Markets rally on Greenspan’s soothing

The victory of the Iraqi people at the poles, calming comments from US Federal Reserve Chairman Alan Greenspan and a rally in the US Dollar late last week, all contributed to a stellar performance by stocks on Friday. The FTSE 100, German DAX , French CAC 40 and the Canadian TSX all hit 52 week highs last Friday, some even closing at the high. After one month of trading in the new year, all the indexes we track are up around 2.5% except Japan. Even the US indexes are on average within 15% of their 52 week highs, clearly demonstrating the financial market’s strong and positive outlook to the future.

Key to the recent gains was Alan Greenspan’s comments on Friday in London where the US Fed Chairman outlined that greater budgetary discipline in the US, a combination of market forces and the improving economic conditions should allow for a reduction in the global economic balances. However, G7 officials continued their call for the Americans to take more urgent action to address the US’s current account and budget deficits. Also factoring into the equation is the obvious hope for improved geopolitical stability coming out of the success of the Iraqi elections, particularly as it relates to petroleum pricing and the end of the winter fuel peak demand period.

We have for the past two years held the view that the United States wanted to weaken their dollar somewhat, with a view to improving the competitiveness of US products both at home and abroad. Although the G7 (the world’s seven leading industrial nations) continue to call for changes which would in fact strengthen the greenback, we feel it unlikely that the US will “take on” its partners in the group. With the upcoming meeting of G7 finance ministers and central bankers, you can look for more rhetoric along these lines.

The long stated policy of the US has been to let the dollar fall, and it looks pretty clear they want to hold in and around the current levels. The plan is to bring growth to the economy and work out of the trade imbalance and deficit with improved future production and earnings. So far, it has been working and Greenspan noted “the voice of fiscal restraint, barely audible a year ago, has at least partially regained volume.” The upcoming G7 statement is expected to repeat its call for fiscal discipline in the US, stronger growth in Europe and more currency flexibility in Asia. China once again will be a guest at the upcoming meeting.

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