Everything was going so well in the overnight session, following some mixed Japanese data (stronger than expected production, inline inflation, weaker household spending) which kept the USDJPY 101 tractor beam engaged, and the market stable, until just before 2 am Eastern, when Tokyo professor Takatoshi Ito, formerly a deputy at the finance ministry to the BOJ's Kuroda, said overvaluation of the yen versus the dollar has been corrected, which led to a very unpleasant moment of gravity for the currency pair which somehow drives risk around the world based on what several millions Japanese housewives do in unison. The result was a slide to just 30 pips away from the key 100 support level, below which all hell breaks loose, Abenomics starts being unwound, hedge funds - short the yen and long the Nikkei - have no choice but to unwind once profitable positions, the wealth effect craters, and streams are generally crossed.
With Abe picking his new dovish playmate, and Draghi doing his best to jawbone the EUR down without actually saying anything, it is becoming very clear that no matter what level of bullshit histrionics is used by the politicians and bankers in public, the currency wars have begun to gather pace. Japan's more open aggressive policy intervention is the game-changer (and increasingly fascinating how they will talk around it at the upcoming G-20), as if a weaker JPY is an important pillar of the strategy to make this export-oriented economy more competitive again, it brings into the picture something that was missing from earlier interactions among central banks of the advanced economies – competitive depreciation. The last time the world saw a fully fledged currency war was in the early 1930s. Morgan Stanley's Joachim Fels looks at what it was like and what lessons can be drawn for the sequence of events - there are definite winners and losers and a clear first-mover advantage.
The first two economic indicators of 2013 are in and are a beat and a miss. The beat was in the December ISM Manufacturing printed at 50.7, higher than the 50.5 expected, and up from November's 49.5. This is happening even as 7 of the 18 manufacturing industries in December report growth while 9 reported contraction: go figure. Looking at the component data, New Orders remained flat at 50.3. The index was driven higher by Backlog of Orders +7.5, Exports +4.5, Supplier Deliveries +4.4, Employment +4.3, and Prices + 3.0. The declines were in Inventories and Production, down -2.0 and -1.1 respectively. The miss was in November Construction Spending, which printed at -0.3%, down from a downward revised October 0.7% (from 1.4%), and well below expectations of a 0.6% print: this was the biggest miss in 10 months, and the first negative print in 10 months, which however will likely be blamed on Sandy.
- Union solidarity rubs up against slow economy in LA port strike (Reuters)
- Geithner predicts Republicans will allow higher tax rates (Reuters). And "no risk" of a US downgrade, "no risk"
- Geithner takes hard line on fiscal cliff (FT)
- Narrowing LDP lead points to Japan post-election confusion (Reuters) - not to mention, USDJPY plunges if LDP loses
- Vietnam Says China Must Avoid Trade Weapon in Maritime Spat (Bloomberg)... and real one, one hopes
- Greece unveils bond buyback plan (FT)
- ECB Can’t Deliver Spain Spread Rajoy Wants, Wellink Says (Bloomberg)
- UK’s euro trade supremacy under attack (FT)
- Merkel Signals Debt Write-Off Possible as Buyback Begins (Bloomberg)
- ECB's Noyer Says Bond-Buying Plan 'Is Bearing Fruit' (WSJ) - as long as just plan, and not execution.
When it comes to firmly established, currency-for-commodity, self reinforcing systems in the past century of human history, nothing comes close to the petrodollar: it is safe to say that few things have shaped the face of the modern world and defined the reserve currency as much as the $2.3 trillion/year energy exports denominated exclusively in US dollars (although recent confirmations of previously inconceivable exclusions such as Turkey's oil-for-gold trade with Iran are increasingly putting the petrodollar status quo under the microscope). But that is the past, and with rapid changes in modern technology and extraction efficiency, leading to such offshoots are renewable and shale, the days of the petrodollar "as defined" may be over. So what new trade regime may be the dominant one for the next several decades? According to some, for now mostly overheard whispering in the hallways, the primary commodity imbalance that will shape the face of global trade in the coming years is not that of energy, but that of food, driven by constantly rising food prices due to a fragmented supply-side unable to catch up with increasing demand, one in which China will play a dominant role but not due to its commodity extraction and/or processing supremacy, but the contrary: due to its soaring deficit for agricultural products, and in which such legacy trade deficit culprits as the US will suddenly enjoy a huge advantage in both trade and geopolitical terms. Coming soon: the agri-dollar.
When it comes to government bailout case studies, the past four years have plenty. One among them is the financial company jovially called Ally - a name which well-paid nomenclature consultants were convinced would inspire confidence and trust. And to an extent they were right - after all we are talking about a firm which several years ago had a far more unpleasant name: GMAC, short for General Motors Acceptance Corporation. It was GMAC which, as one of the various entities on the receiving end of involuntary taxpayer generosity in 2008/2009, received a $17.2 billion bailout. The reason for GMAC's Ally's collapse is that the firm was loaded up to the gills on various subprime and other NINJA auto-financing loans used to purchase cars made by that other spectacular collapse: General Motors, maker of such external combustion vehicles as the Chevy Volt. Over the past several months the Ally CEO, Michael Carpenter, decided to little by little start paying taxpayers back, having sold a Canadian unit to RBC in October for $4.1 billion, and its Mexican Insurance business to Ace Ltd for $865 million. Moments ago the firm just announced it would be selling its international auto-finance businesses, including its operations in Europe, LatAm and a 40% stake in its Chinese JV (a business it previously said it would not seek to divest), for a total of $4.2 billion. The buyer? Another previously bailed out company, and one which still counts the government as its biggest shareholder: General Motors. And so the vendor financing circle is now complete, with GM finally reuniting with its old captive finance units, or at least the international part of them, which were fully owned until GM sold 51% of it to Cerberus in 2006, after which everything went to hell.
Irony of ironies. While the world awaits the Spanish request for 'help' from its friends in Europe (which the market 'hopes' will escalate to EUR740bn very rapidly), it seems the King of Spain and his trusty Prime Minister have another cunning 'inverse-conquistador' plan. AP reports that "Spain receives Latin American investment with open arms," as Rajoy asks the former LatAm colonies to help. Falling back on the assured quid pro quo, Rajoy said Spain had invested heavily in Latin America during its crisis 10 years ago... so fair's fair right? Now that the roles were reversed, he called upon those nations to increase their participation in his struggling empire's economy. The perfect irony is complete as the Iberoamerican Summit at which he was begging speaking was held in Cadiz - the country's main gateway for importing Aztec and Inca treasure!
While it is impossible to predict where the S&P will be in 10 years (or even 1), one can safely make some assumptions about what the world will look like in a decade (assuming of course it hasn't blown up by then). It will be hungry, it will be thirsty, it will demand resources, and it will be crowded (and it will certainly have lots and lots of wheelbarrows carrying pieces of paper to and fro the local bakery). Implicitly then, countries which control the production and export of various key natural resources and commodities channels will become increasingly more strategic and important. However, for some economies, such as the Middle East, whose entire export-based welfare is reliant on a core set of commodities, this export-benefit may be a doubled-edged sword, should it lead to militant antagonism by one time friends and outright enemies, and/or complacency leading to lack of revenue stream diversity. In order to determine who the key resource players in the future will be, we present the below commodity trade matrix which answers two questions: how important is a commodity to a country, and how important is a country to a commodity. As GS notes, those on the riskier side of this equation are economies that are heavily reliant on oil, such as the Middle East or even Russia (which albeit scores better on other hard commodities). On the other hand, food exporters enjoy relatively better diversity in their trade portfolios. We highlight the LatAm economies here, while Canada and the US also look healthy. Will food (and water) be the oil of the future, and will the next resource war be not over black, or even yellow, gold, but, pardon the pun, edible gold?
The past week was dominated by the Eurogroup statement over the weekend that Spain will seek financial support for its banks. According to the statement, Spain intends to make a formal request soon, with financial assistance expected to be around EUR100 bn and to come from the EFSF or ESM. Aid will be channeled through the FROB, and will increase the debt burden of the Spanish sovereign. There will be no macro or fiscal conditionality as in the bailouts of Greece, Ireland and Portugal, but only on bank sector restructuring. That said, there will be monitoring of the deficit and structural reforms as part of this bailout, though no conditionality, and the IMF is also invited to monitor progress under the program. Separately, the week also saw lots of commentary out of the Fed, including from Chairman Bernanke and Vice Chair Yellen. Looking to the week ahead, the key question for us is where to harvest excessive risk premia, bearing in mind that the Greek elections are around the corner.. In terms of policy talk and data, for the former Fed chatter ends on Tuesday when the blackout period begins ahead of the FOMC on June 19/20. For the latter, US retail sales and industrial production will be important to watch as we head into the FOMC next week.
With Europe now seemingly in exile from even the bravest knife-catcher value-manager, and, despite media protestation, US equities facing weak macro data and a fiscal cliff of epic proportions; it is no surprise that everyone and their mom thinks emerging markets are the place to be. However, as UBS notes today, not all EM balance sheets (whether government, corporate, or private) are the same and they break down the low, medium, and high risk balance sheets across Asia, LatAm, and EMEA. As is evident in Europe, high debt levels are detrimental to economic growth and equity returns. Solid government accounts generally reward policymakers in such markets with valuable policy flexibility, while healthy consumer balance sheets allow credit growth to be a strong domestic growth driver. In a slow and uncertain global growth environment, pillars to support growth are crucial and are market differentiators - especially if global contagion spreads as we suspect
- Facebook's selling shareholders can't wait to get out of company, increase offering by 25% (Bloomberg)
- Boehner Draws Line in Sand on Debt (WSJ)
- Romney Attacks Obama Over Recovery Citing U.S. Debt Load (Bloomberg)
- BHP chairman says commodity markets to cool further (Reuters)
- Merkel’s First Hollande Meeting Yields Growth Signal for Greece (Bloomberg)
- Greek President Told Banks Anxious as Deposits Pulled (Bloomberg)
- EU to push for binding investor pay votes (FT)
- Martin Wolf: Era of a diminished superpower (FT)
- China’s Hong Kong Home-Buying Influx Wanes, Midland Says (Bloomberg)
- U.N. and Iran agree to keep talking on nuclear (Reuters)
- US nears deal to reopen Afghan supply route (FT)
Curious how the world's most important trading desk saw the action today? Here it is.
Following a blistering two days of upside activity in Europe and a manic depressive turn in the US in the past 48 hours, the rally is now be running on fumes, and may be in danger of flopping once again, especially in Spain where the IBEX is tumbling by over 3% to a fresh 3 year low. Still, the Spanish 10 year has managed to stay under 6% and is in fact tighter on the day in the aftermath of the repeatedly irrelevant Bill auctions from yesterday, when the only thing that matters is tomorrow's 10 Year auction. Probably even more important is that the BOE now appears to have also checked to Bernanke and no more QE out of the BOE is imminent. As BofA summarizes, "The BoE voted 8-1 to leave QE on hold at their April meeting: a more hawkish outturn than market expectations of an unchanged 7-2 vote from March. Adam Posen - the most dovish member of the BoE over the last few quarters - took off his vote for £25bn QE, while David Miles judged that his vote for £25bn more QE was finely balanced (less dovish than his views in March)." Even the BOE no longer know what Schrodinger "reality" is real: "The BoE judged that developments over the month had been relatively mixed, with a lower near-term growth outlook, but a higher near-term inflation outlook. However, they thought that the official data suggesting very weak construction output and soft manufacturing output of late were “perplexing”, and they were not “minded to place much weight on them”." Naturally, this explains why Goldman's Carney may be next in line to head the BOE - after all to Goldman there is no such thing as a blunt "firehose" to deal with any "perplexing" issue. Finally, the housing market schizophrenia in the US continues to rule: MBA mortgage applications rose by 6.9% entirely on the back of one of the only positive refinancing prints in the past 3 months, which rose by 13.5% after a 3.1% drop last week. As for purchases - they slammed lower by 11.2%, the second week in a row. Hardly the basis for a solid "recovery."
Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.
With the IMF cutting its global growth forecasts and signs of slowing evident in the dramatic contraction in World Trade Volume in the last few months, it is perhaps no surprise that the central banks of the world have embarked upon what Goldman Sachs calls an 'Unprecedented Alignment of Monetary Policy Across Countries'. Our earlier discussion of the European event risk vs global growth expectations dilemma along with last night's comments on the impact of tightening lending standards around the world also confirms that this policy globalization is still going strong and is likely to continue as gaming out the situation (as Goldman has done) left optimal CB strategy as one-in-all-in with no benefit to any from migrating away from the equilibrium of 'we all print together'. Perhaps gold (and silver's) move today (and for the last few months) reflects this sad reality that all your fiat money are belong to us, as nominal prices rise (but underperform PMs) in equities (and risky sovereigns and financials).