Posts Tagged ‘Trichet’
Monday, April 2nd, 2012
A core piece of last week’s European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European “firewall” in the form of a combined EFSF and ESM rescue mechanisms, to bring the total “firepower” to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB’s agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the ‘firewall” does not represent new money, nor is a “firewall” to begin with – it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that “Even a 1-Trillion Euro Firewall wouldn’t be enough.” And they are correct, because the size of the firewall is completely irrelevant, as explained later. All the “firewall” does is shift even more backstop responsibility on the only true AAA-country left in the Eurozone, Germany. However, the main cause of problems in Europe – a massive debt overhang which can at best be rolled over but never paid down due to the increasingly lower cash flow generation of Europe’s (and America’s) assets, still remains, and will do so until the debt is finally written down. However, it can’t because one bank’s liability is another bank’s asset. And so we go back to square one, which is that the system is caught in the biggest Catch 22, as we explained back in 2009. We are glad to see that slowly but surely this damning conclusion is finally being understood by most.
European finance ministers meeting in Copenhagen on Friday agreed to boost the euro-zone firewall to over 800 billion euros. The move marks another U-turn on the part of the Merkel administration, which recently dropped its opposition to increasing the fund. German commentators warn that even the new firewall may still be too small.
Austrian Finance Minister Maria Fekter announced on Friday that the permanent euro rescue fund, the European Stability Mechanism (ESM), would be expanded, by considering the around €200 billion in current bailouts as being separate from the €500 billion earmarked for the ESM — originally, the €500 billion figure was to have included the €200 billion in existing aid. The ESM, which is due to come into operation in mid-2012, will also be boosted by including around €100 billion in bilateral aid that was given to Greece in 2010, as well as aid from other EU funds, bringing the firewall’s total capacity to over €800 billion.
Fekter expressed her confidence that Friday’s move would be enough to calm the financial markets. “The markets are already signaling relative calm,” she said. “That shows that the markets can work with what we have set up here.”
The Nuclear Option
On Thursday evening, in the run-up to Friday’s summit, German Finance Minister Wolfgang Schäuble had said he was prepared to combine the existing bailouts with the new permanent mechanism. He said that the €800 billion capacity was “convincing” and “sufficient.”
But not everyone shares his view that the sum is enough. On Thursday, French Finance Minister François Baroin called for the permanent euro bailout fund to be increased to €1 trillion, to shore up market confidence and prevent contagion in the euro crisis. “The firewall, it’s a little like the nuclear option in military planning, it’s there for dissuasion, not to be used,” Baroin said in a radio interview. He was echoing calls made by the Organization for Economic Cooperation and Development (OECD) earlier in the week to boost the firewall to €1 trillion.
The German press is also finally starting to wake up:
The center-right Frankfurter Allgemeine Zeitung writes:
“It is to be doubted whether all members of the Bundestag actually understand the financial dimension and the technical details of the ESM. It doesn’t help matters that the federal government has repeatedly shifted its position on this issue — as the SPD’s floor leader Frank-Walter Steinmeier rightly pointed out.”
“But the entire euro rescue is a balancing act. On the one hand, fiscal discipline needs to be promoted. The pressure on the crisis-stricken euro-zone members to carry out reforms must not be undermined by the knowledge that, if they fail, they will be caught by a financial safety net. On the other hand, there is the need for solidarity. Those countries that are in a better position can ‘help the others to help themselves,’ as Schäuble put it.”
“As always in the EU, these things lead to compromises in practice, which also explains why the government has readjusted its position on the ESM. The high ratings that Merkel enjoys in the polls may be related to the fact that the Germans seem to intuitively understand this delicate maneuver.”
The left-leaning Die Tageszeitung focuses on the calls to boost the ESM to €1 trillion:
“A trillion! That’s how much money France is now demanding for the euro rescue fund. Until now, Chancellor Angela Merkel only wanted to come up with €700 billion. On the surface, it looks as if a Franco-German showdown is on the horizon. In fact, it is nothing more than a PR battle, where nothing is really new. It was already clear last summer that the existing EU rescue fund, the EFSF, was much too small to save Italy or Spain in an emergency. Even then, people were talking about €1 trillion as a target.”
“One trillion euros is a lot of money, and yet even this huge sum will not be enough. But again, that’s nothing new. For months, calculations have been doing the rounds that show that at least €1.5 trillion will be needed. The only interesting question left is how long it will take France and Germany to acknowledge this reality.”
The last observation is off on the right track but is nowhere near close enough to the true conclusion, which was stated here yesterday by Mark Grant:
The Firewall Lie
Whether some proposed firewall is $760 billion or $1.3 Trillion or $13 Trillion makes no difference as in zero, nada, nothing and null. It is an IOU, a promise to pay and it is not counted in any European sovereign debt numbers nor is it counted in the figures for the European Union’s debt. It will not stop Spain or Portugal or Italy from asking for or needing money. It will not stop contagion nor will it protect any nation from the calamities of another nation. If approved by the Finance Ministers it is not approved by the European Parliaments and even if approved; it accomplishes nothing besides one more unaccounted for contingent liability that is nowhere to be found on anyone’s books. This whole discussion is a head fake, a deception and a ruse carefully plotted out for investors in one more attempt to mislead the entire world. If you wish to be a statistic in the Greater Fool Theory be my guest but I refuse to be apart of this unadulterated scam.
In other words, the next time a crisis flares up, the only thing that will delay the unwind, as the LTRO 1 and 2 did in late 2011, is another fresh injection of liquidity, whether in exchange or not for worthless collateral which was unused to begin with, as only new money can delay the unwind.
Of course, with every new trillion in incremental cash, now that central bank balance sheets are growing exponentially, more and more is now spilling over into hard assets, despite a clogged monetary transmission mechanism. The longer Europe’s farcical crisis continues, the more the status quo will have to fight tooth and nail to prevent an explosion in hard asset prices expressed in fiat. This is a fight they will lose.
Tags: Angela Merkel, Apparatchik, Article In Der Spiegel, Backstop, Contingent Liability, Core Piece, Debt Overhang, ECB, Efsf, Esm, Europe 1, Eurozone, Firepower, German Media, Gold, Massive Debt, New Money, Perpetuity, Spiegel, Stock Market Performance, Trichet
Posted in Brazil, Markets | Comments Off
Tuesday, February 15th, 2011
This post is a guest contribution by Asha Bangalore, vice president and economist of The Northern Trust Company.
The Bank of England (BOE) and The European Central Bank (ECB) have chosen to stand pat after their recent policy meetings. However, inflation readings in the UK and the Euro area are problematic, particularly in the UK. President Trichet of the ECB, last week, presented a less concerned stance about inflation compared with his comments in prior weeks. Inflation in the Euro area (2.2%) is slightly higher than the target rate of 2.0%. However, inflation is at a noticeably higher level in the UK (3.7%) compared with the target. This morning, the Bank of England decided to leave policy rates unchanged as underlying economic conditions are troubling, given that real GDP fell in the fourth quarter.
In the US, the Federal Reserve is in a sweet spot and can continue to focus on economic growth in the inflation-growth debate. At the present time, inflation expectations are contained and pass through of higher food and energy prices to core CPI has not occurred.
In the meanwhile, the situation in emerging markets is markedly different. Inflation in China and India has led to tightening of monetary policy in both nations. Overall inflation in India has decelerated in recent months but the November year-to-year change in CPI was at an elevated level of 8.4% (see Chart 3). The CPI of China touched 5.1% in November and was slightly lower in December at 4.6% (see Chart 3).
In the other emerging markets, price pressures are evident (see Chart 4) and suggest a worrisome trend if the pace of economic growth continues to advance. The dual speed global economy has led to different monetary policy stances of central bankers. The key question is how much of the pass through of higher food and energy prices to core consumer prices will occur across the global economy. This is new territory for central bankers to the extent that emerging markets are leading global economic growth.
Source: Asha Bangalore, Northern Trust, Daily Global Commentary, February 10, 2011.
Tags: Bank Of England, China, Core Consumer, Core Cpi, Dual Speed, ECB, Emerging Economies, Emerging Markets, energy, Energy Prices, Global Economy, Growth Debate, India, Inflation Expectations, Inflation In China, New Territory, Northern Trust Company, Policy Meetings, Price Pressures, Real Gdp, Target Rate, Trichet, Worrisome Trend
Posted in India, Markets, Outlook | Comments Off
Thursday, February 10th, 2011
“The recent breakout of the U.S. 10-year Treasury yield above 3½% is an important technical signal, highlighting that the macro-backdrop is increasingly turning against the bond market,” said BCA Research in a recent report.
I share the following BCA Research view: “Our global cyclical bond indicators have been bearish for some time and valuation is poor in most of the major countries. The only missing ingredient for a fully-fledged bond bear market is the start of monetary tightening cycles in the U.S. or Europe. Recent comments from Chairman Bernanke, President Trichet and Governor King give us little reason to question our call that the Fed, ECB and BoE are on hold until early 2012. Nonetheless, there is room for the market to discount a faster pace of rate normalization even if central banks do not get started until early next year.
“We are not extremely bearish on government bonds in the near term because the absence of central bank rate hikes should limit the upside for yields in the coming months. Nonetheless, we expect yields to ultimately be significantly higher on a 6-24 month horizon.”
Although bearish in the medium to longer term, a short-term rally in bonds won’t surprise me owing to their overbought condition.
Source: BCA Research, February 9, 2011.
Tags: Absence, Backdrop, Bca, Bear Market, Bernanke, Boe, Bond Market, Breakout, Buyer Beware, Central Banks, ECB, Europe, Government Bonds, Governor King, Horizon, Pace, Rate Hikes, Term Rally, Treasury, Trichet
Posted in Markets | Comments Off
Tuesday, January 25th, 2011
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.
The Euro closed up Friday`s session at 136.13, and looks poised to make a run up to test the 140 level in February. I, among many, was thinking the Euro would next test the 125 level, and things started heading well in that direction with the Euro moving down to 129, and appearing on a downward slope.
So what happened? Well, there have been quite a few new developments that prompted this reversal of the euro fortune.
PIIGS Bond Sale Surprise
First, Portugal and Spain had those long anticipated bond auctions, and they went well with a healthy dose of participation, and at lower than anticipated rates priced into the auctions. In other words, the bond vigilantes bid up expectations for a catastrophic auction, and the buyers stepped in and said thank you very much for these fabulous terms.
Furthermore, China and Japan had both publicly stated that they would be buyers of these risky European Country Bonds. So any shorts expecting a European collapse because of these much anticipated bond auctions failing miserably had to cover fast when the opposite occurred.
A Hawkish ECB
The second major turning point was Trichet who made some hawkish comments regarding inflation at his press conference after the ECB`s rate decision. That really caught a bunch of shorts off guard, and sent the Euro up 2 full points in one day.
This really illustrated the difference between ECB and the U.S. Fed–ECB`s sole mandate being to ward off inflationary pressures, versus the FED`s dual mandates of monetary policy being governed by unemployment levels and inflation concerns.
… And A Dovish Fed
As such, the Fed will be able to begin raising the Fed Funds Rate in 2011 as the unemployment rate most likely will not be under 8%, which is the starting point for even considering rate hike according to Bernanke`s remarks on the subject.
If you listen to all the language coming out of the Fed minutes, they have always stated that rates are going to be left extraordinarily low for an extended period of time. This type of phrasing has left many analysts with the opinion that the unemployment level would have to get somewhere near the 6.5% levels before Bernanke would even consider raising rates.
With a major election coming up in 2012, the focus of the Obama administration and everybody else trying to get re-elected will be lowering the unemployment rate at all costs, even if we have to stomach a little inflation along the way.
So, about as hawkish as the Fed will be in 2011 towards inflation concerns is not initiating a QE3 campaign. So it is quite logical that between the two central banks, ECB will most likely be the first to raise rates, and by far the more hawkish when it comes to monetary policy over the next two years.
Hot Money Flowing To Europe
The third major driver behind the resurgence of the Euro is an investment sea change by fund managers at the beginning of the year. In other words, where are the capital flows going in 2011?
After emerging markets had stellar returns in 2010 with the likes of Singapore and South Korea, it appears that the fund managers are moving some of their money into Europe with the belief that because of the over-hyped debt concerns of 2010, that European assets are currently undervalued and at a discount to emerging market assets.
Hot money coming into Europe is extremely bullish for the Euro.
Germany’s Really Kicking
The fourth factor affecting investor sentiment regarding the Euro are the strong economic reports coming out of Europe. At the forefront is Germany which is really firing on all cylinders, and looks strong enough to more than offset any budgetary shortfalls of the PIIGS, which actually make up a small percentage of the combined European GDP output.
Spain Cleaning The Banking House
The fifth reason the Euro bulls can point to is last week`s news that the Spanish government is shoring up some of the weakest banks with capital infusions which alleviates some of the concerns regarding Spain`s potential to be the next bond vigilante target.
This is the type of proactive governmental response that was lacking in 2010, which was always behind the curve, and only pushed into action by market forces. The fact that European leaders are learning their lesson and trying to get ahead of the bond vigilantes in 2011, which manifests itself in lower financing rates, is very encouraging and bullish for the Euro as well.
Euro United Bonds We Stand
Finally, there is the news that Germany is finally on board for supporting a unified European Bond, which would provide continuity, stability, and lower financing costs for the union as a whole (See Graph). Financial Times reported that a multi-billion-euro bond was launched in early January to raise money for the Ireland bailout. The triple-A rated bonds are expected to price at yields of about 2.5%, about 70 bps over German Bunds and well below those of Italian and Spanish debt. Asian and Middle Eastern investors could buy about 30% of the paper.
So, it appears that a common eurozone bond will finally occur sometime in the next few months, probably by March of 2011 at the latest, as the final terms are being worked out and negotiated behind the scenes, as well as the financing benefits that this accord will bring to the European Union.
Regain the Reserve Currency Status
More importantly will be the psychological benefits achieved that are supportive of the original concept for creating the European Union in the first place –as a conceptual structure with sound cohesive benefits realized and shared by all members of the common currency.
This notion was seriously questioned by many pundits and analysts alike during the height of the 2010 debt crisis. Many believe the entire notion of the European Union was flawed because they could never act as a cohesive body, and implement structural reform measures to address individual weaker member countries financing needs.
This euro bond solution appears to be meeting this criticism head on, and will go a long way in reinstating the Euro as the second reserve currency. This bullish is very bullish for the Euro, and will ultimately push it well beyond the 140 level once this confidence in the Euro is solidified and sustained for a period of time.
This is why we are experiencing a trade out of gold in terms of the Euro, as investors who were worried that the Euro was going to collapse went into Gold as a safe haven trade. This trade reversal is also bullish for the Euro, and has really only begun.
Stronger Euro = Weaker Dollar
If the Euro is going to get stronger…guess what?…the Dollar is going to get weaker. So you can expect more investors and hedgers to pile into the Euro. And this fact should further reinforce the idea originated in 2007 that the Euro was a strong second reserve currency to the Dollar, and even had many in the middle east clamoring for transactions to be conducted in Euro as opposed to the depreciating US Dollar.
From Parity To 160 in Six Months?
Expect these same sentiments to reappear as the Euro gains strength against the US Dollar over the next two years. Moreover, as the US starts to address some of its own debt issues, which the European Union finally faced up to in 2010, the 160 level is not that far fetched.
In fact, the 160 may come much sooner than was ever envisioned back in the summer of 2010 when all the experts were calling anything from complete dissolution of the currency, to parity, or at best the 115 level to the US Dollar. (See Technical Chart)
It is amazing how financial perspectives can change in as little as six months in the investment marketplace. Nonetheless, here are some ETF ideas for individual investors to go with the new euro trend – WisdomTree Dreyfus Euro (EU), CurrencyShares Euro Trust (FXE), Market Vectors Double Long Euro ETN (URR), Ultra Euro ProShares (ULE).
Source: Dian Chu, Economic Forecasts and Opinions, January 24, 2011
Tags: Bernanke, Bond Auctions, Collapse, Country Bonds, Currency, Dian, Dovish, Downward Slope, ECB, Economic Forecasts, Emerging Markets, ETF, Fed Funds Rate, Gold, Inflation Concerns, Inflationary Pressures, Major Turning Point, Market Analyst, New Developments, Rate Hike, Reversal Of Fortune, Trichet, Unemployment Levels, Unemployment Rate
Posted in ETFs, Gold, Markets, Outlook | Comments Off
Trichet’s Exit Strategy Trapped by PIIGS; Currency Tensions Continue to Build; China Tells EU to Stuff It
Wednesday, October 6th, 2010
This article is a guest contribution by Michael ‘Mish’ Shedlock, Global Economic Trends Analysis.
In the midst of the crisis with sovereign debt of Greece, Spain, and Portugal, Trichet and the ECB acted by offering as much cash as the countries needed. This stabilized things for a while and Trichet was supposed to drop this support.
However, yield spreads between Germany and the PIIGS is once again soaring, and if unlimited lending is withdrawn now, it is a near-certainty that spreads will widen further.
Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years. The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.
The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.
“The ECB is trapped and the exit door is blocked,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The state of credit markets is going to force them to stay in crisis mode for longer than some of them would like.”
Irish 10-year bond yields soared to a record on Sept. 29 on concern the bailouts of Anglo Irish Bank Corp. and Allied Irish Banks Plc. would overwhelm government finances. The Portuguese- German 10-year yield spread, which hit a record on Sept. 28, was at 398 basis points yesterday, up from 88 basis points on March 10.
While it has phased out its 12- and 6-month loans, the central bank still lends unlimited amounts in its weekly, monthly and three-month tenders. In May, it was forced to reintroduce the unlimited three-month loans and start buying government bonds as Europe’s deepening debt crisis started to threaten the survival of the euro.
With the ECB unlikely to match other nations’ “expansive monetary policy measures,” the euro may continue to strengthen, crimping the region’s exports and economic expansion, economists at WestLB AG economists said in a research note. The single currency has gained 16 percent against the dollar in the past four months and touched $1.3941 yesterday, the highest since February.
Currency Tensions Build
With the rise in the Euro vs. the US dollar, the Euro is also rising vs the Yuan given the Yuan’s peg to the dollar.
Trichet and the EU are pissed that the Euro, and not the Yuan is at the center of global currency trends. Japan is also upset to the point of currency intervention.
China Tells EU to Stuff It
In the midst of global currency debasement wars, China Hardens Opposition Over Yuan Gains, Tells EU to Back Off
China stiffened its opposition to a rapid appreciation of the yuan, setting the stage for a confrontation over exchange rates at this week’s international monetary meetings in Washington.
Premier Wen Jiabao said China will stick to its policy of gradually increasing the currency’s flexibility and lashed out at European Union leaders for teaming with the U.S. to pressure the Chinese government.
“Europe shouldn’t join the choir” clamoring for a higher yuan, Wen told a business conference yesterday before an EU- China summit in Brussels. “If the yuan isn’t stable, it will bring disaster to China and the world. If we increase the yuan by 20-40 percent as some people are calling for, many of our factories will shut down and society will be in turmoil.”
International exchange-rate diplomacy shifts into high gear at the Oct. 8 Group of Seven meeting in Washington after China rebuffed EU and U.S. pleas, the Bank of Japan sought to drive down the yen by unexpectedly easing monetary policy, and Brazilian Finance Minister Guido Mantega warned of a global “currency war.”
“There’s a game of brinksmanship being played,” David Cohen, an economist at Action Economics in Singapore, said in a Bloomberg Television interview. “I suspect at the end of the day the Chinese will agree to return to gradual appreciation of their currency.”
Mistake To Assume Anything
While it’s crystal clear a game is underway, it’s debatable whether that game is better called “brinksmanship” or “currency wars”. Furthermore, it’s a mistake to assume China will agree to anything.
Every country wants a weaker currency to stimulate exports, but that is physically impossible, except of course against gold. The irony is rising gold prices will not stimulate anything that central banks want, but global competitive currency debasement sure has stimulated the price of gold and silver.
Copyright (c) Mike “Mish” Shedlock
Tags: 10 Year Treasury, Allied Irish Banks, Allied Irish Banks Plc, Anglo Irish Bank, Bank Of Scotland, Banking Systems, Bond Yields, Brazil, China, Commercial Banks, Credit Markets, Crisis Mode, Global Economic Trends, Indebted Nations, Michael Mish, Mish Shedlock, oil, Royal Bank Of Scotland, Royal Bank Of Scotland Group, Royal Bank Of Scotland Group Plc, Scotland Group Plc, Silver, Trichet, Yield Spread
Posted in Brazil, China, Energy & Natural Resources, Gold, Markets, Oil and Gas, Silver | Comments Off
Monday, August 9th, 2010
The Economy and Bond Market Diary (August 9, 2010)
Treasury bonds rallied again this week on generally negative economic news. Two year Treasuries hit all-time record lows, falling below 50 basis points as prospects for a Fed rate increase appear remote.
The two big pieces of economic news this week was the ISM Manufacturing Index and the unemployment report. ISM declined for the third month in a row but still remains at a healthy level. The unemployment report disappointed as nonfarm payrolls fell 131,000, as can be seen in the chart, and June’s payrolls were revised down by an additional 96,000 jobs. The media spin was that the report was neutral, citing an increase in manufacturing employment, a roll off of census workers and an uptick in average weekly hours worked. With the economy losing 227,000 jobs in the last two months right in the middle of an economic recovery you need rose-colored glasses to think that this is in any way positive.
- Nonmanufacturing ISM unexpectedly rose last month.
- European Central Bank President Trichet predicted growth in the third quarter and surprisingly ruled out the possibility of a double dip recession.
- Mortgage rates continue to fall, hitting fresh lows again this week at 4.49 percent.
- Nonfarm payrolls fell 131,000 in July.
- Retailers same store sales data for July generally disappointed, and car sales for July also disappointed.
- Factory orders fell 1.2 percent in June, this is on top of the 1.8 percent decline in May.
- Inflation is unlikely to be a problem for some time and this gives central bankers and other policy makers around the world room for expansive policies.
- The risk of austerity measures going too far and significantly diminishing economic growth is a real risk.
Tags: Austerity Measures, Bank President, Basis Points, Bond Market, Census Workers, Colored Glasses, Double Dip Recession, Economic Recovery, Fed Rate Increase, Ism Manufacturing Index, Last Two Months, Market Diary, Mortgage Rates, Nonfarm Payrolls, Record Lows, Time Record, Treasury Bonds, Trichet, Unemployment Report, Uptick
Posted in Bonds, Markets | Comments Off
Friday, April 9th, 2010
Greek Circus Continues To Control Markets In U.S. – Stocks began Thursday in the hole. The primary driver was, yet again, a weak Euro responding to twists and turns in the Greek crisis. There were reports of large draw-downs from Greek banks. Greek government bonds inverted with the two year bond trading at higher yield than the ten year.
In addition to the weight of the weak Euro, U.S. stocks were bothered by higher Initial
Unemployment Claims. Since, by name and definition, “initial” claims are new events, that meant there was an increase in the number of layoffs. Bulls tried to excuse the number, calling it a quirk caused by the Easter holiday (a bit odd twist, I think).
After the opening selloff, stocks began to regroup and edge higher. Again, it was a response to the Euro. This time the Euro was firming.
The turn in the Euro seemed to be a response to calming comments by Mr. Trichet of the ECB at a news conference. He said “default is not an issue for Greece”. Also, helping the Euro was a report from the Greek Finance Ministry citing a drop in the budget deficit.
In addition to the Euro firming, stocks bulls got help from glowing reports at retail stores, especially apparel. Bears countered that it was probably an “Easter Outfit” distortion. Bulls and TV pundits would have none of it. They proclaimed that the American consumer was back and spending.
The Euro firming continued into early afternoon, albeit in a somewhat muted fashion. Then the Euro and U.S. stocks reverted to mildly choppy sideways trading.
Around 2:45 p.m., the stock bulls made another try to juice up the rally. Their effort could not get back to Wednesday’s highs and the rally attempt sputtered into the close. A rather inconclusive session if you’re looking for forward guidance.
Beyond The Napkins – Advances Versus New Highs – Away from the usual cocktail napkin scrawling used by amateur technicians, they use some other tools. Two of them are tools also used by our more sophisticated and professional brethren.
One is an index of advances and declines. In simple hands it is just a gauge to tell how broad or narrow the action is. If the market goes up and advances swamp declines, the rally appears to be broad which is assumed to be synonymous with powerful.
Over the centuries, traders began to keep running tallies of some kind of advance/decline average. There are many variations. For example, some only use “common” stock excluding “preferreds”, “warrants” and other special vehicles. Like a handed down recipe, the user may put in a unique twist or spin on his, or her, version of an advance/decline index.
Twist or no twist however, they all share a basic comparison – advances to declines. As they evolved, some trader folklore became attached. One of the most prevalent is – “You can never have a major top if the advance/decline line is making new highs.
“Never” as you may have noted over the years, is a very dangerous word in a dynamic world. So, let me say that traders think it is very, very, very rare to make a major top while the advance/decline line is at, or making, new highs – and that’s where we are today. Ah, but if only life and the market were so simple.
Another tool we troglodyte technicians use frequently is new 52 week highs and new 52 week lows. More correctly, it is a comparison of the new highs or new lows to the market action. If the market is making higher highs, you hope that it is accompanied by succeedingly larger numbers of new highs.
Last year the market pointed toward its March lows by having fewer and fewer new lows on each selloff. It was getting “sold out” since fewer stocks were joining in the carnage.
In recent weeks, the number of new highs is shrinking with each higher rally. That divergence suggests a pullback may be at hand as it did in January.
So, the combined trader folklore says we may be set up for an imminent pullback but not a major selloff. Let’s see what happens.
Will China Stop Bidding On U.S. Bonds? Well, It Looks Like They’ve Stopped Bidding On Chinese Bonds – China tried to auction 20 billion Yuan in a nine month bill yesterday. They managed to sell only 15.8 billion worth. They also tried to auction 15 billion in a 90 bill but only got off 14.25 billion. Do you think that, just maybe, the bidders see a rate hike looming?
Cocktail Napkin Charting – In Thursday’s Comments, we said that the napkins saw S&P support around 1175/1178. Yesterday’s intra-day low was 1175.12. We’ll save that napkin. For today, the napkins show little change. They suggest support around 1172/1175. Resistance looks like 1194/1197.
In the Dow, traders say that the bulls need to defend 10,800 on any pullback. A break below that could reconfigure the napkins substantially. But, like Scarlett O’Hara, I’ll worry about that tomorrow.
Consensus – Greek crisis still festers but the big funding rollover deadline is still more than a month away. Nevertheless, stocks will dance to the Euro tune. Have a great weekend and stay very nimble.
Tags: Art Cashin, Bond Trading, Budget Deficit, Cocktail Napkin, Easter Holiday, Easter Outfit, Finance Ministry, Government Bonds, Greek Banks, Greek Government, Initial Claims, Initial Unemployment Claims, Morning Musings, New Highs, Odd Twist, Selloff, Stock Bulls, Trichet, Tv Pundits, Twists And Turns
Posted in Markets | Comments Off
Thursday, October 29th, 2009
Canadian central banker, Mark Carney’s concerns about the strong Loonie are well known. It threatens Canada’s economic recovery. Some currency analysts believe the Canadian dollar could test its $1.10 highs again. But what is Carney doing about it?
David Rosenberg says we should embrace this period in Canada’s economic history. “For its part, the Bank of Canada has said that “persistent strength in the Canadian dollar” is going to “slow growth and subdue inflation pressures.” So, in return for softer growth, what we get back is lower “inflation pressures.” The winner here is anyone who needs to borrow money – a strong loonie will prevent the Band of Canada from taking the interest-rate punchbowl away any time soon.”
But, last week, the Bank of Canada interrupted the Canadian dollar’s ascent when it left rates at 0.25%, and downgraded economic growth prospects for 2010 and 2011. The dollar lost 2 cents. There is pressure though for the BoC to ease further.
Carney’s wait-and-see stance on quantitative intervention, indicates he may not have to. Instead, he may be talking through this, while waiting for the G20 to sort out the US dollar; in effect, a policy of benign neglect.
At the G-20 meeting in Pittsburgh in late September, leaders made commitments to pursue policies to bring the world into greater economic balance. Following that meeting, the ECB’s Trichet said it is “extremely important” that U.S. authorities pursue policies supporting a strong dollar, and that excessive foreign-exchange volatility is an “enemy.”
There’s another G20 meeting scheduled for Nov. 6-7 in Scotland, and it’s most likely to serve as a forum where all concerns over the dollar’s weakness will be aired. “I think there will be fireworks at the G20,” said Stephen Jen, a well-respected currencies investor at hedge fund BlueGold Capital Management in London.
The US is wallowing in the advantage of a weaker dollar. Neil Mellor, Bank of New York currency analyst, says, “You can’t continue down this road without something giving way, and it’s clear that the U.S. is not going to do anything to put meat on the bones of its strong-dollar policy.”
US$450-billion has been sucked from money market funds (the dollar) into risky assets since March. Zero-percent-interest-rate policy (ZIRP) crowded investors out of the money market and into risky assets. In the simplest of terms, the global equity markets’ slingshot recovery has led to conversely rapid devaluation of the dollar.
Now, a “strong US dollar policy,” for which there is great political will globally, appears to hinge upon a reversal of fortune in markets or concerted monetary intervention via the IMF, or both.
Therefore, the price of relief from the Loonie’s climb could be a synchronized decline in commodity prices and equity markets, in the near term. The repatriation of cash to US money markets means a stronger US dollar, and thus a weaker Canadian dollar, hence the synchronization with the reversal in equity markets and commodities prices. Perhaps Carney is right to let the big players sort out and tighten the US Dollar.
In newer developments earlier this week, the US government, perhaps under some pressure, showed signs that it is willing to withdraw stimulus, thus tightening the Greenback, by closing down the housing tax credit, and calling on Bank of America to repay its bailout by selling shares. The market is reacting poorly.
It begs the question – Is the tail wagging the dog?
If the stimulus and zero interest rate policy is responsible for the markets’ huge recovery, then what effect will indications now, of the US government’s willingness to withdraw stimulus, have?
Either way, it would be prudent, at this point, to take the political pressure from the world’s other large economies to re-establish balance without jeopardizing their own recoveries, seriously.
Tags: Ascent, Bank Of Canada, Bank Of New York, Benign Neglect, Boc, Buybacks, Canadian Dollar, Canadian Market, Capital Management, Commodities, Currency Analysts, David Rosenberg, Dollar Policy, ECB, Economic Balance, Economic History, Economic Recovery, Finance Minister, G20 Meeting, Global Equity Markets, Gold, Growth Prospects, Hedge Fund, Inflation Pressures, Interest Rate Policy, Late September, Loonie, Mark Carney, Money Market Funds, Neil Mellor, Punchbowl, Resumption, Risky Assets, Strong Dollar, Trichet, Volatility
Posted in Canadian Market, Emerging Markets, Gold, Markets | Comments Off
Friday, October 3rd, 2008
As pointed out by one of our favourite commentators, Hugh Hendry, CIO, Eclectica Asset Management, Ireland’s plans to guarantee all bank deposits could have a destructive impact on the value of the Euro. |Take a look at the chart. At the time of this posting the Euro has dropped against the USD from $1.41 to $1.38. Despite the fact that EU central banker, Trichet, has opted to leave rates alone, the market appears to be paying attention to the toll that Ireland’s guarantees may have on the Euro if they are allowed to go forward with this.
Relative to this development that has arisen out of the widening of spreads and the tightening of credit in the UK and Europe (as well), the US dollar is enjoying the illusion of being stronger. Given the differences in monetary policymaking, it appears that in the near term, the strength of currencies will depend on the winning moves of some policymakers and the losing moves of others.
In this vein, it appears the Fed and the Treasury are making the winning moves. It remains to be seen what the EU will do. Take a look at the Daily and 3-day charts of EUR vs USD.
Tags: Bank Deposits, Blog, central banker, Chart, Cio, Credit, Dollar, Eclectica, Eclectica Asset Management, Euro, Europe, European Union, Fed, Hugh Hendry, Ireland, Monetary Policy, spreads, Trichet, UK, United Kingdom, US Dollar, Us Federal Reserve, usd, Value
Posted in Credit Markets, Markets | 1 Comment »