Monetary Policy

All you need to read.

All you need to read.

Demand in Asia continues to be strong.  China remains the world’s largest producer of mined gold. Premiums for gold bullion bars in Asia are rising again and are at their highest since October in Hong Kong and Singapore. Premiums are at $2.15/oz in Hong Kong and $1.65/oz in Singapore.  Bullion’s strength was also attributed to the euro’s 16 month low, with Fitch warning the ECB to purchase assets to try to stabilize the euro.   Spot gold was up 0.6 percent at $1,650.34 an ounce at 1009 GMT, having earlier touched a one-month high at $1,652.30. U.S. gold futures for February delivery were up $12.60 an ounce at $1,652.20.  A stronger rupee has boosted the purchasing power of gold bullion consumers in India.  This is in the run up for the Indian Wedding Season which resumes January 15th and continues until April, leaving a  few weeks break for a period that is considered bad luck for nuptials.  Chinese demand will weaken next week as many factories and businesses are set to close for the Lunar New Year’s celebrations.

No surprise.

Just like during the holiday "break" the market is euphoric, however, briefly, on the fact that Italy sold Bills , however many, in a period protected by the 3 year LTRO. And just like the last time this happened, about two weeks ago, this auction shows nothing about the demand for Italian paper longer than 3 years, which unfortunately Italy not only has a lot of, but is rolling even more of it. And none of this changes what World Bank President Zoellick told Welt yesterday, namely that the Europe’s interbank market is frozen and continent’s banks only lend to each other through ECB due to a lack of confidence within the financial industry, World Bank President Robert Zoellick is quoted as saying by German daily Die Welt. He continues: "If European banks don’t lend to each other, how can others in the U.S. or in China be expected to do it." Anyway, here courtesy of Bloomberg's Daybook are the key overnight events as we prepare for the ECB 7:45 announcement and subsequent conference.

As both anecdotal, local and hard evidence of China's slowing (and potential hard landing) arrive day after day, it is clear that China's two main pillars of strength (drivers of growth), construction and exports, are weakening. As Societe Generale's Cross Asset Research group points out, China is entering the danger zone and warns that given China's local government debt burden and large ongoing deficits, a large-scale stimulus plan similar to 2008 is very unlikely, especially given a belief that Beijing has lost some control of monetary policy to the shadow banking system. In a comprehensive presentation, the French bank identifies four critical themes which provide significant stress (and opportunity): China's economic rebalancing efforts, a rapidly aging population and healthcare costs, wage inflation and concomitant automation, and pollution and energy efficiency.  Their trade preferences bias to the benefits and costs of these themes being short infrastructure/mining names and long automation/energy efficiency names.

They detail their concerns about the Chinese economic outlook (weakening exports, housing bubble about to burst, local government's debt burden, and large shadow banking system), and show that China has no choice but to transition to a more consumption-driven economy leading to waning growth for infrastructure-related capital goods and greater demand for consumer-related manufacturing. Overall they see a hard-landing becoming more likely.

I’ve received a number of emails regarding the fact that stocks continue to rally despite Europe being on the verge of Collapse. Once again, investors are forgetting that stocks are the most clueless asset class on the planet.

Indeed, here are three reasons why this latest stock market rally isn’t to be trusted.

Heading into the North American open, European equity futures are trading lower, with comments from Fitch’s Riley, who suggested that the ECB must do more to prevent cataclysmic EURO collapse, causing the most recent bout of risk averse sentiment. As a result, major FX pairs are trading lower, with EUR/USD testing 1.2700, while GBP/USD fell through 1.5400 level. Looking elsewhere, apart from being buoyed by Fitch comments, German Bunds benefited from a well received German Bobl auction. Of note, European bond yield spreads are predominantly tighter for the time being, with analysts noting buying of Spanish and Italian paper by domestic and real money account names.  Finally, there is little in terms of macro-economic data and instead the attention will be on the publication of various EU related economic outlooks and the US Treasury is set to sell USD 21bln in 10-y notes.

Anyone anticipating more easing out of the ECB's Mario Draghi first thing tomorrow may be in for disappointment, according to Goldman (which certainly should know how its alumni think), which says that "We expect the ECB to leave policy rates unchanged at its monthly policy meeting on Thursday, and also expect no further announcement of non-standard measures at this point. Before taking further measures, the ECB will likely want to have more clarity on how the macro picture is evolving and how successful the measures taken in December have been in stabilising the situation. That said, the press conference may provide further indication of where the threshold for additional ECB action lies." It is unclear how the EURUsd will react to any such interim halt in currency devaluation, but it is likely that the record number of shorts in the currency will hardly be overjoyed.

The economic superstar, with unemployment at a 20-year low and exports at an all-time high, produces 34% of the Eurozone’s GDP—and it smacked into a wall.

Markets are moving positively across the board today following comments from Fitch, dampening speculation that France may be downgraded from its Triple A status. Fitch’s Parker commented that he does not expect to see France downgraded at all throughout 2012. However he added that there are continuing pressures for France from national banks and EFSF liabilities, Parker also reinforced German confidence stating that Germany’s Triple A rating is safe. Markets were also experiencing upwards pressure from strong French manufacturing data performing above expectations and successful Austrian auctions today, tightening the spread between France and Austria on 10-year bunds.

While Ireland's bond performance is often held up as evidence that living-standard-crushing austerity can indeed lead to positive developments, Citgroup's chief economist William Buiter suggests, in a speech in Dublin today, that they should begin negotiating a new rescue package as soon as possible. Buiter, via The Irish Times, points to the fact that Ireland currently pays around 6% for its 'rescue-money' which could be refinanced (theoretically) at around 3% via the EFSF. He said Ireland was not like Greece but it was in very bad fiscal shape because of its bank guarantee (isn't that what Italy and Portugal are doing with the new Ponzi-bonds?). He said that clearly something had to be done about the "continuing massive sovereign funding gap" that Ireland had and which still existed after three and a half years of "fierce" fiscal austerity. While Merkel's comments today on central bank support as illusory and spending EU money appropriately, it would seem that Ireland remains in a strong negotiating position. We await the term 'referendum' to confirm the discussions have begun - and given the timing (the day before IMF-EU official's fifth review) we would expect to hear it soon.

Poor, poor Federal Reserve.

A confirmation on this could come shortly. My thoughts if it should come to pass.

As many have been suspecting all along, the political game involving the ouster of now former SNB president Philipp Hildebrand has been nothing more than a game of "pin the tail on the scapegoat" for bad monetary policy by the SNB, read the EURCHF 1.20 peg. In other words, it is quite likely that alongside the burgeoning SNB balance sheet, the bank had also accumulated quite a few losses, which the Swiss public will not be too happy with, and a change at the top was required. So what happens next: will the SNB relent and allow the peg to expire as the scramble for a (now much more diluted) CHF resumes ahead of the European D-Day in March, or will the peg be forced to be pushed even higher, at the expense of even greater balance sheet losses? Here is what SocGen thinks will be the next steps.