Reuters reported that the Chinese government has given permission for the U.S.S. Nimitz to visit Hong Kong next week. Given the escalating tensions between these two nations, it was deemed a pleasant surprise and is certainly the result of Secretary Gates’ effort to call for cooler heads, as well as the toning down of rhetoric between the world powers. The Chinese have realized that ratcheting up the threat level about cancelled plane orders and a U.S. debt boycott was not serving their needs and was paving the way for the rise of protectionist sentiment in the U.S. With the Obama administration’s cosy relationship with the unions, China has seen that it is better to work back channels than play the shrill rhetoric game. Now the U.S. and Europe will have to learn to tone down the rhetoric on YUAN values and see if negotiation works better than threats. It is never to your advantage to berate your creditor while in the need of your bankers goodwill.
This afternoon the New Zealand government released their retail sales number and its was much weaker than expected, an indication that the Kiwi unemployment number was not a fluke. The Aussie/Kiwi cross moved to two-month highs as the antipodean economies seem to have separated. Slowing Kiwi growth while Australia is finding new vigor will allow the Aussie to become the darling of the carry crowd again. Get your technicals in order to examine the levels at which the Aussie will definitively assert itself on the crosses, but the economics are certainly leading the market to the Aussie following a correction as the risk-off crowd held sway.
The Guardian reported that Angela Merkle will not support the Greek bailout. It has led to a small rally in the DOLLAR but the story cannot be confirmed. We get the feeling that the European political elite is enjoying the attention the market is giving every statement and the volatility the market is creating. We will hear more multiple denials and acceptances tomorrow and be prepared for massive volatility as the weekend beckons.
There was U.S. news concerning Fannie and Freddie and the role they will play in buying underwater mortgage-backed securities [MBS] from the FED and other market participants. As we said back in December, the removal of the caps on Freddie and Fannie losses would allow the Treasury to become the slush fund of choice for moving mortgages from the Fed balance sheet to the jurisdiction of the executive branch. This will allow the FED to up clean up its balance sheet just in case more quantitative easing becomes necessary. If the FED needs to power up its balance sheet in the future while the Treasury sits on a pile of MBSs via Fannie and Freddie, that will be the signal that we have gone to panic mode: the ultimate outcome of a deflationary spiral. Now that the Treasury has announced its intentions, it is a nice one-year anniversary gift to Geithner’s failed PPIP plan. Oh well, what does it matter? We will always have Athens.