Archive - Jul 7, 2010

China's State Administration of Foreign Exchange (SAFE ) is once again making waves, by reminding the world about its trillions in dollar-denominated holdings, and that these could be dumped in a heartbeat. Of course, in tried and true Chinese fashion, it is notifying the world it has no intention of using the "nuclear option" which of course is merely a reminder that the nuclear option not only exists but is certainly at the forefront of any "diplomatic" negotiations with the US. As Reuters reports, "In a series of questions and answers posted on its website, www.safe.gov.cn, SAFE asked rhetorically whether China would use its $2.45 trillion stockpile of reserves, the world's largest, as a "nuclear weapon." Apparently, the primary focus of the Q&A was to allay fears that China may be stockpiling gold in the open market: "SAFE was lukewarm about gold as an investment. "It cannot become a main channel for investing our foreign exchange reserves," the agency said, noting the size of the gold market was limited and prices were volatile. Buying more gold would also not help much in diversifying China's reserves." Of course, with all this occurring in light of recent disclosure that the BIS has been involved in gold swaps to provide liquidity to unknown banks, immediately obviates this statement, since, as we have pointed out previously, the Chinese 7 and 30 Day repo markets are still sufficiently strained, and gold would certainly come in useful to allay fears that domestic banks have something beyond massively underwater residential loans on their balance sheets to fund trillions in liabilities. All the Chinese statement really is, is a warning to the US to avoid following the advice of such permaspenders as Krugman, and now Goldman, and to launch into another round of monetary devaluation via QE. We are skeptical that once Bernanke puts the presses into turbo mode once again, that China will theatricize the same kind of wholesome support for US-based assets.

HSBC's Chief Economist states that emerging markets hit a bump in the road in terms of growth (duhhh!) but their longer term outlook is positive. I agree, but since we happen to live in the present, we have a few wrinkles to iron out first. After all, it can be said that HSBC is simply talking their book since they are highly levered into the emerging markets! Here is my take on the situation from a more objective perspective.

• Asian stocks fall, Yen strengthens on slowing US service industry growth.
• Brazil's Lula falters in bid to cut floating-rate debt as rates increase.
• China has significantly increased its purchases of Japanese govt bonds as it diversifies its foreign-currency reserves.
• China plans new resource tax on coal, oil, gas in Western areas.
• Europe will outline stress test procedure.
• Iceland’s lenders stand to lose as much as $4.3B, after court ruling last month found that some foreign loans were illegal.
• Oil traded near $72 a barrel in New York.

And now the latest joke - the increasingly more incorrectly named "stress" tests being conducted in Europe are now officially confirmed to be anything but. As Market News reports: "Planned stress tests for European banks will cover their resistance to a crisis in the market for European sovereign debt, but not the scenario of a default of a Eurozone state since the EU would not allow such an occurrence, a German newspaper reported Wednesday." Now that is some serious downside stress testing. Of course, by the time the stress tests are found to have been a joke, and the country hosting the bank blows up just becase the bank's assets are 3x the host nation's GDP, and the country is forced to bankrupt, it will be far too late. So let's get this straight - the very issue that is at the heart of the liquidity crisis in Europe, namely the fact that a bankrupt Greece has managed to destroy the interbank funding market in Portugal and Spain, and the other PIIGS, and has pushed EURIBOR and other money market metrics to one year stress highs, and forced the ECB to lend over $1 trillion to various central and commercial banks, will not be tested for? Fair enough - if the ECB wants to treat the CDS vigilantes as a bunch of idiots, only to be hounded in the press with derogatory words as "Wolfpack" and much worse, so be it. But it certainly should not be surprised if this is latest show of idiocy by Trichet's henchmen serves as the springboard for the latest round of spreads blowing up across Europe.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 07/07/10

UPDATES: First relief well may be finished this month; the former President of Shell Oil said he HOPES that the relief wells have a 50% chance of succeeding; huge amounts of natural gas make relief wells trickier ...