Currency wars and the return of the 'big deal'

February 11-15, 2012

AMERICAS 

Market comments: Currency wars became a concern last week when Japan sold off the yen and planned to ease monetary policy. Since then, the G20 finance ministers have responded with statements that they will not take part:  “We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes”.

A currency war exists when countries devalue their own currency to gain a trade advantage against other nations.  The Brazilian finance minister used the term in 2010 to describe how Quantitative Easing was pushing up other nation’s currencies, making the domestic currency less competitive.

Mixed data from the States – fewer jobless claims but reduced productivity - combined with poor economic data from Europe also helped keep markets relatively flat throughout the week.  Canadian markets were particularly dragged down last week by gold's poor performance. The metal now sits 13% lower than its high. Gold demand fell last year, as demand for jewellery and the like has fallen and suggestions that the gold rally is wearing out.

This YTD chart shows a marked decline in the price of gold so far in 2013. 

Gold.jpg

Company News:  RIM co-founder James Balsillie, announced he does not own any shares of RIM (renamed BlackBerry).  As a result, shares fell almost 3%. The company has not been doing particularly well, despite positive sentiment leading up to the launch of their new phone two weeks ago, and has fallen over 8% since that launch.

Poseiden Concepts Corp. plunged over 70% last Thursday. News that two thirds of the company’s reported revenue should not have been recorded as revenue. Previous statements from 2012 will be restated in the coming weeks.

Warren Buffet is looking to buy Heinz. Or rather Berkshire Hathaway and 3G are. Heinz is valued at US 23.3 bn. With this deal, shareholders will have a 20% premium on their stock. There have been some issues with this deal, notably insider trading. Currently, the SEC is looking into 'highly suspicious options trading activity' that may have earned traders $1.7m over Buffett's Heinz deal

With the Heinz deal comes beliefs that the ‘big deal’ is back. Increasing confidence and higher stock prices, in combination with healthier banks that are more able to finance deals, are leading companies to spend accumulated cash.

International news: The euro zone has contracted the last three quarters, shrinking 0.6% in Q4 2012 and more than expected. It is “weighed down by weak, debt-laden countries such as Greece and Spain, where governments have been aggressively increasing taxes and cutting spending.” The most recent fall makes it the “biggest fall since the first quarter of 2009 when the global economy was in its deepest recession since the Second World War.”

UK/EMEA

The potential for currency war also took a toll on UK markets last week. Despite strong earnings at the beginning of the week, the FTSE 100 experienced a sell off as weak economic numbers had investors taking their gains. Additionally, sterling fell as a result of weak economic data coming from the UK. More people are shorting the currency, than going long.

Anti Brussels sentiment is likely to increase as  regulation is being to curb banking remuneration is discussed early next week .  It seems negativity for the EU is already quite high, and the UK would not remain in the Eurozone if a poll was taken tomorrow.

Given an in-out referendum on EU membership tomorrow, 50 per cent would vote “out” against 33 per cent “in” and 17 per cent who would not vote either way

Fortunately, a referendum will not be held until 2017.  

And almost completely tangental but interesting is this article from The Economist, which suggests there is no correlation between financial education, financial knowledge and better financial behaviour. This could be particularly problematic, as the British government just changed the curriculum to include financial literacy.