The Secret Is Out!

At least that’s what we’re learning this morning after WikiLeaks did indeed confirm through the release of classified documents that the US does still practice espionage. Phew, I’m actually relieved to hear it, as I thought we had all but abandoned tactics meant to keep us out of harm’s way. While this is bound to increase international tensions, the big boys playing international politics should be able to worm their way out of this.

What we’re also learning this morning is that the market is thoroughly unimpressed with the Irish bailout announced over the weekend, to the tune of $ 113 billion (85 billion Euros). Senior bondholders won’t have to pick up the tab for the bailout and the Irish agree to pay a 5.8% in interest. The important thing to note from the bailout agreement is that going forward, bonds issued after 2013 won’t be guaranteed so this seems more like a patch-job than an actual solution.

Lastly, we are learning that N. Korea may have taken on the personality of their leader, Kim Jong Il who is doing his best “weekend at Bernie’s” impression and is certifiably nuts. Should China continue to support this madness then there could be economic fallout which would further the trade wars.

This all adds up to risk aversion in the FX markets, led by Euro weakness across the board. Stocks are lower to start the day, though oil is trading higher on increased geo-political risk.

In the forex market:

Aussie (AUD): The Aussie is lower as the risk aversion has reduced the demand for carry trades because Australia’s exposure to Asian economies which could be affected by the Korean conflict is high. Australian GDP figures are due out on Wednesday.

Kiwi (NZD): The Kiwi is also lower for the same reasons as the Aussie, though better than expected trade balance figures rose the most in nearly 2 years.

Loonie (CAD): The Loonie is mixed as risk aversion is offset by the lack of exposure to Asia and overall Euro weakness. Canadian GDP figures are due out tomorrow. (Click chart to enlarge)

Euro (EUR): The Euro is lower across the board despite the Irish bailout as long-term implications of policy going forward outweigh the immediacy of Irish default. Tomorrow is Euro zone CPI data followed by GDP data and the ECB interest rate decision on Thursday. Don’t expect the ECB to do anything with the issues it is currently facing. (Click chart to enlarge)

Pound (GBP): The Pound is mixed as projections for slower growth next year counter-balance increased projections for growth this year. This is a light week of news for the Pound as there is some home price data due out later in the week so expect the Pound to remain mixed as it vacillates from risk taking and risk aversion.

Dollar (USD): The Dollar is higher across the board as the flight to safety trade is in full effect. The Dollar is faring better than the Yen as it is distanced from Korea. The big news for the week is Friday’s Non-Farm Payrolls report which will show whether or not the employment picture is getting better. Mixed results from last Friday’s “Black Friday” shopping event have left retailers wondering about the health of the US economy.

Yen (JPY): The Yen is mixed this morning as on the one hand it is being bid from the un-wind of carry trades, while at the same time it has exposure to the Korean conflict. Overnight, retail trade figures came in lower than expected.

Just when you thought the world stage couldn’t get any wackier, it does. While this WikiLeaks release is certainly embarrassing, it is not a game-changer in the grand scheme of things. Think of it more like when you get caught speaking badly about a supposed friend. However, if enough friends take offense, then it could require some major groveling to get back to better terms.

More important is what is taking place in Korea, which could eventually pit the US vs. China and escalate the current trade war between the two Superpowers. In a sense, this is more smoke and mirrors intended to heighten global tension and destabilize.

The only news of real significance is that Ireland has received a bailout which will essentially just kick the can down the road for another day. Changes in policy regarding how EU debt is dealt with in the future have not been viewed positively by the markets. When (and if) pressure on Spain and Portugal increases is anyone’s guess.

However, I expect there to be continued Dollar strength to close out the year as the geo-political risks combined with the economic problems around the globe will offset Bernanke’s QE2. Not to mention new tax rules which go into effect next year which could induce some tax benefit selling.

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