The world economy has experienced another year of subdued growth, having failed to meet even the most modest projections for 2013. Most developed economies continued trudging along toward recovery, struggling to identify and implement the right policies. Meanwhile, many emerging economies encountered new internal and external headwinds, impeding their ability to sustain previous years’ economic performance. Nonetheless, some positive developments in the latter part of the year are expected to gain momentum through the coming year. But the global economy is still subject to significant downside risks. In short, while the global economic outlook for 2014 has improved, policymakers worldwide must remain vigilant about downside risks and strengthen international cooperation. Developments in 2013 provide strong incentive for policymakers to do so.
In the "west", the higher the price of gold rose, the more demand there seemingly was by momentum-chasing gamblers investors, if only for paper certificates claiming to represent gold, or GLD as the case may be. Conversely, once the momentum turned, the same investors couldn't be bothered with gld (sic) even at 30% lower. At the same time, in the "east" the higher the price of gold rose, the lower the demand was for physical, which for that extinct breed of deranged gambler known as "value investor" is a familiar concept." And now that gold's price is not only back to early 2011 levels, but is essentially below production costs, demand out of China is off the charts. Demand in India - traditionally the greatest in the world - continues to also at unprecedented levels, although now that official purchases of gold are regulated and limited through capital controls, it is forcing the local population to smuggle in gold through the most innovative of schemes. But while the west is the west, and the east is the east, and no amount of adaptive behavioral modifications can change that, much to central bankers' chagrin, what lies in-between? Courtesy of the Saudi Gazette we learn that the uber-rich middle eastern kingdom, which floats on a sea of oil has picked its side... and it has chosen to take advantage of the ongoing paper-driven price collapse and load up on as much gold as possible.
Procuring physical gold seems to be a rather problematic and time-consuming process, as the Bundesbank is learning. Yesterday Buba head Jens Weidmann told Bild that gold valued at €1.1 billion has been repatriated so far. Putting a weight to this number: to date the Bundesbank has received shipments of a paltry 37 tons of gold from its existing storage place in either New York or Paris to Germany: "The gold reserves of the country will be stored in Frankfurt because it has a special storage with the corresponding equipment,” said Carl-Ludwig Thiele, a Bundesbank board member. The repatriated amount over the course of all of 2013 represents just over 5% of the total stated target of 700 tons, and is well below the 87.5 tons that the Bundesbank would need to repatriate each year if it were to collected the 700 tons ratably ever year in the 8 year interval between 2013 and 2020.
Watching Indian bureaucrats attempt to halt more than one billion human beings’ desire for gold has been one of the more entertaining and pathetic stories of all of 2013. As we noted previously, gold smuggling has now outstripped the illegal drug trade but it appears the trend continues, potentially at an accelerated rate, as we just learned that, incredibly, “almost every passenger on a flight from Dubai to Calicut was found carrying 1kg of gold.” As I have said many times in the past, if an Indian wants their gold, they will have their gold.
Chinese demand may once again stem the decline in gold prices. Chinese buyers eagerly scooped up gold at bargain prices overnight after the 4% price fall. Gold volumes for the benchmark cash contract on the Shanghai Gold Exchange (SGE), China’s biggest spot bullion market, climbed to a 10 week high as lower prices led to increased buying.
Overnight one of the main stories is that the European Union has been downgraded to AA+ from AAA by S&P. While the market digests the impact of the downgrade, all eyes remain on the US treasury market. As Deutsche Bank notes, treasuries are increasingly being viewed as a potential sign of the success or not of the Fed taper in early 2014. From the lows in the immediate aftermath of Wednesday’s FOMC, 10yr UST yields have added more than 10bp. Yields continue to leak this morning (-2bp to 2.95%) though we’re still hovering at levels last seen in early September just before the Fed surprised markets with its non-taper. Despite this, US equities and credit were both reasonably well supported yesterday. However the combination of higher UST yields and a stronger dollar resulted in a fairly difficult day for EM. In EMFX, the Brazilian Real fell 1.1% against the USD, underperforming most other EM currencies. The move was exacerbated by the announcement from the BCB that it would wind back its intervention in the currency market, following the initial positive reaction to tapering on Wednesday. Other EM currencies also struggled including the TRY (-0.7%), MXN (-0.7%) and IDR (-0.3%). A number of EM equity markets struggled including in Poland (-0.7%) and Turkey (-3.5%).
• the risk of runs and asset fire sales in repurchase (repo) markets;
• excessive credit risk-taking and weaker underwriting standards;
• exposure to duration risk in the event of a sudden, unanticipated rise in interest rates;
• exposure to shocks from greater risk-taking when volatility is low;
• the risk of impaired trading liquidity;
• spillovers to and from emerging markets;
• operational risk from automated trading systems, including high-frequency trading; and
• unresolved risks associated with uncertainty about the U.S. fiscal outlook.
Although the probability of any one of the predictions coming true is low, they are deduced strategically by Saxo Bank analysts based on a feasible - if unlikely - series of market and political events. As Saxo's chief economist notes, "This isn't meant to be a pessimistic outlook. This is about critical events that could lead to change - hopefully for the better. After all, looking back through history, all changes, good or bad, are made after moments of crisis after a comprehensive failure of the old way of doing things. As things are now, global wealth and income distribution remain hugely lopsided which also has to mean that significant change is more likely than ever due to unsustainable imbalances. 2014 could and should be the year in which a mandate for change not only becomes necessary, but is also implemented."
US equity markets were the first to move yesterday on the news of the tapering which is a loosening and not a tightening move by the Fed. Overnight and today has seen stocks stabilize as the rest of the world wakes up to what this slowing of flow actually means... From EM FX to precious metals to colossal flattening in the US Treasury term structure, things are making major moves...
We think not as increasing signs of corporate distress in China will weigh on emerging market growth.
- MOAR: BOJ Said to See Significant Room for More Bond Purchases (BBG)
- Meltdown Averted, Bernanke Struggled to Stoke Growth (Hilsenrath)
- New Mortgages to Get Pricier Next Year (WSJ)
- Republicans to Seek Concessions From Obama on Debt Limit (BBG)
- Hunting for U.S. arms technology, China enlists a legion of amateurs (Reuters)
- Jury Begins Deliberating in Case of SAC Portfolio Manager (WSJ)
- BP to Write Off $1 Billion on Failed Well (WSJ)
- Rajan Unexpectedly Keeps India Rates Unchanged to Support Growth (BBG)
- Thai protesters say they will rally to hound PM from office (Reuters)
- SEC Brings Fewer Enforcement Actions, Slows Early-Stage Probes (WSJ)
Of the 8 "most important ever" FOMC decisions in 2013, this one is undisputedly, and without doubt, the 8th. As Jim Reid summarizes, what everyone wonders is whether today’s decision by the FOMC will have a bearing on a few last-minute Xmas presents around global financial markets. No taper and markets probably breathe a sigh of relief and the feel-good factor might turn that handheld game machine into a full-blown PS4 by Xmas day. However a taper now might just take the edge off the festivities and leave a few presents on the shelves. Given that the S&P 500 has pretty much flat-lined since early-mid November in spite of better data one would have to say that some risk of tapering has been priced in but perhaps not all of it. Alternatively if they don’t taper one would expect markets to see a pretty decent relief rally over the rest of the year. So will it be Santa or Scrooge from the Fed tonight at 2pm EST?
According to a recent survey by the Pew Research Center, just 33% of Americans think their children will have a better life than they did. On the other hand, 62% believe their children will be worse off. They’re likely to be right. The typical American family has seen its real income (adjusted for inflation) fall for 5 consecutive years now, and it earns less in real terms that it did in 1989.
- Fed’s $4 Trillion Assets Draw Lawmaker Ire Amid Bubble Concern (BBG)
- Ex-Goldmanite Fab Tourre fined more than $1 million (WSJ)
- EU Banks Shrink Assets by $1.1 Trillion as Capital Ratios Rise (BBG)
- Japan to bolster military, boost Asia ties to counter China (Reuters)
- China condemns Abe for criticizing air defense zone (Reuters)
- Insider-Trading Case May Hinge on Phone Call (WSJ)
- Republicans Gird for Debt-Ceiling Fight (WSJ)
- Mario Draghi pushes bank union deal (FT)
- German Coalition Plans More Pension Money (WSJ)
- Oil Supply Surge Brings Calls to Ease U.S. Export Ban (BBG)
Today (like pretty much every other day), it will be all about the Fed and the start of its 2-day FOMC meeting, whose outcome will be influenced by today's 8:30 am CPI report as inflation (Exp. 0.1%) according to many is the only thing stopping the Fed from tapering in light of better than expected recent economic data as well as a clearer fiscal outlook. Or at least that's what the watercooler talk is. The hardliners now agree that since the Fed openly ignored the bond market liquidity considerations in September, that it will plough on through December with no announcement, and potentially continue into 2014 with zero chances of tapering especially now that we approach the end of the business cycle and the Fed should be adding accommodation not removing it. To that end, the consensus still is in favour of January or March for the first taper so markets are not fully set up for a move; conversely a dovish statement would probably result in yet another pre-Christmas, year end market surge, which in the lower market liquidity days of December is likely what the Fed is going for, instead of a volatile, zero liquidity sell off, despite Thursday's double POMO.