The global economy has continued its slow recovery, but the bullish effects from September are beginning to wear off. The U.S. experienced a slew of positive economic data, but the three-month rally seems to be a bit stalled. Additional uncertainty surrounds the European, Japanese and British economies that all seemed to move sideways in October.
U.S. Investors Shrug Off Recovery
The United States has experienced many signs of a recovery over the past month, with the unemployment rate falling to 7.8% in September and housing starts jumping 2.3% in August to a seasonally adjusted annual rate of 750,000. However, despite this seemingly great news, the S&P 500 has remained roughly even and the U.S. dollar has actually depreciated.
So, why is the market so lethargic?
Capital market investors are likely deterred by a few different things. First, there are many indications that a quick recovery is simply unlikely based on historical trends and these upticks may be simply bumps along the road. Secondly, many investors are taking profits off the table after the run-up between June and September that was driven by stimulus and bond buying.
Forex traders have a number of other reasons to be concerned about the U.S. dollar's health moving forward. Namely, the U.S. Federal Reserve seems set on maintaining an easy money policy for the foreseeable future. In fact, New York Fed President William Dudley suggested in a speech that even a recovery wouldn't necessarily result in any meaningful tightening.
Europe Takes Baby Steps Forward
The European Union may have won the Nobel Peace Prize this year, but investors aren't so concerned that they'll be able to maintain the peace for long. After instituting an unlimited bond buying program last month, the eurozone has managed to tame rising bond yields in troubled countries, but a lack of cohesion still threatens to derail the progress made so far.
The financial markets will be closely watching Spain, in particular, as it has refused to accept any aid from the eurozone's monetary authorities thus far. While officials are reportedly in talks to accept aid in November, the indecision has left Spanish bond yields still near 5.6%, despite a new 2013 budget that the country hoped would assist in lower rates more.
Of course, convincing Spain to accept aid isn't exactly solving a problem entirely. The region still suffers from chronically high unemployment and anemic economic growth, with the exception of Germany, which has fared quite well with the low euro valuation. And investors seem to realize this fact, with U.S. and Swiss bond yields remaining near record lows.
Japan Sees Divided Successes
Japan's economy has struggled over the past few months, with slowing demand in key end markets and the end of recovery-related spending. Recently, the country's government cut its forecast for factory output for a third month in a row, as business moods also appear to be on the decline, according to a survey by the Bank of Japan.
Despite the turmoil in the economy, there seems to be at least one bright spot thanks to the yen's dynamics. A high valuation for the currency has led to an extraordinary number of mergers and acquisitions, including Softbank's $10 billion bid to acquire 70% of Sprint/Nextel. These mergers could add to economic growth over the long-term.
Forex traders will be closely watching the Bank of Japan for any further signs of monetary easing, which would be a logical way to boost its economy. These easing policies could involve additional intervention in the forex market - a scenario certainly worth watching.
Britain's Economy Grows More Uncertain
Britain's economy appears to be improving after jobless claims and consumer spending both showed some signs of improvement. Unemployment in the region fell to a 15-month low during the quarter to August, causing the official unemployment rate to drop to just 7.9% from 8.1% during the quarter to July and the lowest rate since March and May 2011.
Unfortunately, the improvements probably won't be enough to prevent a 0.2% fall in 2012 gross domestic product (GDP) or enough to prevent the government's 95 billion pound deficit target. Worse, it could be just enough to convince the government to forego additional stimulus spending that could provide the boost needed to revive the economy.
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