Archive - May 31, 2011

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

Case-Shiller house prices, the Chicago PMI, and consumer confidence. Fasten your seatbelts: bizarro day will be fully enforced today with horrible data leading to market surges.

Much has been speculated about what the possible impact on the fixed income market may be if the debt ceiling is breached. Few, however, have wondered about the impact of what the lack of a debt ceiling resolution would be on a market that one could argue is even more important: FX. Citi's chief currency strategist Stephen Englander takes a preliminary look at the implications of what this would look like. Englander admits that "a breach of the credit ceiling is priced in neither fixed income nor FX markets to any significant degree now", and proceeds to speculated that it is foreign exposure (recall that China has over $4 trillion in foreign financial assets) that would be most impacted by such an adverse development. To wit: "Our expectation is that the FX reaction to a
debt ceiling breach would be sharper and probably more permanent that
the FI reaction, because unhedged foreign investors will see another
layer of risk that can not be 'fixed' in the way that cash flows from
Treasuries can. The FX market reaction may not be catastrophic, given
the limit to the fixed income damage that is likely to be permitted to
emerge, but it would legitimately tax foreign investor patience and lead
to further USD dumping whenever the opportunity arises." Bottom line: the race to the garbage bottom between the USD, EUR and JPY continues in earnest, with nobody yet a solid favorite to win, er, lose first.

• Emerging states working on IMF candidate: South Africa (Reuters)
• Berlin Considers a Shift on Greek Debt (WSJ)
• Housing Sales in China Seen To Fall Over 10% (Shanghai Daily)
• Greece may run out of funds within weeks (Independent)
• Lagarde, on Visit to Brazil, Vows Speedy IMF Reforms (WSJ)
• BlackRock’s Fink Says Europe Problems Go ‘Way Beyond’ Greece (Bloomberg)
• Libya's Goldman Dalliance Ends in Losses, Acrimony (WSJ), or how Goldman lost 98% of Libya laundered money, offered Libya the chance to become one of its biggest shareholders
• Australia Fund Says No to Euro-Zone Rescue Bonds (WSJ)
• Saudi-Iran Feud Draws Sectarian Line Across Mideast Oilfields (Bloomberg)

Concurrent with last night's Moody's reminder that it is about to downgrade the Japanese economy, which we have long been claiming is the marginal global economic wildcard, we get an exportindustry update from the Japan Automobile Manufacturers Association. In short: April car exports were an unprecedented disaster, with the average exporter seeing a 68% drop Y/Y, with some, such as Toyota plunging from 150,118 to only 31,025 cars in April 2011. And while this would be the ideal environment for US carmakers to grab market share, the fact that many are missing critial Made in Japan components in their supply chain means that there is a broad based supply drop. Which is why tomorrow's update of GM's recent channel stuffing practice will be observed with such interest: if the firm reports yet another increase in the cars parked with dealers, then something in the US carmaking space is seriously wrong two months after this Japanese car export free fall.

The euro climbed to a three-week high versus the dollar on speculation Germany and other European nations may pledge more funds to bankrupt Greece and favourable German economic data. This is more a reflection of dollar weakness rather than any great confidence in the euro. The euro at €1,068/oz remains under pressure versus gold and is less than 2% from record nominal highs at €1,088/oz. While the focus, has of late, been on the increasingly ‘unsingle’ single currency, news overnight shows how there are also substantial risks posed to the yen. Moody’s have warned that they may have to downgrade Japan and have warned of a “tipping point” which may lead to a government funding crisis for heavily indebted Japan. The United Nations warned on Wednesday of a possible crisis of confidence in, and even a "collapse" of, the U.S. dollar if its value against other currencies continued to decline. The UN’s mid-year review of the world economy did not get covered widely. The UN economic division said that a crisis of confidence in the dollar, stemming from the falling value of foreign dollar holdings, would imperil the global financial system. This trend, it said, had recently been driven in part by interest rate differentials between the U.S. and other major economies (see table above) and growing concern about the sustainability of the U.S. public debt, half of which is held by foreigners including the Chinese government.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 31/05/11

Move over Jack Meyer and David Swensen, there's a new woman on the mighty US endowment block...