The forex and world equity markets rebounded as world central banks joined together to solve the global sovereign-debt crisis.   The coordinated effort does not solve the core problems facing Europe nor does reflect the long road head next week when the European Summit meeting in Brussels commences on Friday.  World leaders recognize failure is not an option, but expect nothing more than a high level directional agreements.

The world believes Germany is in position to bail out Europe and this is just not the case.   With 50% of Germany’s GDP coming from exports, the slowing global growth is expected to bring down Germany’s GDP from 3% this year to about 1% next.   Germany supplies about 27% of ECB capital and thus must absorb weighted profits or losses based on this investment.  What does all this mean?   The reality is these actions by central bankers amount to turning up the global printing presses to unprecedented levels.   In essences, the central bankers hope to eliminate an immediate problem and kick the problem further down the road where they hope improving economic conditions on a global scale will lessen the pain.   The ECB has resisted big purchases of government bonds, which could stabilize yields.   The markets anticipate the ECB to reduce rates a quarter-point, to 1% at their next meeting December 8th. All this means global inflation will be a major problem in 12 to 24 months.

The big winner in all this may actually be the British pound as the U.K. emerges as a safe haven alternative to the U.S. dollar.  Demand for U.K. government bonds has been rising and yields on the gilt briefly dipped below those of Germany”s bonds last week.    Further upside is supported by the decision of the Swiss to stop appreciation of the Frank.  For much of the year Bank of England has been buying government bonds, effectively injecting pounds back in the economy creating pressure on the pound.  The pound is some 10.8% undervalued in U.S. dollar terms and could rally significantly over the coming months.

Uncertainty continues in Europe as Italy’s borrowing costs jumped to Euro era highs. Europe’s troubles continue to weigh on world markets as investors deal with what seems like daily doses of bad news. Monday will see a significant test for markets as Italy holds another debt auction. In addition, Spain, France and Belgium all plan to hold their own debt auctions next week. All in, the 5 euro-zone countries plan to offer some $25.36 Billion (US$ Value) debt. Given Italy is the world’s 3rd largest bond market, you can bet the world will be watching.

The forex markets continue to be threatened by overseas turmoil and now the U.S. recovery may suffer as well.   U.S. exports to the euro zone grew just 0.5% in September, down from 5.9% in August.   Exports now account for about 14% of total U.S. economic output, up from less 10% in 2004.  This is critical news as exports have really driven the recovery in U.S. GDP.  In fact, export have risen 5.2% from their pre-recession high and GDP has barely made in back to its adjusted for inflation pre-recession peak.   U.S. companies sold a record $180.4 billion in goods and services to foreign customers in September.

However, the European Union just slashed its growth forecast for the coming year and said it can not exclude the possibility of a deep and prolonged recession.   The commission expects already broad disparities between their member nations to widen next year.  While Germany is expected to grow 2.9%; the Portuguese economy is expected to contract 3%; Greece is expected to shrink 2.8% with an unemployment rate of 18.4% .  The impact on the U.S. economy could create significant head winds and continued risk and opportunity in the forex markets.