Geithner’s lack of detail deflate overly-optimistic markets.

This report was prepared by The Bank of Nova Scotia
While many attributed the unfavourable reaction to a lack of detail in Secretary Geithner’s speech, especially as it related to the newly proposed public-private asset purchase scheme, we’d view this reaction as a welcomed and delayed adjustment from the past two sessions of somewhat unfounded optimism. It was strange that, after an absolutely horrible nonfarm payrolls print on Friday, that markets still managed to rally and stay positive on Monday in the hopes that the announcement would bring some sort of game-changing miracle. While we agree that the announcement would have been much better received had it possessed a greater measure of detail, the impact on sentiment would still likely have been short lived as it would have not changed the fact that the proposed measures would not only have taken time to implement, but would have also taken an even greater amount of time before having an impact. Thus we can say that current equity and currency trading levels better reflect economic reality, at least as an adjustment to the high degree of post-nonfarm optimism that has existed over the past couple of sessions. Of course yesterday’s fall would not have seemed so pronounced had expectations been properly aligned. If anyone is to shoulder the blame for this, it would more likely have to fall on the government as the delay in the announcement of the financial stability plan helped to stoke expectations that it was in order to fine tune what would be sweeping and immediate measures. The details given (or lack thereof) suggest that a judgment on how sweeping these measures are will have to be suspended until greater clarity is provided, and it is obvious that there is a great deal less “immediacy” than hoped for. The USD, though surging yesterday, may not see as much support as on previous bouts of risk aversion as this one is more directly tied to factors that impact the health of the US economy. However, equities may once again help to decide the dollar’s ultimate short term performance, and the lack of strong selling today in Europe and the positive (though rapidly deteriorating) open indicated by North American futures may point to the reason why the USD is not better bid at the moment.

Filed under: Research, carry-trade USD Geithner, Scotia