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Forex Market Outlook 10/28/11

Yesterday’s meteoric ride higher in risk assets is emblematic of the overall state of the global economy in that it is government and not business that is holding us back. With the “resolution” of the Euro debt crisis having been established, let’s not forget that the debt problem is not going to go away, but rather now they have a coherent plan to deal with it. That is, until something happens.

Part of the problem with the plan laid out yesterday is that it did not address the debt problems in the other four periphery countries and while Greece may live to see another day, the people of Italy, Ireland, Portugal, and Spain may take issue that they did not receive debt forgiveness. So this situation is far from over, and it will be interesting to see what happens when the it comes time to actually follow through on these plans if necessary.

So the major risk appetite from yesterday has abated some today as we some profit-taking in the markets ahead of the weekend. Risk assets are slightly lower to start the morning, but not enough to show a reversal of sentiment. Moves like yesterday’s are rarely one-day phenomena so it seems likely that barring some extremely bad news, markets particularly US stocks should move higher. The Dow climbed above 12000 and corporate earnings have continued to impress.

This rise in stocks yesterday was both accompanied and caused by US dollar selling, as the Dollar experienced a broad-based sell-off and commodities were higher as well. Economic data has been slightly better of late, but it will be interesting to see if this is sustainable with the potential inflation on the horizon.

There was no significant news out of Europe this morning, but overnight in Japan the jobless rate came in much better than expected, posting a 4.1% figure vs. an expectation of 4.5%. Household spending also decreased by less than expected, and CPI data showed continued deflation. Industrial production figures however were worse than expected.

So the story in Japan is one of an improving economic picture despite the recent Yen strength which is at an all-time high vs. USD.

Economic data released here in the US missed expectations slightly with Personal Income showing a .1% gain vs. the expected .3%, though personal spending increased .6% as was expected. Later this morning the U of Michigan consumer confidence figure will be released and is unlikely to bet expectations.

Today is setting up to be an inside day which is not surprising given yesterday’s massive move. Essentially this means that we won’t be making new highs or new lows. These types of pauses are generally necessary as it gives the markets time to fully digest the impact of the change in sentiment and determine if the move is warranted.

In this case I think it is, not because the economic fundamentals looks so good, but because there really is no place else to go. With bonds paying little interest, the value of the Dollar declining, and global growth uncertain, stocks are a pretty good place to be. The rationale behind it is that companies can maneuver more quickly than governments and can maintain earnings but cutting spending if need be. With valuations fairly low historically, dividend yields are higher making stocks an attractive bet.

But what’s even a better bet are the commodity currencies in my opinion as dividends are paid quarterly in stocks; in currencies interest is paid daily. So you don’t have to try to pick individual winners like in stocks or get locked up for months waiting for dividends. You can get in and out in a moments notice and get your interest daily.

In addition, if the Dollar continues to weaken with the threats of QE3 on the horizon, then other currencies are going to look more attractive. That’s what makes the currency market the market of choice for these uncertain times!

By Mike Conlon,

Market Snapshot