Today's Outlook - Ireland Downgrade, Huge ADP Emp Miss, and POMO

Yesterday the market surged higher as the Fed purchased $5.19B of 2016-2020 Treasuries and the primary dealers drove BIDU, NFLX, and AMZN up 5% or more. The dollar sank to an 8-month low against the euro as market participants continue to believe that the Fed will launch a $1 Trillion asset purchased program (QE2) on November 3rd, on top of the $400B or so of expected POMO over 2011. Also helping the market was the ISM Services Index which came in at 53.2 vs. the 51.8 that had been expected. Gold was up 2% to a new all-time high of $1340.60/ounce, and oil reached 82.48. Lastly of major note was Japan announcing plans for a 5 trillion yen fund to purchase bonds and ABS securities. So QE announcement out of Japan, and as we are not going to lose the race to hyperinflationary-causing currency debasement, it looks all the more likely that we will see QE2 sometime over the next few months.

The Dow finished at a fresh 4-month high at 10,944 up 193.45 points. The S&P closed at 1,160.75, and the Nasdaq at 2,399.

Futures are slightly lower this morning on ADP Employment Change data which came in at -39K vs. +10K prior and +20K forecast. Ouch. We'd probably be looking a lot lower, but we will have another batch of POMO at 7:15 a.m. PST. Judging by its effects yesterday, and also given that it is the last installment of POMO for a number of days, its likely to be as robust as yesterday's.

Ireland was downgraded to A+ from AA- and put on negative outlook by Fitch. "The downgrade of Ireland reflects the exceptional and greater-than expected fiscal cost associated with the government's recapitalization of the Irish banks, especially Anglo Irish Bank." Fitch said this morning.

The FT reports this morning that IMF chief Dominique Strauss-Kahn has said that governments are risking a currency war if they try to manipulate exchange rates to solve domestic problems.

The IMF also has a report out this morning lowering its US growth forecast to 2.6% and 2.7% for 2010 and 2011, respectively. These revisions are -0.7% and -0.6%. IMF Chief Economist Olivier Blanchard told a press conference, "But it is an unbalanced recovery, sluggish in advanced countries, much stronger in emerging and developing countries."

Dow +100 today? Why not?

Ireland, Spain, & Portugal Update

Ireland announced this morning that the worst case scenario for bailing out its banks to be 50B Euros ($68B). The cost of Anglo Irish Bank will be approx 34B Euros. This is higher than the original estimate of 25B euros. The nation will also likely raise its stake to a majority in Allied Irish Banks which will need an additional 3B Euros this year.

The public debt in Ireland will now be approximately 99% of GDP and Dublin-based Davy Stockbrokers expects that figure to peak at 105% in 2012.

The support for the banking system will drive up the 2010 deficit to 32% of GDP, which as a reminder is 10x the EU's maximum allowable deficit. (Reuters).

Spain's credit rating was cut one notch by Moody's from AAA to Aa1. This was expected however as Moody's was the last rating agency to still maintain Spain at AAA.

Spain will release its 2011 budget today. Reuters, who obtained a copy of the budget ahead of its presentation to Parliament today showed that the government plans to cut net debt issuance in 2011 to 43.3B euros from the 76.2B that was originally planned for 2010. The budget includes much greater austerity measures with a 7.9% reduction in public spending with 16% average cuts for government departments.

In Portugal, PM Jose Socrates, announced that civil service pay would be cut by 5%, public sector pensions would be frozen, and the VAT will be raised to 23% from 21%.

While it's nice to see Ireland admit its woes (perhaps the rest of the world could learn something here...) the numbers are in fact horrendous, Spain was downgraded, and austerity measures in these three nations will make growth and economic health that much more difficult going forward. One might expect the Euro to be weak this morning on some of these disclosures, but afterall its the last day of the quarter and Brian Sack is on deck with a possible record amount of POMO. We are much more commmitted to destroying the value of the dollar than the Eurozone has been to destroy the Euro. When German exports begin to take a hit from the higher euro, we will likely see more aggressive action by the ECB.

Until then, keep your seatbelt securely fastened...To the moon Alice!