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The Dilemma For G-7

Last updated 2/5/2010 4:15 AM ET (GMT -5) 4 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Another wild night of volatility across all capital markets saw key levels give way in gold, equities and the euro as risk liquidation continued unabated ahead of the NFP report at 13:30 GMT and the G-7 meeting this weekend. With liquidity extraordinarily thin ahead of event risk later in the day, the price moves were highly exaggerated with gold tumbling to $1050/oz. Dow futures breaking below the 10,000 level and EUR/USD hitting multi month lows at $1.3650 all in a matter of minutes at the open of European trade.

Markets remain extremely jittery regarding sovereign debt risk in Southern Europe with Greek bonds to German bund spread widening another 17bp overnight. Despite the turmoil, few traders expect any meaningful impact from the G-7 meeting which is informal  in nature with no official statement scheduled.

It is no small irony that the G-7 meeting will take place in Iqaluit, near the Arctic Circle with finance ministers and monetary authorities seemingly wishing to escape as far away as possible from the vicious volatility that has roiled capital markets this week. Part of the agenda will focus on exit strategies  from the extraordinary stimulus measures taken during the credit crisis of 2008. Both Japan and US are expected to share the details of their budget plans, but it is unlikely that any member at the meeting will be able to demonstrate serious reform or fiscal discipline.

One of the key problems facing G-7 policymakers is that the economic rebound of 2009 has not yet  translated into any pick up in labor demand with is essential for any deficit containment.  A rise in employment would reduce fiscal outlays for jobless payments and at the same time increase tax revenue. Until this  dynamic is in place any attempts at deficit reduction are likely to be only cosmetic in nature, which is why today’s NFP data will be critical to  the near term direction of risk assets.

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Comments (4)

schultzz.at

February 05, 2010 at 04:55 AM ET

Some headline job growth may lift temperatures by some degrees. Nevertheless, my latest climate simulation indicates that we are entering an ice age of lower incomes and glacial growth.
Tom Schultz.

bschlossberg

February 05, 2010 at 05:00 AM ET

We need a transformational technology shift to spur growth

alexjbrandt

February 05, 2010 at 05:36 AM ET

lol.

My climate simulation shows that China is overheating triggering a flood that takes us back to 1930. ;)

And China goes back to the stone age.

Semaj

February 05, 2010 at 07:33 AM ET

Technically, monthly chart analysis in various markets paint an very ugly picture if we get follow thru on them. :(

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.