Reports indicating that Americans have invested more in equity funds here in 2013 than they did all last year have given rise to talk of the "Great Rotation". The idea is that Americans are selling fixed income investments bought during the financial crisis and now buying shares. We are less sanguine. There is a third asset class that needs to be integrated into the analysis: cash. After surveying the data and various reports, it looks to us that the flows into equities is not coming out of fixed income but rather money market funds and deposits.
Platinum and palladium surged Tuesday on renewed concerns that supplies of the platinum group metals will shrink. Zimbabwe's government has given platinum producers two years to begin refining the precious metals in Zimbabwe. This means that production of platinum will drop, because mining companies are now expected to build refineries – something which they may not do, due to the real risk of confiscation and nationalisation of assets. Both metals climbed more than 1% yesterday with platinum for April delivery rising $21.10 to settle at $1,717.2/oz. Palladium for March delivery rose $12.80 to $771.40/oz. "The worry is that it's going to restrict production," said James Steel, chief commodities analyst at HSBC in New York. "That was the prime motivator for the price movement today."
Just like yesterday, it was some anonymous Yen vigilante smacking down the USDJPY saying the initial G-7 statement was misinterpreted, so today it is the ECB's turn, which just smacked down the EUR royally, for the second time in a week following last week's Mario Draghi comments, when it said that:
- THE ECB IS WORRIED EURO STRENGTH WILL HURT RECOVERY IN CRISIS STATES
And just like yesterday the refutation came via shady pathways, i.e., an anonymous leak in D.C., so today, apparently the information comes from that venerable ECB conduit: Bild. What can one say - all is fair in central bank love and currency war.
Following yesterday's G-7 announcement which sent the USDJPY soaring, and its embarrassing "misinterpretation" clarification which undid the entire spike, by an anonymous source in the US who said the statement was in fact meant to state that the Yen was dropping too fast and was to discourage "currency wars", it was only a matter of time before another G-7 country stepped into the fray to provide a mis-misinterpretation of the original G-7 announcement. That someone was the BoE's outgoing head Mervyn King who at 5:30 am eastern delivered his inflation reporting which he said that "it’s very important to allow exchange rates to move," adding that "when countries take measures to use monetary stimulus to support growth in their economy, then there will be exchange rate consequences, and they should be allowed to flow through." Finally, King added that the BOE will look through CPI and relentless UK inflation to support the recovery, implicitly even if it means incurring more inflation.
The price action in the foreign exchange market is choppy as short-term participants seem nervous after being whipsawed yesterday. Sterling fell nearly a cent to new multi-month lows following the BOE's inflation report that confirmed official expectations that price pressures will remain above target and King welcomed the recent depreciation of the point. Also of note the Australian dollar, which staged a sharp recovery off the year's lows yesterday and has seen follow through buying today, helped perhaps by gains in a consumer confidence measure.
The was nothing in the rogue G7 sourced comment yesterday that that Japanese Finance Minister Aso did not say prior to the G7 statement and before the weekend. The pace of the yen's depreciation was too fast. The market reacted to it at the time.
As debate about currency wars heats up, there's been little talk about which currencies will prove safe havens. We think the Singapore dollar tops the list.
First domestic fiscal policy, and now global monetary policy has become an utter circus:
- G7 OFFICIAL SAYS G7 STATEMENT WAS MISINTERPRETED, STATEMENT SIGNALED CONCERN ABOUT EXCESS MOVES IN JAPANESE YEN
- G-7 OFFICIAL: G-7 CONCERNED ABOUT UNILATERAL GUIDANCE ON YEN
- G7 OFFICIAL SAYS G7 IS CONCERNED ABOUT UNILATERAL GUIDANCE ON THE YEN, JAPAN WILL BE IN SPOTLIGHT AT G20 MEETING IN MOSCOW
We already mocked the G-7's original stupidity... and now they say it was not what they meant. Because what the G-7 clarification really means it that while the G-7 will supposedly "allow the market to set rates", the G-7 was not happy with how the market set rates following the G-7 statement. And... #Ref!
Confused what the earlier released statement by the G-7 means? Fear not, because here comes Goldman with a post-mortem. And just in case anyone puts too much credibility into a few sentences by the world's developed nations (whose viability depends in how quickly each can devalue relative to everyone else) in which they say nothing about what every central bank in the world is actually doing, here is a history of four years of G-7 statements full of "affirmations" and support for an open market exchange policy yet resulting in the current round of global FX war, confirming just how 'effective' the group has been.
- The Man Who Killed Osama bin Laden... Is Screwed (Esquire)
- G7 fires currency warning shot, Japan sanguine (Reuters)
- North Korea Confirms It Conducted 3rd Nuclear Test (NYT)
- Italian Police Arrest Finmeccanica CEO (WSJ)
- Legacy, political calendar frame Obama's State of the Union address (Reuters)
- China joins U.S., Japan, EU in condemning North Korea nuclear test (Reuters)
- Wall Street Fading as Emerging-Market Banks Gain Share (BBG)
- Berlin Conference 2.0: Drugmakers eye Africa's middle classes as next growth market (Reuters)
- Barclays to Cut 3,700 Jobs After Full-Year Loss (BBG)
- US Treasury comment triggers fall in yen (FT)
- ECB Ready to Offset Banks’ Accelerated LTRO Payback (BBG)
- Fed's Yellen Supports Stimulus to Spur Jobs (WSJ)
- Libor Scrutiny Turns to Middlemen (WSJ)
- Samsung Girds for Life After Apple in Disruption Devotion (BBG)
With the world so obviously gripped in currency war even the hotdog guy has moved away from saying how technically undervalued AAPL stock is to opining on who is leading the global race to debase, it was only a matter of time before the G-7 confirmed the only strategy left is FX devaluation by denying it. Sure enough, a preliminary statement from the G-7 came earlier, in which the leading "developed" nations said, well, absolutely nothing:
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.
This follows a statement by the US Treasury's Lael Branaird yesterday in which she said that she is supportive of the effort in Japan to end deflation and “reinvigorate growth”. Lastly, the SNB's Jordan also confirmed that the Swiss National Bank will continue to do everything to crush its own currency, and will the 1.20 EURCHF floor, stating that Japan is merely doing the right thing to stimulate growth (i.e., doing what "we" are doing). In other words, let the FX wars continue and may the biggest balance sheet win, all the while everyone pretends nothing is happening.
The G7 issued a statement that essentially endorses stimulative policies in Japan and elsewhere, but reaffirmed its commitment to market determined exchange rates. This is a green light to buy dollars against the yen and to buy euros.
This morning, in an understated way (of course) ahead of the G-20 group-hug at the end the week, Economic and fiscal policy minister Akira Amari stated "It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31)." This level for the Nikkei implies a USDJPY level of 104.75 (or a further 12% devaluations for here). However, there is a strong correlation between the USD-JPY exchange rate and the S&P 500-to-Nikkei 225 relationship. Based on that 104.75 target (and the toungue-in-cheek belief that this will help Japan's competitiveness - which means someone else has to suffer), the ratio of the SPX to NKY would be 8.7x. So while the Nikkei would see a 17% surge (in nominal value), the S&P 500 would lose 3-4% from here.
With Abe talking his down explicitly, Weidmann talking his up explicitly, Draghi's subtle talk-down, Hollande's outright plea, and the developing world in full 'war' mode, Citi's Steven Englander sets out some brief 'rules of engagement' for the G-20 nations as competitive devaluation escalates.
JPY could fall a lot further because weak JPY has been the most effective tool to create equity market wealth and spur Japanese demand. Moreover, Citi's Steven Englander notes, Japanese policymakers do not have many other options. If JPY is ticket for the Nikkei to regains ground lost versus other equity markets, USDJPY would have to go into three digits. By implication JPY would have to weaken a lot more. The loss of market share in part reflects long-term structural issues but Japanese governments (like others) are more mindful of incurring the anger of domestic political constituencies by making tough structural reforms than of G20 counterparts by weakening the exchange rate. From a political perspective, the Nikkei-JPY relationship is too much a good thing for Japanese policymakers to give up - but divergences are abundant at the short- and long-end of the JGB curve - and too much of a good thing in this case is a disaster.
Ron Paul spoke with Bloomberg television and said that we are in a currency war and we have been for decades. He noted that governments have always competed against each other’s currencies even under Bretton Woods. It has always been a form or protectionism and will make people want to export more. Dr. Paul said don’t blame countries like China and Japan just look at the debt the U.S. is buying. There will always be currency wars. The Bank of Japan claims it has to defend itself against deflation and decades of slow growth. Ron Paul noted that the Bank of Japan’s yen devaluations will eventually lead to further price inflations that are to come. Investors and citizens will eventually reject the yen and switch to other currencies like dollars or Swiss francs. Then eventually people will move to hard assets altogether as they are losing confidence in paper assets. Dr. Paul was asked, “Do you think protectionism will lead to a crash in the international monetary system? He replied, “Nothing good can come of it. Even short run trade benefits leads to a weaker economy and higher prices. It doesn't solve the problem they won't face the truth. That is that all governments spend too much money, there is too much debt and they get away with it by taxing people”.