becoming visible, which may not be sustainable for longer period of time. Pound sterling, too, is suffering due to mounting challenges as the economy continues to underperform. Inflation and deficit are the biggest threat. Yen is struggling to make fresh gains, as investors are not too keen to buy the currency; so as long as new highs are not tested yen could move in the opposite direction, but will remain in narrow range.
However, investors are once again challenging the Swiss Central Bank despite repeated warning by SNB. Investors/speculators are buying Swiss franc as safe haven on fear that Greece and Italy may not be able o fulfil the austerity pledges. The other factor, that could have encouraged SFR buying, is probably after the statement by Swiss economy minister who last week said that "we will just have to live with it". I doubt that if this could be SNB's policy statement, as it is an independent body. However, market will be watching SNB's stance on current and if Swiss Central Bank fails to show its presence in next couple of days, SFR could gain another 4 to 5 big figure.
FX & Gold Weekly OutLook
GOLD - $1883. As I have almost attained my first target of $1890, there is still high probability of hitting my extended target of $1945, and beyond, I would like to caution all to book profit so that next opportunity of buying on dip is not missed. Buying on dips should be the strategy as first support lies at $1840, with major at $1760. Ranges for the week $1810 - $1980
SFR - 0.7881. Watch out as this week there is a high risk of volatility on both sides. If dollar fails to make gain against SFR beyond 0.7990 in next couple of days, Swiss franc could hit 0.7410 on break of 0.7605. Range for the week 0.7340- 0.8240.
EURO - 1.4205. Saw a fine dip hitting the lower band of my last week's range. Euro would struggle to gain beyond 1.4370, a break below 1.4030 would encourage for 1.3940 or else 1.4490. Range for the week 1.3880 - 1.4440.
GBP - 1.6217. Pound sterling would continue to struggle and should stay below 1.6370. Any violation on the upside should top out around 1.6450, as I am looking for a break of 1.6070 to test 1.5950-80 zones. But watch out, as Cable is likely to make quick bounce back. Range for the week 1.5890 - 1.6450
YEN - 76.84. As long as yen holds above 75.80, it will gradually move towards and beyond 77.50 at a snail's pace for 78.10. Range for the week 75.90 - 78.50.
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