Tomorrow the Eurozone Determines Greece's Fate

And now… today’s Pfennig for your thoughts…

Good day, and a marvelous Monday to you.

Well, have you felt the BIG SHIFT? I sure did, and am still scratching my balding head and wondering where did this BIG SHIFT in sentiment by the Fed toward a rate hike in June come from? But it’s there for sure. And to just enforce that the BIG Shift (BS) pun intended, the Fed will send at least six more speakers out this week to talk, including Fed Chair, Janet Yellen, who speaks on Friday.

There really isn’t a plethora of economic data on the docket this week, so these speakers will carry the ball for the resurgent dollar.  In fact, I don’t think we’ll see any “real economic” data until Thursday when Durable Goods/ Capital Goods Orders print. That’s very fortunate for the Fed speakers in my opinion, as they won’t have to be looking over their shoulder for a weak economic report that just printed while they talk about hiking rates in June.

The dollar has turned down the heart on the burner to simmer this morning. You can tell that the dollar still has the upper hand, but for the most part, the currencies are trading in the same clothes as Friday, which means that the dollar is softer as a whole. Yes, there are some currencies getting the snot knocked out of them, and some currencies that are carving out gains, but for the most part, it’s a day of calm, so far.

Remember a couple of weeks ago, when I told you that May 24th was the next day to watch regarding Greece and the Eurozone Finance Ministers. And guess what? Tomorrow is May 24th! It’s here already! It appears that everyone is playing nicely in the sandbox, as the Greek Parliament easily approved the measures that creditors required of them, and now it appears that a euro 10 billion in program funds will be issued to Greece, which, get this, will allow them to pay their debt that’s due next week to the Eurozone.

Did you follow that? The Eurozone will give Greece the money they need to pay the Eurozone back. Why didn’t they just give them an extension on the amount due? Ahhh, because Greece doesn’t have the money to pay back the loans whether you have it due this week, next week or next year, or the next five years for that matter! I won’t say never, because miracles do happen.

Speaking of the Eurozone the euro is still holding the 1.12 handle by the skin of its teeth, but could see a bump coming this week when their latest PMI’s (manufacturing indexes) print. The recent prints by month have looked steady Eddie for the Eurozone, and another steady Eddie print or even a bump higher in the index would sure underpin the euro for this week.

The Japanese yen is bit stronger this morning as their latest Trade Balance printed last night, and believe it or don’t but their Trade Balance returned to a Surplus! The April Trade Surplus was yen 824 billion, which beat the expectations of yen 755 billion. I think what this Surplus hides is the fact that import trends continue to drop in Japan. And that’s not a good thing for the domestic economy. Yes, I always say a surplus is a good thing, and it is. But you’ve got to look around the corner here to find that there are unintended consequences with this Trade Surplus for Japan, and that is, no domestic demand.

The Bank of Canada (BOC) will meet on Wednesday this week. I don’t expect any rate movements from the BOC on Wednesday, but I’ll bet a dollar to a Krispy Kreme that BOC Gov. Poloz will find the time to mention the strength of the Canadian dollar/loonie. The loonie, even though it has backed off recent highs is still two-cents above where it was at the last BOC meeting, and they were hemming and hawing about it then. So, look for Poloz to say something that could weaken the loonie this week. But remember, it’s only words. Loonie traders have to remember that sticks and stones my break their bones, but words should never hurt them!

The price of oil is sniffing around $48 this morning, as it is trading at $47.88. It sure looks like to me that oil is hell bent and whiskey bound to reach $50 this summer. I was reading some research on the price of oil this weekend, and found a trader that has tied the performance of the oil price to the yield of the 2-year Treasury. So, if you believe the BS/Big Shift change, and that rates in the U.S. are going higher, then Treasury yields will go higher too, and if this relationship remains intact, then we could see the oil price reach $50, as I talked about here.

Those sure were some powerful statements last Friday about household debt levels here in the U.S. weren’t they? You know, the economists have all been chastising the Fed for not hiking rates because the Fed was too concerned with global problems. The economists said that the Fed needed to just hike rates and be done with it. But what about these debt problems? Did you see that high percentage of people, no matter what salary range they were in, would struggle to make a $1,000 payment on something that came up? OMG! Wouldn’t it behoove the Fed to pay attention to these things? Household debt levels are so high, and guess what the credit card companies are going to do with a rate hike?

Gold is flat this morning at $1,252.00. The shiny metal sure has had the stuffing kicked out of it in May. The month of May has been gold’s kryptonite. It will be interesting to see if gold can get back on the rally tracks in June. I somewhat think that it’s going to be a tough row to hoe for gold in June. First of all we have a plethora of things going on around the world including a Fed Rate meeting. But wait! What am I saying here? I completely forgot what I told Joseph and Chris last week in our monthly meeting,  when I asked them the question (knowing the answer of course) “what has gold done since the Fed last hiked rates?” And of course we all knew that gold had not let the rate hike interfere with its rally. So, maybe, of course we never know, but maybe gold can pull that rabbit out of its hat again in June!

The U.S. Data Cupboard is in need of data, but will scratch around and find the Flash PMI’s for May to print today. And the Fed speakers on the docket today are James Bullard, and John Williams, who’s been speaking a lot lately, and Patrick Harker. So, a trio of Fed speakers today, will all sing from the same song sheet and talk about the virtues of a rate hike in June, as the BS/Big Shift gets in motion.

I found this on Bloomberg this morning. And I’m hoping it’s not going to come to fruition, as the old “risk on/risk off” trading drove me absolutely crazy! So, here’s the snippet from the report:

Rather than being led by economic data or monetary policy, emerging-market exchange rates are the most closely tied to moves in stocks and commodities since at least 2013. When they fall, it’s almost certain the yen will rise, and vice versa.

The pattern known among traders as risk-on, risk-off is back.

At its most forceful, it can blindly cleave financial markets in two — categorizing everything from the dollar to the dong as either a haven or a “risk asset” and dictating how they move in response to news or events, regardless of the fundamentals. It’s dogging markets again — just as it did in the wake of the 2008 financial crisis — as investors come to terms with the distorting effects of central banks’ quantitative easing.

That means getting the big picture right can take precedence over local insight — which HSBC Holdings Plc says makes it harder for skillful money managers to distinguish themselves.

“We are going from a QE world to a risk-on, risk-off world,” said David Bloom, London-based head of global currency strategy at Europe’s biggest bank. “At the moment, it feels like a risk-off environment.”

Fed Factor

The recent peak in many of the correlations between currencies and other assets came earlier this year after a stocks rout wiped $9 trillion from global equities.

Now the links are increasing again as investors prepare for a multitude of challenges, from next month’s U.K. referendum on European Union membership and Federal Reserve meeting to the U.S. election in November. The re-emergence of a binary market may already be hurting investors, with currency funds failing to turn a profit in 2016.

Risk-on, risk-off is only likely to get stronger as the Fed gets closer to raising interest rates. When the minutes of the central bank’s most recent meeting were published this week, speculation officials will act sooner rather than later hurt emerging-market currencies and stocks. The yen weakened Friday as equities and commodities rallied.”

Chuck again.. Well, I’ve said all I need to say about risk on/risk off. I sure hope it goes away, and was just a false dawn.

That’s it for today. I hope you have a marvelous Monday and be good to yourself!

Regards,

Chuck Butler
for The Daily Pfennig

P.S. Have you thought about investing in gold but don’t know the best way to do it? Then you need to see the FREE special report we’ve produced called The 5 Best Ways to Own Gold. It answers all the questions you have. We’ll send you your report immediately when you sign up for the free daily email edition of The Daily Reckoning. It combines hard-hitting information with charm and wit to bring you a unique perspective on the world. Click here now to sign up for FREE and claim your special report.