AussieWatch: It’s a good thing the Reserve Bank has managed to squeeze six rate rises into the Australian economy since last October. They might have hurt a few home buyers and retailers, but they have given the central bank the leeway to reverse them if the current outbreak of fear and loathing in financial markets help slow the global economy and threaten a slump back into recession. As the Financial Times‘ Lex column noted overnight, “Markets tend to lead fundamentals, and investors are right to fear the second half of 2010 being brought to them by the letter W.” In other words, the current market slump — triggered by incompetent management by Germany of the European crisis, and aided by Greek greed — could also be a signal that the economic rebound is weak and there’s a chance the world could slow in the second half of the year. That’s why there are fears about China, why the Aussie dollar is sliding (and not fairytales about “raids’). If this goes on much longer, we’ll be talking about rate cuts in Australia…

AussieWatch 2: In all the absurdist reporting of the markets this week and the police round/sensationalist (isn’t a terrible thing, dollar plunges) reporting of the dollar’s fall, one simple fact has been forgotten. It’s supposed to fall when there are times of uncertainty. It did in 2008, and then rebounded through 2009. We have seen it before. The currency is supposed to do that — be a shock absorber and protect the domestic economy. And all the gloomsters forget that the RBA slashed rates very quickly from late 2008 to early 2009 to give the economy further help. What the commentators should really be saying is that it’s the idiotic Germans and other Europeans, who have learned nothing from the past three years and are busy pushing the world towards the slope again, not dollar shock/raid fairytales. And while the Swiss National bank has intervened to keep the Swiss franc down as tens of billions of euros flow out of the eurozone, there’s been no sign of the Reserve Bank here trying to smooth the movement of the dollar this week.

Why the Aussie is down: Simple reason, not the silly story of a ‘raid’ on Australia over the mining tax — just the result of a trading change by big investors desperate to maintain liquidity. The Australian dollar has  long been a favourite for punting on growth because of our resources exposure to China and the rest of Asia (which some dunderheads seem to have forgotten is the fastest growing part of the world). Our dollar has become a market indicator of risk; when the Aussie rises past 90 USc, risk fears are low, and when risk fears rise, as they are now doing, the dollar falls — down to under 81 USc overnight. That’s a loss of 9% so far this week, and around 12% from its most recent high in April of 93.29 USc. So, traders are scrambling to close out their long positions in the Australian currency. It’s all to do with what’s happening in the market — look at the way metal prices have fallen as well — and not silly stories about ‘raids’.

EuroWatch: And if you had to point the finger at any one catalyst, it is the incompetents leading Germany who triggered another bout of instability overnight, helped by investors in the US panicking over some economic reports that were not as bad as they seemed. German Chancellor Angela Merkel, fresh from the triumph of sending global markets lower in with the ban on naked short selling (not backed up by anyone else), had another go overnight. She said in a speech in Berlin, “We need the financial industry to be honest with us. If we don’t get honesty, then we might not do the right thing technically, but we will do the right thing politically.”  She and her Government have set up a negative feedback loop which she keeps alive every time she opens her mouth.

EuroWatch 2: But the right thing politically has been the wrong thing all along for Europe (the €750 billion rescue package had to be dreamed up because Germany and Ms Merkel wouldn’t commit to supporting Greece). The ban on naked short selling was rushed, badly flawed (banks can do it in the US) and didn’t punish anyone except investors of all kinds, and undermined confidence. If this goes on for much longer, Ms Merkel will talk Europe back into recession. And she’s going to address European finance ministers tonight, so we could wake up tomorrow morning and find there’s been another Merkel-driven sell off. She’s desperate, and that seems to support the suggestion that she’s short of votes in the German Parliament to approve the big rescue package for Europe. If that’s defeated, then watch the euro plunge, the Aussie dollar and commodities tank, and a re-run of the Lehman Brothers collapse experience back in the last quarter of 2008.

GrowthWatch; Japan: For the time being, growth is still good. Japan’s economy grew an annualized 4.9% in the January-March quarter, 1.2% quarter on quarter. It was the fourth quarterly rise in growth in a row, and up from the 1% figure in the 4th quarter of 2009. Deflation, however, remains a problem with the GDP deflator falling to minus 3% from minus 2.7% in the December quarter (when it was first estimated at minus 3%). Industrial production rose 6.7% between January and March from the previous quarter — the fourth consecutive quarter of growth — while monthly wages rose by 0.8% in March from the same month last year, the first rise in 22 months. 0.7% of the 1.2% quarterly growth came from external demand with exports up 6.9% in the quarter. Japan is as tied to China as Australia is: over half Japan’s exports are going to China now every month. The mainstays: cars, car parts, steel, electronics parts and similar products.

GrowthWatch: Singapore: A similar story from Singapore, where the first full estimate of first quarter growth topped the flash figure released in April. Growth was 15.5% annual, from the first (depressed quarter) a year ago. The April estimate was for growth of 13.1% year on year. And GDP was up an annualised 38.6% from the December quarter. Not quite whoopee, but… The Singapore Government sees conditions slowing, is worried that the efforts to cool China might be too much and is becoming wary about the financial woes in Europe. So it left the 2010 GDP growth forecast steady at 7% to 9%.

GrowthWatch: Taiwan: In Taiwan, growth in the first quarter grew at the fastest in 30 years, thanks to the Chinese economy.  The Government said GDP rose 13.27% in the three months to March, from the same quarter of 2009 (which was down a very depressed 11% in Taiwan’s case). As a result, the Government has raised its 2010 growth forecast to 6.14% from 4.72%.

GrowthWatch: Brazil: A similar story as well. Growth was an annual 9.84% in the March quarter compared with the first quarter of 2009 (which was depressed by the crunch). According to the country’s central bank, that represented a quarter on quarter rise of 2.4% from the December quarter. The Brazilian economy is forecast to grow by around 6% this year.

USMarket: Watch American markets and bank shares there and in Europe. In the current instability, the new tougher laws controlling financial groups that emerged from the US Senate this morning, our time, could spark an unfortunately timed sell-off that might just break the market. The Senate’s financial bill is the most sweeping increase in regulation in American banking and finance since the Great Depression. There are new restrictions on the biggest banks, the Fed is brought under control — that will worry other central banks — and there’s a new consumer protection division for mortgage and credit-card products. The legislation passed 59 to 39 and also requires “too-big-to-fail” banks to install new capital restrictions and divest their derivatives units, and there’s a government board to assign credit raters for banks’ structured finance securities. As well, there’s a one-off unprecedented audit of the Fed’s emergency response programs, especially loans to banks in 2007-2009. All laudable and all worthy. Now it goes to a resolution conference with the House of Representatives and its different bill. If the final legislation is deemed too tough on banks and other groups, watch for a nasty sell off.

USBankWatch: The number of US banks on the the government’s sick list reached the highest level since 1992 in the March quarter, with 775 banks now at risk of failing. That’s up 10% from the December quarter’s 702. A year ago, there were 305 banks on the list kept by the key regulator, the Federal Deposit Insurance Corporation (FDIC). But the slower rate of increase than in previous quarters seems to support the belief that the troubled sector is starting to improve, with earnings up, as the FDIC explained, “First quarter results for insured commercial banks and savings institutions contained positive signs of recovery for the industry. While new accounting rules had a major effect on several components of the industry’s balance sheet and income statement, there was clear improvement in certain performance indicators. Lower provisions for loan losses and reduced expenses for goodwill impairment lifted the earnings of FDIC-insured commercial banks and savings institutions to $18.0 billion. While still low by historical standards, first quarter earnings represented a significant improvement from the $5.6 billion the industry earned in first quarter 2009 and are the highest quarterly total since first quarter 2008.”