Volatility is the name of the day

A good start for Sterling quickly turned sour as fear once again gripped the markets by the throat. 

A lack of action points on the Greece situation certainly did not help matters, however other factors also conspired to turn the markets away from risk. 

A big factor was the decision from the Chinese central bank (PBOC) that it was once again raising its reserve requirements by another 50 basis points. The decision to do this is to cool the rapid pace of credit growth in China which is unsustainable.

The monetary tightening will hurt global growth sentiment as China is the key driver for global recovery; in particular Australia will suffer. 

The news led to a sell off in the AUD, GBP and the EUR; the negative vibes were not helped by weak Eurozone data this morning with GDP coming in at a lame 0.1% against the expectation of 0.4% and a decline of -1.7% for Industrial Production.

Given the mood in the markets we can expect to see more selling pressure on EUR/USD and GBP/USD…later today we have US retail sales- a +0.4% is expected and a good number is need to help lift the cheer in the markets. 

EUR/USD at 1.35 is a key level to watch out for and if broke should enforce further downside momentum. Sterling has benefited on the weakness in the euro pushing beyond 1.15 again.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

China and Eurozone centres of markets attention

China are scheduled to release their 4th Quarter GDP figure with market consensus looking for reported growth of 10.5%. 

The odds however are for an even stronger outcome and markets could react very positively towards the regions currencies and commodity currencies against those of the industrialised West. 

In The Land of the Rising Sun, this week should see further developments in the winding up of Japan Airlines. Reliable rumour has it that the company’s commercial activities, including their oil and fuel contract will be 100% guaranteed but that their forex hedges will be required to be unwound. This could mean the company needing to sell US Dollars against the Yen.

As expected last week, there was no change to the ECB’s policy interest rate and Trichet’s post-announcement was largely uneventful. 

Although he managed to achieve a balanced tone to his testimony, it was apparent that he was not overly concerned on imminent inflationary pressures within the zone. 

He acknowledged that current fiscal problems are placing a considerable burden on monetary policy but that individual States’ current difficulties would not cause the ECB to require a change in the collateral framework of any country.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

US dollar weakens on news

A combination of factors has caused a weaker US Dollar this morning. 

Firstly the market is still reacting to the disappointing US non-farm payroll data on Friday; the expectation was for a positive number at +10,000, however the actual came in at -85,000 for the month of December. 

This data after volatile markets led to a weaker US Dollar. This morning the Pound and the euro have gained further against the greenback with sterling heading towards 1.62 and the euro pushing back over 1.45. 

The weekend release of December Chinese trade data which came in above expectations is helping lift risk sentiment in the markets. Chinese exports rose 17.7% in December helping to reinforce confidence in the global recovery and lifting FX risk flows. 

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Chinese shares fall on fears of false credit rally

Chinese shares fell to their lowest level in two months amid growing fears that this year's rally has been based on unsustainable levels of easy credit.

The benchmark Shanghai Composite Index fell 5.8pc to close at 2,870.63, its lowest level since June 18, with commodity and property companies hardest hit.

China's markets have shown increasing volatility this month as investors chase rumours that China's banks have been ordered to cool the surge of lending seen in the first half of the year.

Some analysts have estimated that up to 20pc of the $1 trillion (£615bn) in bank lending in the first half of 2009 has been funnelled into property and the stock market, creating a fresh round of asset price bubbles.

Reports have also suggested that rises in metal and other commodity prices this year have been driven by Chinese inventory stock-piling rather than actual demand, further dampening the appetite of investors.

Confidence had already been hit after a report released on Friday showed US consumer confidence was weaker than expected in August, confirming that China's exporters will not see recovery in the short term.

And foreign direct investment in China fell for a 10th month in succession in July as international companies stalled expansion plans amid the global financial crisis, according to figures released by the Commerce Ministry.

Although the market is still showing a 58pc gain this year – down from a high of 90pc on August 4 – the market has see-sawed since July on rumours and media reports that credit policy was tightening.

Despite some record land sales in China in the first half of this year, fuelled in part by state-owned enterprises seeking a home for easy credit, new property sales fell by 20pc to 30pc in major cities, indicating a worrying imbalance between supply and demand.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Credit tightening threatens China's giant Ponzi scheme

China's loan growth plunged in July while exports fell 23pc from a year ago after grinding lower for nine months as consumers in the West tighten their belts further.

The data raise fresh doubts about the strength of global trade and whether the world can rely on China's growth miracle to power recovery.

Separately, the Baltic Dry Index – measuring freight rates for bulk goods – has tipped over, dropping 25pc since late July. The shipping figures buttress reports that China has stopped building up stocks of metals and other commodities after a spate of frantic buying over the early summer.

China's central bank said loan growth fell to $52bn (£31bn) from $248bn a month earlier, although it is too early to tell whether Beijing has begun to rein in credit after the explosion of bank loans in the first half of the year.

The loan figures are being watched closely by analysts and traders in the City. Excess liquidity in China has been a key driver of global markets since the rally began in March.

Beijing is walking a tightrope by trying to offset the collapse in exports – almost 40pc of GDP – with an investment blitz in roads, railways, and industry through state-owned companies.

The real economy cannot absorb the money, so it is leaking into asset speculation. The central bank estimates that 20pc of fresh credit has ended up in equity markets. The Shanghai index is up 80pc this year, though profits have fallen by almost a third. The pattern echoes the final phase of Japan's Nikkei bubble in 1989.

China is a big fat tail risk for world markets. Shanghai equities have reached the same extreme as in late 2007. The country will have to cut credit growth, and when this happens, Shanghai equities and commodities will suffer. That is what could bring this global rally to a halt.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

The perils of bangers for cash- Chinese style

Say what you like about the Chinese, they certainly know how to do economic stimulus.

The 3.9 per rise in British private car sales in June announced this week was hailed as a great success. It was clear evidence that the labour Government’s “bangers for cash” car scrappage scheme and other efforts to revive the economy were starting to work.

Big deal. In China, June car sales were up whopping 48 per cent. Now that’s what I call a stimulus.

It just shows what you can do when you own the banks. Yes, I know we own our banks, too, but that’s different because labour are too incompetent- and broke to do anything that really works.

When China decided it needed a stimulus package, it chose to create one by ramping up government spending and opening the lending spigots.

Bank chiefs were told to flood the economy with credit and competed with each other to get the most money out the door. The result was a tidal wave of cash, with bank lending in June twice the level in May.

The authorities are now worried about inflation, a property bubble and future bad debts. But it has kept the economy growing at a decent lick despite the slump in exports. This is good news for many foreign companies, particularly carmakers. Jaguar Land Rover will this year sell many more than the 12,456 vehicles it shifted in China in 2008.

But China’s growth may actually be a net negative for Britain in the short term because of its impact on commodity prices. As Barclays Capital pointed out in a recent report, the effect of Chinese growth on the price of oil and metals seems disproportionate to its share of the world economy.

For the British economy, the near-doubling of the oil price in the past six months is a high price to pay for selling a few more Jags.

Although the oil price has fallen back by more than $10 a barrel in the past two weeks, economists warn that at above $60 it is one more reason to be nervous that flickers of life in the British economy could be snuffed out.

Recent signs have been discouraging, notably the 0.5 per cent fall in factory output in May published this week.

Against this background, yesterday’s decision by the Bank of England’s Monetary Policy Committee not to extend its quantitative easing programme was a surprise.

The purchases of bonds using newly created money have had limited impact so far.

The Chinese are clearly storing up serious potential problems in the future. But the British economy is still in such a fragile state that there remains more risk in doing too little than too much.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Wise Money view- risk aversion reigns again

For currency traders, the G8 was notable solely for what was not said and for who was not there.

Rhetoric suggested the summit would be the “high noon” for the dollar as a reserve currency, as China pushed for a more diversified anchor for foreign exchange.

But currencies are not even mentioned in the draft communiqué. China’s premier was not present for the discussions, thanks to trouble at home. The showdown on the dollar’s future did not happen.

Rather than dancing to the tune of the world’s leaders, forex markets suffered a new wave of aversion to risk.

That wave started in the commodities market, where prices dipped sharply. The CRB index, a broad index of commodity prices, dropped to its lowest level since early May, pushing below its 200-day moving average – a strong signal that its rebound of the past few months was over.

The CRB is down more than 12 per cent since it topped out last month and is 51 per cent below its high set last year. This implies that deflation – falling prices and stalled economic activity – is a much greater risk than the resurgent inflation that was being talked about only weeks ago.

Gold, an inflation hedge, fell 2.2 per cent and is now down more than 10 per cent since it hit $1,000 per ounce in February.

In currencies, the Japanese yen, which gains when people are anxious, made dramatic and sudden gains against the dollar and the euro. This could increase pressure to intervene to keep the currency cheap.

These developments are alarming. The pendulum in the debate between inflationists and deflationists has swung back to the deflationists – at a point that inflation still looks the lesser evil.

But at least risk aversion will help the dollar avoid further falls and delay the moment when it is replaced as a reserve currency.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

G20 unity spells end of Brown’s New Deal

Gordon ditherer Brown’s plans for a $2 trillion (£1.4 trillion) “New Deal” to revive the global economy have been quietly dropped to preserve the facade of unity as world leaders gather in London for the G20 summit.

The US and Britain have both backed away from spending proposals worth 2pc of global GDP, accepting that each country must find its own way. White House officials confess that there is no chance of a deal that entails further public debt.

“Nobody is coming to London to commit to do more right now. No single number is sacrosanct,” said Michael Froman, the US deputy national security advisor.

British Foreign Secretary David Miliband disowned a leaked draft retaining talk of a $2 trillion boost, insisting that it was an old document that merely lists spending packages already under way across the world. “This G20 summit was never about writing national budgets. Let us not hear that somehow the Anglo-Saxons are for fiscal policy and the other Europeans are somehow for regulation – you have got to do both,” he said.

The pledge to uphold free trade has already been cast into doubt by China, which announced a raft of export tax rebates on Friday to shore up exports.

The protectionist move is likely to irk Washington. There is grumbling on Capitol Hill that the US stimulus is leaking out to surplus states in east Asia and northern Europe which seem to be counting on American demand to rescue the world again.

But the two sides are so far apart in their diagnosis of this crisis that no real agreement seems possible. German Chancellor Angela Merkel said over the weekend that the “German economy is very reliant on exports, and this is not something you can change in two years. It is not something we even want to change”.

Czech premier Mirek Topolanek, holder of the EU presidency, attacked the US fiscal plan last week as the “road to Hell”. Europe’s leaders insist the region is already doing enough since generous unemployment payments – starting at 80pc of earnings in Germany – act as an automatic stabiliser.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Thanksgiving Day Holiday in the US

US bank holiday will leave the markets desperately thin this afternoon with complete closure of their fixed interest and equity markets plus there being no Dollar cash settlement today.

Yesterday saw a bit of an up and down day on the stock markets with the US indices ending higher at the close on bargain hunting for technology and energy stocks. this has filtered through to a better opening in European bourses and will hopefully hold for the rest of the week.

A bit of positive Corporate news would help but at present, that doesn't seem to be on the cards. The sad demise of Woolworths and MFI along with the less than buoyant economic data lend themselves to this being another of those false dawns.

Yesterday's economic data from Europe, UK and the US all failed to inspire and although the numbers came in as expected, they did sound a bit like Frankie Howard's soothsayer with her €˜Woe, Woe and Thrice Woe'.

GDP figures affirmed, as if we needed it, that the UK and US are deep in recession and there is concern that the measures that have been taken by Governments in all areas to combat the downturn might take an overly long time to trickle through. Pressure will be on to make sure that the initiatives are effective.

The weak US data had an adverse effect on the return on US Treasury Bills with yields hitting 50-year lows. The yield on the 10-year note dropped to its lowest ever level, down 0.13% to 2.98%.

As reported yesterday, China cut rates savagely, the largest reduction in 11-years, in reaction to the rapidly falling growth rate in the country. Even though the economy is still growing at about 7.5% per annum, this level of growth is the minimum required increase for the country to effectively ‘stand still'.

The Chinese leaders are obviously very concerned. Metal prices jumped on the back of the cut.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Oil hits new highs as dollar sinks

Oil carried on its upward trend yesterday almost hitting $120 a barrel supported by supply concerns largely driven by rising demand from China.

In addition, sentiment may have shifted and ignited a rethink towards the backing for biofuels in the US and Europe as rising food prises may mean this solution to the oil supply issue may no longer be commercially viable.

Rice jumped to a record high as World Bank officials stated they were concerned with the mounting pressure in Thailand to restrict shipments. Thailand is the world's largest exporter of rice and these comments help add fuel to the worsening global food crisis.

The dollar sank to lifetime lows against the Euro breaking through the significant $1.60 level as hawkish comments from the ECB supported the eurozone currency.

According to traders yesterday, strong demand for the Euro came from Asian sovereign institutions. Also ECB council member Yves Mersch made comments that the central bank may well have to revise up its inflation figure on the back of the recent surge in oil and food prices which pushed inflation to a 16 year high of 3.6% in March for the eurozone.

This has caused certain economists to rethink their rate cut stance with a view there may actually be rate increases ahead.

The Euro lost ground against the pound as Tim Beasley a member of the Bank Of England's (BOE) MPC commented on the recent action to ease liquidity problems in the UK financial system would allow it to focus on controlling inflation.

This also saw the pound rise 0.8% to 1.9955 against the greenback and gained 0.6% to Y205.66 against the Yen.

Elsewhere Bank of Canada (BOC) cut interest rates by 50 basis points to 3 per cent with the Canadian dollar falling 0.5% to C$1.0070.

Although the cut was expected the BOC made changes to their statement stating the expected US slowdown was likely to affect Canadian exports and prompt further rate cuts.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Sterling hits $2.10 as dollar is dumped

Sterling has pushed through the $2.10 barrier for the first time in 26 years after the Chinese government indicated it is prepared to diversify some of its huge foreign exchange reserves.

The Pound stormed to as high as $2.1021 in trading in London, a level not seen since the early Thatcher era, and many currency experts now predict it go higher despite signs that the UK economy is slowing.

The greenback's renewed weakness was sparked by comments from Cheng Siwei, vice chairman of China's National People's Congress, who suggested China will diversify some of its $1.33 trillion (£660bn) of foreign-exchange reserves.

Mr Siwei told a conference in Beijing: "We will favour stronger currencies over weaker ones, and will readjust accordingly."

Besides sterling, the dollar was down against 14 of the world's 16 biggest currencies this morning, hitting the lowest since the 1950s versus the Canadian dollar, reaching a new record against the euro and its weakest in more than 20 years against the Australian dollar.

Sterling's move higher comes a day before Bank of England Governor Mervyn King and the rest of the Monetary Policy Committee are due to give their latest decision on interest rates.

While the majority of economists expect interest rates to be left at 5.75pc, the surge in the currency is likely to put parts of the country's manufacturing industry under pressure.

The flight from the dollar is helping to fuel oil's assault on the $100-a-barrel mark and investors' appetite for gold, which is denominated in the US currency. The dollar was also hit yesterday by a report that the Fed's loan officer survey reported evidence of an incipient credit crunch across broad reaches of the US economy, with banks tightening lending standards on prime mortgages.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Dollar falls amongst further tension with China

The Dollar fell sharply against the Pound and the euro yesterday amongst further tensions between the US and China. The Dollar fell around 0.6 per cent against the euro to $1.3439 and by roughly the same margin against the pound to $1.9740.

The intensified tension followed China’s stance to decline an invitation to take part in the G7 talks which are to be held in the US. This seems to be tit-for-tat retaliation against the Americans complaint to the World Trade Organization over arguments about intellectual property rights and China’s restrictions on foreign book and film sales.

Although we are still far away from the dollar high this year against the pound, the added pressure on the US economy, despite strong non-farm pay roll figures last week, has pushed £/$ further in that direction.

An expected result in Europe is rate changes by the ECB and BoE but the question is how soon and in what direction? The consensus in the UK is that there may be a rate increase as soon as May with recent economic data showing UK inflation edging up and retail sales still growing strongly.

The ECB meets this Thursday to discuss the state of the European economy and with the hawks circling over the past few weeks with one hawk, Austria’s Libscher, citing the reason that “everything that is necessary needs to be done to keep inflationary expectations where the are”, they could possibly follow in the same direction.

As mentioned in yesterdays Wise Money report the commodities market may be a key area to keep an eye on this year with oil and gas key components in every economy especially those that are highly dependant and high consumers like the US. An aggressive stance by President Hugo Chaves of Venezuela to take control of several major oil projects owned by American and European companies by May 1st will add further tension, just as it has seemed to ease off after the UK-Iran issue.

Commodity linked currencies have done well this year for instance; the Australian dollar hit a 16-year high against the dollar on Tuesday. Brazil's real touched a six-year high versus the dollar on Monday and the Canadian dollar recently rose to its highest level since December 2006.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.