Market Break

The Financial Times of London has the story:

US stocks soared on Friday as the dollar saw its biggest one-day jump against the euro in eight years and oil prices plunged.

The moves marked a key reversal of a trend that many investors had followed profitably for months – betting that high commodity prices would keep the dollar weak.

The dollar reached its highest in five months against a trade-weighted basket of currencies, while oil fell more than $5 to $114.87, 22 per cent below its record high of $147.27 last month. The S&P 500 closed 2.4 per cent higher in New York.

The shift in sentiment was triggered by Jean-Claude Trichet, president of the European Central Bank, who warned on Thursday that third-quarter eurozone growth would be “particularly weak”. This sparked talk that the ECB would be forced to abandon its hawkish policy stance and start cutting interest rates, thereby weakening the euro.

“This is the watershed week for the US dollar,” said Marc Chandler, currency strategist at Brown Brothers Harriman. “The magnitude of the dollar’s moves and the breaking of key technical levels suggest that a major shift in the outlook towards the dollar is occurring as massive positions are adjusted.” Other analysts described the widespread buying of dollars as “capitulation”.

Wasn't Obama calling for a strengthening of the dollar the other day? I think he got his wish. Before the government could do anything.

It also looks like the US economy is holding its own.

WASHINGTON (Reuters) - U.S. business productivity rose solidly in the second quarter as companies cut jobs to cope with rising costs, helping curb inflation pressures while also keeping a tight grip on stocks of unsold goods.

A Labor Department report on Friday showed worker efficiency, or output per employee, gained at a 2.2 percent annual rate in the second quarter.

While slower than the first quarter's 2.6 percent gain, analysts said it was strong enough that Federal Reserve policy-makers may be able to keep interest rates low into 2009 to bolster growth.

The Fed said on Tuesday that it considered inflation risks "of significant concern" but held its benchmark federal funds rate at 2 percent. Labor costs rose at only half the rate in the second quarter as in the first quarter.

It is hard to say what this will mean. Lower oil prices? Probably. Higher trade deficit? Yep. American consumers with more buying power? Yep. Lower inflation? Likely. Recession? Not likely. Economic slow down in China? Possible.

Now add in one other factor that makes Europe shaky. The war between Russia and Georgia.

MOSCOW -- Russia and Georgia, once united under a single Soviet banner but now sworn enemies, were on the brink of all-out war as Russian troops and tanks surrounded the capital city of the Georgian breakaway republic of South Ossetia after a day and night of bloody clashes.

Russia ordered its troops into the rebel southern republic a day after Georgian forces were sent in to seize the region, which declared independence after a 1992 civil war.

Fighting reportedly raged into the night with Georgia's Interior Ministry saying early today that warplanes attacked three Georgian military bases and key facilities for shipping oil to the West.

After more than a day of violence, Russian news media reported overnight shelling of the regional capital, Tskhinvali. They said Georgian forces were responsible.

So besides the economic fundamentals you have what is known as the flight to safety. "Pack your ermines" time as William Burroughs would say.

In addition there is the mortgage melt down going on in Europe. Let us start with the British version.

Britons have come to an uncomfortable realization in the last few weeks: after 17 years of uninterrupted growth, the British economy is moving closer to recession, and may already be in one.

Figures released on Thursday by HBOS, Britain’s largest mortgage lender, showed the housing market slump, which has been dragging down consumer confidence, is gathering pace. The average price of a property fell 8.8 percent in the 12 months ended July 31, the biggest drop since the company started tracking prices in 1983. Repossessions, bankruptcies and unemployment, though at relative lows, have started to creep up in the last three months.

The Bank of England, the nation’ s central bank, is unable to lower interest rates to keep the economy growing because inflation looms. It left lending rates unchanged at its meeting on Thursday.

Now many economists are predicting the situation will drastically deteriorate over the next six months, leaving Britain to face a longer, more painful downturn than the United States.

And just months ago they were laughing at us for our stupidity. Heh.

How about the Spanish property market? Here is a report from the end of March this year.

Spain's once-booming property market is in freefall, official statistics have revealed for the first time.

The announcement that house sales had plunged has dashed government hopes for a "soft landing" in the sector that has driven the Spanish economy for more than a decade.

The buying and selling of homes fell by 27 per cent in January compared with the same period last year, Spain's National Statistical Institute (INE) announced yesterday. The collapse coincided with a 25 per cent fall in the granting of mortgages, the biggest drop since 2004. The size of individual mortgages has also fallen, by nearly 4 per cent, as providers fear for the security of their loans.

There are also problems in Ireland and a number of other European housing markets. So while the US is slowly coming out of its slump Europe is going into one.

Where will all this end? Probably with the US stronger than ever. Especially with a lot of very interesting new technology coming out of US Labs in a month. For instance there will be a final report in the next few months giving the results of fusion experiments now going on in New Mexico. If the results are positive expect a further boost to the US economy because it could mean practical fusion power in as little as five years. It would also mean a decline in the long term prospects for oil. Cheap electrical power or even cheap steam could provide a very big boost to oil shale and tar sand extraction and conversion. It would also make ethanol cheaper by reducing the cost of distillation.

The future is so bright I gotta wear shades.

Cross Posted at Classical Values