Like the illusion of Wall Street, with its vast and powerful investment banks, now shuttered, China too is an illusion perpetuated by the Globalists that gave us the 15,000 mile Caesar salad, poisoned cat food and lead based paint on babies' pacifiers. Like the illusion that money would come from thin air to always push housing prices higher, China has spent a generation pursuing its illusion. Pursuing an unattainable dream to be like the West, while 6000 years of its carefully shepherded top soil blows into the sea.
Posted: Tue Aug 05, 2008 12:31 am Post subject: Re: Trader's Corner 2008
WTI drops below $119, Brent below $118
I always try to stress that ALL assets trade relative to one another. There is no one asset that can consistantly outperform all other assets. Therefore, one has to periodically rebalance their portfolio for optimal performance. Demand + growth DO NOT = profits. Profits are turning relatively inexpensive inputs into relatively expensive outputs at a win.
The share price of any firm is an estimate of future profits discounted back to present value. Therefore, no matter how wonderful a firm appears if it is too expensive, it is too expensive. All the upside appreciation has been factored into the share price and from that level it can only fall.
Quote:
Resource stocks tumbled in Asia on Tuesday as oil and metals prices retreated amid more U.S. economic gloom and signs of deceleration in China that added to fears about a global slowdown.
The high-flying sector was hit by selling from investors who had formerly poured cash into commodities and related companies as a hedge against U.S. dollar weakness and rising inflation, analysts and fund managers said.
Among the heaviest losers were global miners BHP Billiton <BHP.AX> and Rio Tinto <RIO.AX>, which both lost more than 5.5 percent, leading Australia's mining index down 6.3 percent. On Monday, the UK mining index shed 5.2 percent.
"You've got an economic slowdown and markets are slowly coming to terms with it. Some of the speculation that was looking for safe harbour in commodities is starting to unwind," said Mark Konyn, chief executive of Allianz SE's RCM Asia Pacific arm, which manages about $15 billion.
"Our longer-term view is still for a structural uptrend, because we don't see the demand easing at all and we still see some supply side constraints."
Investors have relied for months on China's boom supporting prices for oil, copper, aluminium and steel, even as the U.S. economy has suffered a housing crisis that has taken it to the brink of recession. Richer households in China and India have also contributed to a sharp rise in food prices.
But copper <MCU3> hit a six-month low on Monday and other industrial metal prices declined as rising inventories pointed to lower demand, while U.S. soybean futures <SQ8> hit their lowest in three months, with ideal crop weather boosting supply just as Chinese buying slowed down ahead of the Olympics in Beijing.
"Global demand for commodities is coming down, so it's not surprising that there will be a cyclical correction from what were very high levels driven by the four years of robust back-to-back world GDP (gross domestic product) growth," said Geoff Lewis, head of investment services at JF Asset Management in Hong Kong.
"For those people who don't have any exposure, this would be a good entry point."
Japan's iron and steel index was down 4.1 percent and the MSCI ACWI Materials Index was 1.3 percent lower.
Australian oil and gas producer Woodside Petroleum <WPL.AX> lost 5 percent, after a 4.9 percent fall in the S&P Energy index <.GSPE> on Monday.
Top Chinese aluminium producer Chalco <2600.HK> fell 5.4 percent and coal giant Shenhua <1088.HK> slid 7 percent, while specialist coking coal miner Hidili <1393.HK> lost a tenth of its value.
"After several years where the focus has been mainly on tight metal supplies, it seems the markets are finally focusing more on the implications of rapidly weakening demand," said MF Global analyst Edward Meir.
Data last Friday showed China's manufacturing sector contracted in July for the first time since an official survey began in 2005, although analysts said the slowdown was due at least in part to the shutdown of polluting industries ahead of the Olympics, which start on Friday.
"China's economic growth has shown a drastic deterioration lately, which is much faster and worse than many people's expectations," Citigroup Asia strategist Lan Xue said in a note to clients.
U.S. crude oil <CLc1> lost another $1 to trade at $120.40 a barrel in Asian trade on Tuesday. Oil's slide has undermined U.S. natural gas futures <NGU8>, which fell 8 percent on Monday.
Pressured by weak U.S. demand, oil prices have tumbled nearly 20 percent since hitting a record $147.27 a barrel on July 11. But oil is still up about 25 percent so far this year.
The Reuters-Jefferies CRB index <.CRB>, which tracks a basket of 19 commodities, fell 3 percent on Monday, wiping out all the gains made since early May.
Source: HONG KONG, Aug 5 (Reuters)
Commodities cannot continue to climb in price indefinitely regardless of what is going on in the real economy. First of all commodities are inputs, so in the long-term they cannot cost more than the output. Secondly, firms have to eventually turn inputs into outputs at a profit. And thirdly, the real economy must generate a sufficiently high enough return (wealth) to be able to pay for commodities for consumption (like food and fuel) as well as commodity inputs in the form of output (like manufactured goods).
It is like a spider's web. If you tug at one end of the web the whole web moves. There is no doubt that there is demand for more commodities, and therefore in the longer term these are excellent sectors to be in. But in the short to medium term the economy has to expand enough to pay for those commodity inputs. And demand is based on the ability to pay. Remove a large source of potential demand from a cooling global economy, and the underlying demand may still remain, but not the ability to pay. Importing nations still need value-added exports with which to pay for imports.
Hopefully, these resource shares fall sufficiently, so that it is interesting to get back in from the long-side. I am not sure when? The S&P Energy Index (GSPE) looks like it might re-test 480-485 that has been good support in the past.
A lot will depend on developments in China post the Olympic Games. If they pursue a jobs at any cost economic policy this will support commodity prices in the short-term, but if global demand is weak then this will just result in falling prices, and China exporting deflation as they try to make up for falling revenue with increased volume. That just destroys margins for other manufacturers. But in the end demand is the willingness and ability to pay. They may be ramping up production for a market that no longer exists.
Rio Tinto Group, the world's second-largest aluminum producer, said July 22 that the $3 billion, 700,000-ton-a-year project in Abu Dhabi was ``dead'' because the United Arab Emirates decided not to use its gas supplies to generate power for smelters. In February, Manama-based Aluminium Corp. of Bahrain said it shelved a plan to increase capacity by 39 percent to 1.2 million tons because of insufficient gas supplies.
Energy accounts for as much as half the cost of making aluminum.
``The Middle East was seen as the most attractive place to build a smelter because of its access to cheap energy,'' said Graham Birch, who manages more than $40 billion in natural- resource stocks at BlackRock Inc. in London. ``But many things have changed in the last year that have meant it is not such an easy route.''
Rio also said it may close a 148,000-ton smelter in Anglesey, Wales, if the London-based company can't secure a new power contract when the current one expires in September 2009. Rio suspended work on a $2.7 billion South African project because it wasn't able to obtain guaranteed power.
UPDATE II: ADM profit falls but revenue rises 78 pct
Quote:
Archer Daniels Midland Co <ADM.N>, one of the largest U.S. food processors and ethanol producers, said on Tuesday that quarterly profit fell 61 percent mainly due to one-time gains a year earlier.
Earnings fell to $372 million, or 58 cents per share, in the fiscal fourth quarter ended on June 30 from $954.8 million, or $1.47 cents per share, a year earlier.
A year earlier, ADM saw an after-tax gain of $616 million or 95 cents per share from an asset sale.
Revenue rose 78 percent to $21.78 billion from $12.21 billion, compared with Wall Street forecasts of $15.36 billion. Revenue was bolstered by corn, soybean and wheat prices hitting
record highs.
Shares of ADM, based in Decatur, Illinois, have fallen 39 percent this year, compared with a 4.7-percent drop in the Dow Jones U.S. food producers index <.DJUSFO>. Shares have been hard hit by concerns that record corn prices will erode ethanol margins and the U.S. government may reduce incentives to produce alterative fuels from crops.
source: CHICAGO, Aug 5 (Reuters) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Aug 05, 2008 8:37 am Post subject: Re: Trader's Corner 2008
Starvid wrote:
Madness. Haven't these people taken a basic course in economics? Loans should only be taken to pay for investment, never for spending. Debt based social spending is only acceptable as a contra-cyclical tool but can only be used if you have the disicpline to increase taxes and cut spending when the good times return. I mean, this is economy and political science 101.
Maybe the Federal government could take control of all infrastrucuture in the nation, repairs, new investment, the lot of it, control it centrally and finance it by issuing T-bills?
I would agree that it makes more sense to invest in productive assets using debt than for social spending. I also believe that any contra-cyclical deficit spending must be balanced during any subsequent upswing in the nation's finances. Afterall I am a fiscal conservative and social liberal.
However, real politik in the economy as distasteful as it can be is balancing the various needs of all stakeholders in society. That is where the real balancing act starts. The challenge is not to run the perfect economy (nor to please everyone). That clearly is the goal, but something so large and complex as a nation's economy within the context of a global economy is far beyond following some simple macro-economic rules.
If society is made up of individuals, and there is always some trade-off between what is good for an individual versus what is good for society, then the choice is not between one or the other, but finding the middle ground where the most individuals are best off, while society is better off than it would have been.
Clearly, there is no one right answer to solving this trade-off, but there are obviously a lot of wrong answers that take us down blind economic allies and leave us all worse off.
The real economic test
If Europe’s problems are not only caused by the excesses of financiers (though some bad and stupid behaviour cannot be denied), what can the model-watchers learn from a wider crisis? One question is whether the countries whose policies they admired during the good times are more resilient in hard times.
Quote:
A big claim was made for the “European social model”—actually several different models—during the recent years of benign growth: that European countries generally tempered the efficiency of the markets with a commitment to social justice and equality that put places like America to shame.
If that claim was made of Europe’s models on the way up, it seems reasonable to study how they fare on the way down. The 15 EU nations that use the single currency—the euro area—offer an additional experimental advantage. Because they all share one currency and one monetary policy, an important variable has been taken out of the equation. Countries can no longer devalue their way out of trouble, for one thing. Instead, their underlying competitiveness and resilience is going to be put to the test.
A widely read 2005 study by Bruegel, a think-tank in Brussels, divides long-standing members of the EU into four groups: Mediterraneans, Continentals, Anglo-Saxons and Nordics. Two criteria were used to judge each: their success at getting lots of people into work and their ability to keep citizens out of poverty.
The author, Andre Sapir, found that Mediterranean countries (eg, Greece, Spain and Italy) fail on both counts. Their social spending is skewed towards old-age pensions, and employment policies are focused on making it hard to fire people already in work. The result is low employment rates and a poor record of helping people escape poverty.
Continental countries (France, Germany, Belgium and the like), with their generous welfare systems, are good at helping people avoid poverty, but less good at getting them into work. The Anglo-Saxons (Ireland and Britain) have high employment rates but lots of inequality. Only the Nordics (Denmark, Finland, Sweden, plus the Netherlands) are hailed as combining the best of both worlds. The tough love of Danish “flexicurity” has won special praise in recent years, thanks to its apparent success at protecting workers (with things like welfare payments and government retraining schemes), rather than the jobs they currently hold (it is rather easy to hire and fire Danes).
.... when all other things are equal, the fit should fare better than the frail. This is true of economies as well as of people. Nobody wishes for an epidemic, but if one really is about to strike, Europe is in for a revealing few years.
So, in otherwords, in social-democracy with a market economy even if you have 'the best economic model' you still need to convince the majority of stakeholders in society to accept your economic arguments as well as your political solution.
That is neither basic economics nor Political Science 101! ; - )) _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Tue Aug 05, 2008 12:36 pm Post subject: Re: Trader's Corner 2008
Mr Bill, where do you think oil will fall to?
My take on the situation from a technical point of view is the 110 area is looking like a good place for a bottom.
The 200 SMA and 61.80% fibonacci are around this level and just below is the major trendline that began in January 2007.
If oil is going to post a new low and resume an uptrend I would guess it will be from this level, of course if the fundamental supply-demand balance has changed technicals are largely irrelevant.
Posted: Tue Aug 05, 2008 1:20 pm Post subject: Re: Trader's Corner 2008
I am not ready to buy energy stocks yet. I still think oil has further to go. However I am back in the yellow metal. Just bought ABX which seems to trade with gold but with bigger swings. I noted a near 30% swing when gold ran from the high eights to just over a thousand about 6 months back. Anyways I picked it up for 39 a share on the TSX due to the carnage of a 300 pt retreat.
Joined: Apr 08, 2006 Posts: 1454 Location: Somewhere there
Posted: Tue Aug 05, 2008 1:33 pm Post subject: Re: Trader's Corner 2008
any ideas when usd/jpy will start to fall finally? All other jpy pairs started to fall already, except usd. I hoped it will go at the very least to 104.
Posted: Wed Aug 06, 2008 1:54 am Post subject: Re: Trader's Corner 2008
EURJPY is stubbornly below 170, but USDJPY seems to be just grinding higher. The ECB has raised rates to fight inflation widening the interest rate differential against the US dollar, but the BOJ has not. They have kept rates very low there to combat the recession they are in.
Therefore, I see no good reason why the JPY should appreciate against the USD at this time, unless Japan starts recovering sooner and the US recession becomes much worse than is currently anticipated? With such low real interest rates I just cannot see BOJ intervention or Min Fin jaw-boning as being particularly effective either?
110 is a very comfortable mid-point for the USDJPY. Anytime it gets below 100 the Japanese get nervous. Anytime it gets above 120 the Japanese get nervous. But it seems everyone can live with a JPY at around 110?
EURJPY is a different story as eurozone growth slows down and the ECB continues to fight inflation. Watch for further ECB statements this week. But obviously this hurts EU exports a great deal. And now that China has put on hold and reversed yuan appreciation against the USD and the EUR it will affect exports and imports to and from China even more. With a decelerating eurozone economy teetering on the brink of recession, a slowdown in exports to Asia and weak domestic demand the stronger than justified euro-crosses can only exacerbate the short-term pain of the downturn.
As the US dollar has come back from the brink ($1.6000) on the expectation that the Fed will eventually raise rates as the US emerges from their recession sooner than some of their trading partners - at least that is the assumption at the moment - the weak USD has clawed back some gains against the euro ($1.5500). That spills over in the USDJPY as well if EURJPY remains steady between 165-170. Although appreciation above 110 might meet resistance. _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Your $110 target looks realistic from trendline support and is close to the 0.618 Fib retracement. Just like the market aimed for $150 on the topside and fell short it will likely aim for $100 on the downside and may also come up short. Therefore, that $100.54, although a less popular technical retracement may represent a sort of compromise between buying ahead of $100 to close shorts and bottom picking ahead of $100.
Much will depend on crack spreads, the remainder of the hurricane season, the situation with Iran and other geo-polical events. If it makes you feel any better then even Hugo Chavez thinks $150 is 'irrational' and thinks $100 is nearer to where the price should be. OPEC has said they are unlikely to touch production targets in September unless crude is at or below $80. I think their main concern is a global downturn and collapsing oil prices. A move towards $1.5000 in EURUSD would auger well for $100 between now and year-end.
But there are too many external variables, so much will simply depend on investor sentiment. We see that the global slowdown has broken the back of many commodity rallies this year even if it is within a multi-year super bull cycle. Especially base metals and some ag commodities have suffered from a change in sentiment. This throws water on some of the arguments that the commodity rallies were merely the flipside of US dollar weakness. Obviously due to strong demand many commodities were posting gains in a basket of currencies. Not just the US dollar. And again due to demand some are holding onto those gains better than others.
AS for the S&P Energy Index (GSPE) it looks likely that we will test 480-485 again (triple bottom), so that is a worthy target. However, that is below where we started the year. Although some individual companies like Massey Energy (up 84% YTD) have done very well. For those that rebalanced their portfolios in April-May then 480-485 will be a good place to replace those longs. Otherwise I would be a scale down buyer. These are high beta stocks, so they should outperform the S&P 500 on the way up, but they will also tend to be overly punished on the way down. The S&P 500 has put in a temporary bottom in July, but I am very hesitant to call it The Bottom.
_________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Thu Aug 07, 2008 3:29 am Post subject: Re: Trader's Corner 2008
Quote:
It’s all about Trichet
The focus rests on the ECB and BoE rate decisions. The latter is likely to prove a bit of a non event, rates are expected to be unchanged at 5.00% and hence the MPC will make no statement. The July Minutes showed that the committee was split three ways, such a lack of agreement is likely to favour the status quo. Indeed, whilst the string of poor activity indicators has increased the chances that the next move will be a cut, the need for the MPC to balance growth concerns with upside risks to inflation suggest that policy may have to remain unchanged for quite a while. The GBP has held up remarkably well given the weak data and hence an expected unchanged BoE is unlikely to drive the market, with EURGBP likely to have to wait for Trichet’s comments later this afternoon for direction.
In line with the consensus, we expect the ECB to also keep rates on hold today, at 4.25%. Given the rhetoric from Governing Council members over the past few months, however, we still feel that the door is open for another rate hike later in the year. Whilst very weak Eurozone data continues to signal problems ahead for the GDP outlook, a view we expect to be confirmed with soft German and Italian IP data today, the Bank’s sole focus on inflation implies that it will be difficult for Trichet to alter his rhetoric too much without risking undermining his credibility.
Forthcoming Q2 GDP figures, from Italy tomorrow and Germany, France and Eurozone next week, will confirm that activity in the second quarter slowed significantly after stellar growth in Q1 08. The Bank however was expecting such a downturn, even when it hiked rates in July and could be brushed aside by Trichet merely reiterating that the risks to growth remain to the downside. Whilst we would argue that the sub 50 Eurozone PMIs and the collapse of the EU Commission sentiment indicator in July signal that the weakness has spilled over in to Q3 and that perhaps even the economy is in recession it is unclear how strongly this will weigh on the Governing Council.
Part of the problem in the second guessing what Trichet will say is due to the fact that members have been very quiet recently, with many off on their summer holidays. What comments there have been however, especially from Wellink, still indicate that the Bank remains concerned about price stability. Admittedly, the drop in the oil price since the last meeting will soothe some of these price concerns, but HICP rose again in July and strong Italian wage growth figures in June and the inflation busting pay award given to Lufthansa staff to their staff. The fear of a wage price spiral therefore should be as strong as ever. With the market assuming however that Trichet will remain comparatively hawkish, rattling on about inflation concerns, the risk is that the central bank head signals a little more concern on the growth front and/or indicates that inflation has peaked. Any signs of a move to the dovish side and the EUR should plummet.
Given the focus on the rate decisions, the data calendar looks a little peripheral outside of the Eurozone. Sweden’s inflation figures are expected to edge higher in July, but with Q2 08 GDP very weak it will take a huge upside surprise to convince us that the Riksbank will want to hike rates further. Historically, the Swedish central bank, similar to the Bank of Canada, has been a little more sympathetic to the growth inflation trade pff when deciding policy. Indeed, post Tuesday’s FOMC decision the comparatively sparse UIS data calendar is unlikely to deflect attention from Trichet. Unsurprisingly, Initial jobless claims are expected to fall back after last week’s data showed the highest gain since April 2003. Further, another decline in pending home sales in June is unlikely to produce gasps of surprise from the market, with the figures still likely to correct to the downside following the shock 7.1% MoM rise in April.
Finally, labour market data overnight from both Australian and New Zealand surprised to the upside. The Australian unemployment rate was unchanged at 4.3% in June, but more jobs were added during the month than expected. In addition, whilst New Zealand unemployment rose to 3.9% in Q2 from 3.7%, employment rose 1.2% QoQ on the quarter after a 1.3%, albeit after a 1.3% decline in Q1. Whilst both central banks are still expected to cut rates the comparatively strong employment figures should help underpin the AUD and NZD, by at least suggesting that the easing may not need to be overly aggressive.
What happens now?
It is almost exactly a year since the European Central Bank was forced to inject €95bn into the eurozone banking system, bringing home what many had suspected – that the fallout from the US subprime mortgage crisis in the US was causing serious pain to global financial markets.
The fallout has been dramatic. Across the world, banks have been forced to raise fresh capital to repair ravaged balance sheets. Several have gone bust or have had to be bailed out, and thousands of jobs have been cut.
The fallout from the crisis has not been confined to the financial sector. The effect on the wider economy, against a backdrop of collapsing house prices, slowing growth and rising inflation, has been profound.
In a series of stories thoughout this week, the FT looks at how the world has changed in the past 12 months and the long-term impact on the global financial system and the world economy
Central banks caught between the risks of recession and runaway inflation are pursuing policies that make little sense in aggregate...
So, a year into the big freeze in financial markets and the world economy bears all the hallmarks of overheating, not another Great Depression. Yet that global truth is almost entirely lost on policymakers, many of whom talk about rising energy and food prices as if they had nothing to do with them.
soruce: Big Freeze part 3: The economy _________________ The organized state is a wonderful invention whereby everyone can live at someone else's expense.
Posted: Fri Aug 08, 2008 1:26 am Post subject: Re: Trader's Corner 2008
EUR/USD hits $1.5150 $1.5050 on the downside
Worrying developments in S. Ossetia as Georgian warplanes pound separatist positions, while Moscow vows to protect Russian compatriots in the region, and the USA nominally lines up behind Tsblisi. That and some separtist bombs going off in Istanbul as well as a pipeline explosion in Turkey blamed on the Kurdish minority. Good for a few dollars risk premium on the price of crude despite the US dollar making gains against the euro, Sterling and the yen. Not exactly a quiet end to the week.
UPDATE: Georgia has shot down two Russian planes over its airspace and Russia has in turn sent 150 tanks into Georgia. The EU and NATO are calling for an end to hostilities. This is most disturbing. Russian jets have just bombed the Vaziani airbase outside Tbilsi. Gosh, wars have started over less.
Quote:
Commodity Watch
Worrying developments in S. Ossetia where Georgian warplanes have pounded separatist positions, with Moscow vowing to protect Russian compatriots there, and the USA nominally lined-up behind Tsbilisi. That and a few separatist bombs going off in Istanbul and pipeline blasts blamed on the Kurdish minority. Good for a few dollars in risk premium for crude despite the US dollar gaining against the euro, Sterling and the yen.
Commodity demand restrained, but not destroyed
We continue to believe that recent demand weakness is likely transient, as rising prices have been required to constrain demand in line with supplies. The negative macro sentiment may constrain near-term commodity upside. But we believe that supportive fundamentals remain intact and that the recent sell-off is increasingly providing buying opportunities.
Demand concerns have driven negative commodity performance
Commodity prices and returns as measured by the S&P GSCI Enhanced Commodity Index plummeted in July and have declined further in recent days. Broadly driving these declines has been a substantially negative shift in sentiment, owing largely to concerns about commodity "demand destruction" in the context of both slowing global economic growth and substantial commodity price
increases this year. Concerns about increased supply availability -owing to OPEC production increases and substantial improvement in the US corn and soybean harvest outlooks - have also contributed to recent sharp price declines.
Demand restrained, but not destroyed
We continue to believe that US oil demand weakness has been necessitated by extremely disappointing non-OPEC crude oil supply growth in the context of still strong emerging market demand, which explains the lack of a meaningful inventory build, despite the weak US demand. As rising prices explain the magnitude of the recent demand weakness, it is likely that such demand weakness is temporary rather than permanent demand destruction and could
reverse substantially following the recent sharp price declines. We believe a similar dynamic has taken place in the agriculture markets, with the recent price retrenchment given improved harvest outlooks likely stimulating sufficient demand to keep soybean and corn balances tight.
Raising 12-month returns forecasts on recent price declines
Although the negative macro sentiment may limit near-term commodity upside, we believe constructive commodity fundamentals remain intact and that potential upside is strongest for oil, soybeans and corn. We are raising our 12-month energy, agriculture and precious metals return forecasts on recent price declines, leading to an upward revision in our forecast of the S&P GSCI Enhanced Index to 17.9% from 9.3% previously.
source: Goldman Sachs Commodities Research
August 7, 2008
Quote:
Current themes
Stagflation keeping central banks' policies in check The ECB reiterated at yesterday's policy meeting that price stability was its leading concern. President Trichet indicated that Eurozone growth was expected to weaken substantially this year, which explains why the ECB has left rates on hold at 4.25% (following a 25 bps hike at the July meeting).
The BOE also left its ending rates on hold - at 5.0% - and, like the ECB, the BOE is facing stagflation, given that inflation pressures continue to rise at a time when economic growth is crumbling. The euro and the pound weakened sharply in the wake of yesterday's policy meeting, due to the aforementioned GDP concerns that were expressed by both central banks, which in turn ensured that the dollar enjoyed extended and broad-based strength despite yesterday's US equity market sell-off. Indeed, Wall Street incurred a fresh wave of selling pressure on Thursday following some extensive losses from US insurer AIG and a cautionary sales announcement from retailer Wall Mart.
Gold falls while oil rebounds Gold prices fell about 0.8% to $873.08 on Thursday on the back of a stronger dollar. The greenback gained against the euro as the ECB dampened the likelihood of further rate hikes this year, as growth concerns come to the fore in European economy. A falling gold price bodes ill for SA's exports, given that gold forms 16% of SA's top 10 exports.
Oil prices rebounded by almost 1%, from a close of $115.83 on Wednesday. The rebound was surprising, given current dollar strength. Partly explaining the rebound is supply concerns following a terrorist attack on a Turkish pipeline that will be shut for several weeks.
South African business confidence stops falling
After falling for 10 consecutive months, SACOB's business confidence increased marginally in July. This uptick is likely due to inflation expectations having become more optimistic, commodity prices coming off the boil, and the rand's recent strength. The change in inflation expectations is also mirrored in the bond market. Break-even inflation yields have fallen from 8% - 9% in June to 6% - 7%. We believe that the more optimistic inflation outlook and the more gloomy economic growth prognosis will persuade the SARB to hold rates unchanged at next week's meeting. That said, the risk lies to the MPC raising rates in order to anchor inflation expectations, given the current wage settlements in the 9% - 12% range, which bodes ill for second-round inflationary pressures.
Given the sparse data calendar the market’s focus is likely to remain on digesting yesterday’s ECB decision and comments from Trichet. There was no surprise that the Bank kept rates on hold at 4.25%. The tone taken by Trichet in the press conference was however interpreted as being on the dovish side. Consequently, the bond market rallied and EUR/USD slumped to the below 1.52. Was the reaction over done? Well, not wanting to sit on the fence, but the answer to that is yes and no. His tone did seem to imply that the Bank may be a little more worried about the growth outlook and perhaps have been surprised by the string of recent weak data. He reminded the market, however, that the slowdown in mid 2008 was expected.
Despite this rather relaxed approach, the release of Italian Q2 data today, which is expected to be weak and be a precursor for similarly subdued figures from other EMU countries next week, is likely to keep the EUR on the back foot. But before a sub 1.50 EUR/USD is priced in, we need to look at the other side of the coin, and as far as the Bank is concerned the more important one. The ECB doesn’t target growth, it’s sole focus under the mandate is to ensure price stability and Trichet’s comments still signal that the Bank remains worried about inflation, with money supply growth, wage increases and second round effects remaining a threat. The snap estimate for July HICP showed inflation at 4.1% YoY, compared to the Bank’s target of just under 2% YoY in the medium term. Hence, we suspect that the hawks on the Governing Council will not be to happy with the market’s dovish take on the decision and will not be surprised if some of their big hitters are on the wires over the coming week reminding us all that inflation is too high and perhaps limiting some of the downside EUR move.
Another quiet US data calendar offers little for the USD to get its teeth in to. Productivity in the nonfarm business sector likely advanced 2.6% in Q2, but with compensation gains outpacing productivity unit labour costs are forecast to slow to 1.3% from 2.2% in Q1. The Canadian labour market data should garner a little more attention, where another rise in unemployment could prompt further gains in USDCAD. Moreover, whilst the recent manufacturing PMI showed headline activity holding up quite well in July, the (CDN) employment index slipped below 50 for the first time since the end of 2007.
Posted: Mon Aug 11, 2008 6:36 am Post subject: Re: Trader's Corner 2008
Passing the Poisoned Challice
Quote:
Investors and former policy makers predict that the same market forces that torpedoed President Bill Clinton's ``putting people first'' spending initiatives at the start of his presidency are gathering again at the prospect of McCain's tax cuts and Obama's health-care and education programs.
``Though times are different and a lot of the government spending is necessary, we're going to see rates rise in a saw- tooth pattern over the next few years,'' says E. Craig Coats Jr., the head of Salomon Brothers' government securities desk when it was the world's biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.
That course-reversal prompted Clinton political adviser James Carville to observe at the time: ``I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter.But now I would like to come back as the bond market. You can intimidate everybody.''
Clinton's experience shows what such pressure can do to a president's agenda. Promises of spending on education, public works and a middle-class tax cut fell by the wayside as advisers led by Robert Rubin, who later became Treasury secretary, convinced the new president the best thing he could do for the economy was to show investors his resolve on fiscal discipline.
Clinton's Rage
``You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of farking bond traders?'' Clinton raged at aides, according to journalist Bob Woodward's book, ``The Agenda.''
Clinton's deficit-reduction policies resulted in a sustained economic boom that generated budget surpluses from his last four budgets and helped pull 10-year yields, which topped 8 percent in 1994, below 5 percent by the late 1990s.
Just as Bush benefited from the achievements of the Clinton years, gaining room to pursue his initial tax-cut agenda, either McCain or Obama will likely be under immediate pressure to fix the problems left over from Bush.
Forget any big policy changes. Forget fixing social security. Forget addressing energy self-sufficiency in any meaningful way. Forget fixing America's crumbling infrastructure. Forget rebuilding America's rail network. Its going to be raining and when its raining priority number one is fixing the leaking roof.
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The U.S. economic slump will extend into 2009 as the longest expansion in consumer spending on record comes to an end, according to a Bloomberg News survey.
The world's largest economy will grow at an average 0.7 percent annual pace from July through December, half the gain in the first six months of the year, according to the median forecast of 50 economists surveyed from Aug. 1 to Aug. 8.
Household spending, which has grown every quarter since 1992, is projected to stall in the last three months of the year as the impact of tax rebates fades, wages fail to keep up with inflation and property values fall. The jobless rate, now at 5.7 percent, will reach a five-year high of 6 percent in early 2009.
``The consumer is very much squeezed,'' said John Lonski, chief economist at Moody's Investors Service Inc. in New York. ``The downside risks swamp whatever the economy's upside potential would be.''
Currency strategists simply do not know where the US dollar is headed at the moment. Forecasts range from $1.4000 to $1.6700 over the next 6 to 18-months. Near-term I see some consolidation around $1.5000 ($1.4800-1.5200) until it becomes clear whether the Fed will start raising rates by March 2009 or not.
However, with commodity prices moderating, and as the world economy continues to decelerate, the Fed may be much slower to raise rates than money markets are currently betting on. That could erode support for the dollar, but much also depends on the will of China. They have also been quick to put the brake on yuan appreciation as their export lead economy begins to slow.
Producer price inflation in the UK was much higher than expected further putting the BOE in a bind as they were set to let rates drop to support the economy that has been hit hard by falling house prices and a sour mood in The City. But now they may have to temper those rate cutting plans if inflation remains stubbornly high.
I am currency neutral at the moment as it seems any weakness in the euro has been offset by weakness in the Can dollar as well, so that cross has not been moving at all. Ordinarily I would be swapping strong euros into Can dollars on euro rallies. I think that slow growth will catch-up to the euro eventually. EUR/JPY has finally dropped. But I am at a loss to which major currencies will benefit in this slowing global economy with commodity prices moderating. Look to countries with strong interest rate differentials, so long as those are not also accompanied by high domestic inflation as well. Normally I would say the ruble, but it has been hit hard by the US dollar rally and the outbreak of hostilities between Russia and Georgia. Best to avoid that space at the moment.
Bonds Show Inflation Peaks as Commodity Rally Stalls
UPDATE: battered and beaten, but still solvent...
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Besides increasing premiums, the FDIC has options if failures escalate and further drain the fund. The agency can tap a $30 billion line of credit at the Treasury Department and borrow up to $40 billion from the Federal Financing Bank to cover assets at failed banks.
As a last resort, the U.S. Congress can step in to protect depositors with legislation and appropriations as it did during the savings-and-loan crisis by creating the Resolution Trust Corp. in 1989 to manage the closings of 747 failed thrifts.
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