Market Risk on Holiday and so-called “Protectionism” 3 April 07

Key News
• Key Reports Due (WSJ):
ICSC Chain Store Sales: +0.3%. Previous: +0.2%.
8:55a.m. Redbook Retail Sales Index. Previous: +0.7%.
10:00a.m Feb Pending Home Sales. Previous: -4.1%.
5:00p.m. ABC/Wash Post Consumer Conf. Previous: -2.
N/A Auto Sales. Previous: 16.5M.


“It was a bright cold day in April, and the clocks were striking thirteen.”
     George Orwell

FX Trading – Market Risk on Holiday and so-called “Protectionism”

It seems nothing can satiate the risk appetites in this market.

The dollar is acting badly, no doubt.  But the key alternative global deposit currency, the euro, hasn’t acted all that great so far given the backdrop for U.S. recession and protectionism, though there is still plenty of time for the euro to make a move. 

We would have expected a lot more damage to all markets and a bigger rally in the euro against the dollar on news of a trade skirmish shaping up between the bookends of the global economy—U.S. and China.  We saw an initial intraday dip last Friday in the U.S. stock market when news of U.S. tariffs on Chinese paper was announced.  But it was only a blip.  So far this protectionism stuff has been met with a collective yawn. 

Currency traders have now poured right back into the risk trade i.e. buying the high yielders in Asia (Australian $ and New Zealand $), countries where continued strong economic growth is predicated on continued strong economic growth in China.  They seem to have no worries that protectionism has the potential to derail anything in China. 

And of course today, $-yen rallied (yen weakened against the dollar).  The yen at this point can be considered the pressure gauge for risk.  Weakness validates the view traders risk appetites are back.

The still hungry crowd may have it all exactly right.  Despite hikes in central bank rates, there still seems plenty of money in the system thanks to the proliferation of sources of credit globally.  And the fact that derivatives seem to have weathered the subprime storm relatively unscathed, is another notch in the belt for those that have told us modern derivatives do an excellent job of spreading risk—reducing the chances for a major accident.  And despite being on “recession” watch, U.S. growth numbers haven’t been as bad as expected, given the most (including us) expected a much bigger impact on jobs and consumer spending from the housing fallout.

Knocking on the doors at the Church of Free Trade

And though “protectionism” is seen as bad for the dollar, maybe there is some method behind the seeming U.S. madness.  I’m sure Europe doesn’t mind.   There are many China sycophants who seem to sanction any trade behavior on the part of China.  Cheating and stealing its way along, with the acquiescence of many of the world’s corporate elites who bow down to gain market access or sweet property deals, doesn’t exactly fit the lofty ideals of the so-called World Trade Organization, a badge China proudly displays and hides behind when needed.

That said about China, we do realize the enormous profits pulled out of China from the so-called platform companies that produce there and take most of the profits onto their income statements.  No doubt its been a boom for corporate Everywhere, as profits soar,  thus its no surprise they play the quid pro quo technology transfer game with China.  Of course those not tuned into the knowledge economy, i.e. the working blue collar stiffs of the world are left holding the bag.  Would Schumpeter be proud?  Does it ultimately enhance the wealth of Western nations as they transit to pure services?  It seems the business cycle volatility has diminished.   And that equates to consistent employment opportunities for all. 

But is it unrealistic to believe the bulk of the citizenry can move, with proper training, into the knowledge-based class of the haves, and avoid the seeming potential for balkanization in the West?  Is there any other choice? Who knows?  Maybe the shots across China’s bow on trade may prove beneficial over time.  We have noticed that former Fed Chairman Alan Blinder, no intellectual slouch he, is now weighing in against that that “shining beacon on the hill”, otherwise known as “The Church of Free Trade” by its many global parishioners.  Mr. Blinder was once a disciple, yet he seems to have fallen from grace.  Maybe he was pondering the fact that the Western world’s working class is carrying the load, in what is shaping up to be a decades long campaign, for developing an Asian consumer class.  And maybe the idea of carry that burden so the West can shift both consumer and manufacturing power to Asia didn’t seem to make sense to him any longer.  Thus, he decided to exorcise himself from the Church of Free Trade.

This is obviously a debate that goes well beyond the scope of this morning missive.  And as you can see, my blue collar roots are showing.

Jack Crooks

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