Busch: All The News Is Bad Today
FED, INFLATION, ECONOMIC POLICY
Posted By: Andrew B. Busch | CNBC Reporter
Actually, the bad news started yesterday with Argentina nationalizing their pension funds. The government's seizure of $29 billion of private pension funds has heightened concerns of a return to 2001 policies and a default on their bonds. Bloomberg reports that, "President Cristina Fernandez de Kirchner's decision hurt markets already reeling from slumping commodity prices and slower growth."
On the news, there was a run on emerging market currencies and stocks. Argentine bond yields have soared above 25% and the Merval stock index collapsed as the private retirement system owns around 27% of shares available for public trading.
This tactic should scare everyone with a pension fund. Why? According to the Argentine pension website, 55% of the funds are invested into government debt. A takeover would allow the Fernandez administration to write off the sovereign bonds held by the funds, said Javier Salvucci, an analyst with Buenos Aires-based Silver Cloud Advisors according to Bloomberg. This theme of extreme moves both legal and not-so-legal by governments across the globe is disconcerting and increasing with frequency.
On this theme of government reach, how disturbing was the news out of France? The UK Times reports that Nicolas Sarkozy risked blowing apart the European consensus over how to deal with the financial crisis by proposing today that each country launch sovereign wealth funds to take stakes in key industries to stop them falling into foreign hands. "Stock markets are at historic lows.
I do not want European citizens to wake up a few months from now and discover that European companies belong to non-European capital which has bought at the lowest point of the stock exchange," said Mr. Sarkozy. If that wasn't scary enough, "With France holding the rotating presidency of the EU, Mr. Sarkozy is in a strong position to push through his plans for sovereign wealth funds as world leaders prepare to re-write global financial rules at a series of Bretton Woods-style meetings starting next month."
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What's driving this reach are indications that individual European countries can not act in concert to stem the problems from the global credit crisis. The IMF has released their fall report on Europe and it states that all major European economies will enter recession in the coming months. "Confronted with a crisis in the financial system that is of unprecedented scale, scope and complexity, on top of a commodity price shock, it's hardly surprising that Europe's economy is entering a major slowdown," the acting director of the IMF's European department, Alessandro Leipold, said in a statement." Following up on this theme, the governor of the Bank of England Mervyn King warned that the UK is entering into a recession, that the slowdown could be prolonged, and that there is a risk of another sharp decline in the currency.
The markets didn't wait for any of these actions or predictions to come true. Emerging market currencies all lost value with Brazil, Turkey, and South Korea all taking hits of 3% or more. The WSJ details how bad these short US dollar bets have hurt Latin American companies and added to the selling today. The pound and the euro sank on the news and on the belief that European interest will fall sharply as their economies slow. Until they can act in a more unified fashion, this is perhaps the only thing they can do at this point. Right now, the currency markets are very pro-US and very negative the rest of the world due to this theme of unity versus anarchy.
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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. He can be reached here.