Archive - Jun 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 21/06/10

We pointed out previously that the one certain mid- to long-term impact of China's revaluation decision, aside from stimulating the US manufacturing export economy (don't laugh), will be to trim Chinese interest for bonds. This is due to a direct effect of fewer Chinese dollars being recycled into USTs now that less USD reserves will be accumulated, but also due to an indirect effect of stimulating demand for risky assets, pushing USTs off the plate of investors. For a much more in depth perspective, we provide the views of MS Rates strategists Jim Caron and Igor Cashyn.

The ECB has announced its weekly Term Deposit Auction to be held tomorrow will be for an incremental €4 billion, bringing the total variable tender to €51 billion, compared to last week's €47 billion. This simply means that as of Monday, €51 billion in sovereign debt has been monetized by the central bank. As always, this is a liquidity circle jerk, in which the auctioned deposits are eligible collateral for any other ECB credit operations, thereby not having any liquidity-reducing impact whatsoever, even as more Spanish, Portuguese and Greek bonds are purchased by JCT.

The bulls may be ready to challenge resistance levels, thanks to China’s loosening of the yuan peg. The napkins see S&P first resistance at 1123/1125 with a fallback at 1130/1134. Support looks like 1110/1112 and then 1104/1106. Over the last seven years, the week following the June Expiration has seen stocks move lower. Given the look of the pre-opening futures, the bears will have a lot of wood to chop. - Art Cashin

• China turns tables on AAA debt time bomb nations (Bloomberg)
• Gold at new record high after Saudi reserves double (FT)
• Germany and France examine two-tier euro (Telegraph)
• So that's why investors can't think for themselves (WSJ)
• Failed AAA-deal rated Rembrandt spurs outcry (Bloomberg)
• Medvedev sees chance for new world order (FT)
• Amid the crisis, Wall Street touted BP stock (Reuters)
• Gold reclaims its currency status as the global economy unravels (Telegraph)

There was plenty to be happy about if you are a Gold bull this weekend.

The stalking horse behind last week’s strength showed its hand in the gold markets. China made the announcement they'd be ending their peg to the dollar.

The Saudis revised their gold holdings up from 143 to 322 tons, a small (+125%) rounding error perhaps.

What's more, among the most read stories on Bloomberg was something from July 10 last year titled: Medvedev Shows Off Sample Coin of New ‘World Currency’ at G-8. The dollar barbarians are closing on the gates it would seem.

Last week, the IMF released a whitepaper of sorts discussing a new global currency. Most likely a red herring to get the conversation going at the upcoming G-20 meeting, but a sign of gathering momentum nonetheless.

Which brings us to the point. We think there is a greater chance than many that gold will be a factor in currency backing in the not too distant future.

The euro is now back to testing day lows (ignore the decoupling for the time being, total confusion reigns right now in the FX markets), not only after Meredith Whitney's very bearish remarks on the economy, but after a report by S&P that is increasing its assumption for private-sector loan losses in Spain from 4.4% to 5.5% between 2009 and 2011. Most notable is the increase in real estate loan losses by 50%, from 9.6% to 14.5%, while construction loan losses are now expected to generate 6.3% in losses compared to 5.1% before, over the same period. S&P's conclusion: "We expect to take some negative rating actions on Spanish banks as a result of these changes in assumptions." It is now time for major denials from the ECB/IMF/EC/WB/NKVD who will claim all is really wonderful.

• China kept Yuan's exchange rate unchanged against the dollar, after saying it was unhitching its de facto peg.
• Crude-oil futures inched closer to the $80/bbl in late Monday morning trading in Asia.
• Stocks, commodities, US futures rally as China gets Yuan off the USD peg.
• US corporate defaults have fallen to an annualized rate of barely 1% in 2010; future uncertain.
• Yuan climbs most in 18 months as China signals end to peg; Forwards jump.

Highlights from an interview by Meredith Whitney currently on CNBC (full interview to be posted later):

• A double dip in housing is a certainty
• State economies are plunging, and are $200 billion underwater, will lead to 2 million in state-level layoffs leading to a low-end impact; raising taxes at state level will impact the top-end
• Retail sales have been stronger only due to consumers not paying mortgages, retail sales have already topped as is
• Q2 bank results will finally catch up with accelerated mortgage foreclosures; charge-offs and delinquencies in credit cards are better due to mortgage non-payment cash flow going to other obligations, and this will soon top as well
• Structural employment issues in the US won't get better any time soon

What specifically is happening, and will happen to the CNY? Like many others, I went to bed last night thinking that how Beijing allowed the fix to move today would be key. In fact, it was unchanged, and since then spot has moved notably from 6.8275 down to 6.8055 last print. I am reminded, that truly technically, today’s fix reflects the previous days trading, so in this regard, where we close will determine tomorrow’s fix, and in some sense today’s fx was not relevant. Given that the PBOC statement said that the daily trading band will not be widened ( beyond the 0.5pct which it has never experienced), this means the limit for today is 6.7930 I believe. Of course, it also means if this is all true, then we could have in theory a maximum 2.5pct rise of the CNY against the Dollar this week. I guess if that happened, and you times it by 52 even Congress would be happy, a 130pct move….I doubt that Mr. Schumer…… - Jim O'Neill, Goldman Sachs

Even as investors increasingly sniff at the possibility of the CNY becoming the new reserve currency, buying up the Yuan with both hands, resulting in a provisional close of 6.7970, the highest since the 2005 revaluation, and even as algos cheer this move in the futures market, gold hits another all time record of $1,263. For full implications of what buying both stocks and gold at the same time, we refer you to the previously published essay by Don Coxe, but in a nutshell, it is a rather bad omen, when stock appreciation is being hedged for complete systemic failure. In the meantime, China's UST holdings just depreciated by a few billion in FX adjusted terms, and the end of the USD accumulation, as well as its negative trade balance, means that the country will now be a second-rate player in the Treasury market. We really hope the frontrunning algos have it right this time.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 21/06/10

This is just getting far too surreal: Robert Mundell, the "intellectual" creator of the currently most despised monetary experiment in the history of the world, i.e., the euro, told reporters in Hong Kong, that "China’s pledge to return to a more flexible exchange-rate policy may erode stability in the global and Chinese economies." According to Bloomberg "keeping the yuan pegged to the dollar has been “a great source of stability” for China and the world, the Columbia University professor told reporters in Hong Kong today before giving a speech." Presumably, we should believe Mundell- he knows all about "monetary stability" - just look at Europe to see what happens when you have a monetary union without a political one. It is precisely the inability to adjust relative monetary strength between Europe's countries, thereby providing only a fiscal mechanism to adjust busted economies, that has led the continent to the brink of insolvency and illiquidity. Yet somehow Mundell suggests that "exchange-rate swings were a cause of the global financial crisis." Which in turn leads us to just one question - how long before America's universities stop teaching economics and expose it for the sham science it is and always has been, and out its professors, as nothing more than hollow charlatans preaching a gospel of Keynesian lies.

The direct correlation between the 30 (and 7) Day repo we pointed out on Friday, may have broken... At least on the surface. Whether the point of the depegging was to loosen tight interbank lending, via CNY/USD funding imbalances, or just to shut our worthless SecTres up for a few months, it is unclear. What is clear, is that at least for now, there is no knee jerk improvement in 1 month interbank rates, which at 3.9%, have just hit a fresh 52 week high. The direct conclusion:at least Chinese banks, if not idiot futures traders, are seeing beyond the PBoC's little scam - the depegging is ultimately devaluationary. Everything else is just smoke and mirrors ahead of the G-20.

The market just added one more bank to its daily intervention watch. The PBoC, which left the CNY fixing unchanged from Friday at 6.8275, is now being tested by the market, which is trying to determine what the real trading band is. At last check, the USDCNY was at 6.8125. So far the daily band has been pushed beyond 0.002% and the PBoC has not yet intervened, or at least not in a manner comparable to that we have grown to love and disrespect from the SNB. In the meantime, just so there is no confusion, Former Chief Executive of the Hong Kong Monetary Authority, Joseph Yam says the "Yuan may appreciate or depreciate in short-term." Well, that now makes it all clear.