There was a Reuters story yesterday by William Schomberg, “G7 Finance Chiefs to Discuss Bank Reform Push.” Very few people picked up on this but it seems strange that all the sudden a meeting is called to discuss what elements of bank reform. Are they going to try to persuade Germany to get behind the EU push for a banking union and if so why the hurry before the September German elections? The idea of a banking union with resolution authority is sure to be a lightening rod for all the German angst about the bailouts of the peripheral nations. The Reuters piece notes that some G-7 officials are upset that the U.K. called the meeting so soon after the recent IMF talks in Washington. One official said, “I am really annoyed I’ve got to give up my weekend for this.”
Archive for the ‘RBA’ Category
First, the RBA finally cut the lending rate by 25 basis points to 2.75%. By the close of the market, the Aussie dollar remained weak as some were surprised by the move. As I promised my readers of NOTES it is the 2/10 yield curve where the indicator of further currency and bank action will be found. The 2/10 steepened a slight three points, but the action ahead will be the key. Failure to take out recent steepener highs will be an indicator that the RBA has more work to do if it wishes to give a boost to the Australian economy.
First, the unemployment report offered no surprises as the market was close to the actual release. The real surprise was in the upward revisions to the February and March numbers. The negative surprise was the average work week shrinking by 0.2% of an hour. The shorter work week may be an aberration but it may mean that employers are cutting workers hours so as to keep under the Affordable Care Act mandates, but I caution it is far too early to say that this is definitely occurring. The BOND markets reacted negatively to the “stronger” jobs data and the 10-year note future fell as yields rose by 10 basis points. Investors bought stocks and seemingly sold bonds in a performance of risk-on/risk-off. Again, one day’s action does not a trend make. The pure risk-on/risk-off paradigm has been dormant for quite a while and let’s hope it stays that way.
Over and over, financial news airwaves are filled with noise about since the Bank of Japan–under the supervision of Governor Kuroda–has embarked on a massive dose of Quantitative Easing, there has been no real outflow of YEN around the world. The only problem with this bloviating is that its devoid of fact. The BOJ’s action, or rather, call to action has led to a drop in European bond yields as well as a new pillar of support for U.S. Treasuries. Further proof is last night’s employment data from Australia, which was much weaker than expected (a 36,000 job loss and a 0.2% jump in the unemployment rate to 5.6%), but the AUSSIE DOLLAR rallied after an initial selloff as Japanese investors are seeking higher returns. A favorite place for higher yields for Japanese seekers has been Australia and New Zealand. Many financial institutions offer what are known as Urudashi and Samurai bonds. These are bonds issued in Japan in foreign currency of usually kiwi and Aussie. Those who say that the Japanese don’t invest afar and remain in Japan–what is called HOME BIAS–are badly misinformed.
The initial check with no move on interest rates was offered by the Reserve Bank of Australia as it held its overnight lending rate steady at Tuesday’s meeting. The Aussie 2/10 curve flattened a bit after the meeting and the Aussie two-year note continues to trade at a lower interest rate than the official overnight rate of 3%, yielding just 2.88%. Many readers have asked about the impact of yield curves on equity prices and I will deal with this on an ongoing basis. For an immediate example, if the Aussie curve continues to stay flat I will venture to say that over the course of the year the Australian stock market will underperform. That doesn’t mean that it won’t have synchronized rallies with other developed markets, just by year’s end it will underperform other equity markets. If the RBA acts to cut rates and reset the curve on a more positive slope, the outcome, of course, should be of a better equity performance. To paraphrase Max Planck: Good trading and analysis advances one funeral at a time.
Give the pollsters their due. They were virtually perfect in the predictions of electoral outcomes. Can the electoral algos now reduce all that data and tell us the policies that will be produced to deal with the problems that plague the U.S.? The Obama victory was greeted by a market selloff as the investment world woke up to the possibility of tax increases and spending cuts leading to a recession and decreased profits. The elections were widely anticipated as the bookies in London and worldwide had predicted. I am left scratching my head, wondering what caused the steep decline in the U.S. equity and commodity markets? The EURO currency was not sold hard enough to think that the Greek situation was the catalyst. Besides, the Greek parliament passed the austerity budget tonight. There is no way that Europe will not provide the Greeks with the promised funds as the outcome would not be worth the 30 billion euros that are in question. If the Obama victory and coming government standoff should have led to a selloff in the BONDS for one would have to be insane to purchase U.S. bonds priced at FED manipulated risk levels.
Yes, the U.S. Presidential election is finally here. After the POLITICAL-INFO COMPLEX has spent the $6 billion on various political campaigns, we are left wondering why anyone would contribute money to feed the monster and prolong our agony. I know the answer and the “road to political hell is not paved with good intentions.” There are so many polls predicting a very tight race that I care not for the popular predictions. As an investor/trader I am much more concerned about the outliers. First, the most significant result would be for the Democrats to retake the house. The 2010 Republicans claiming the majority in the House by such a wide margin was not predicted. If the Democrats were to undo 2010 it would mean a landslide victory for President Obama as well as the continued control of the Senate. The triple crown for the Democrats would be a negative for the markets as there would be no movement on the “fiscal cliff” as the Democratic leadership would be empowered with a mandate.
For the almost three years that NOTES has been published, I tried to make it clear why the subtext of NFU was that 2+2=5. The idea of the math being so obviously incorrect was a direct reference from Dostoyevsky’s short story Notes From Underground in which the great Slav nationalist rails against the rationalists of the day. My use of the 2+2=5 reference is an attack on the rationalists of today, otherwise known as those dependent on sophisticated models to offer explanations for all the answers to questions in the realm of social science–economics of course being the main target. I bring this up as a reflection on the most recent stress tests of the Spanish Banks for if those literalists who think that the math in the Dostoyevsky story is wrong, then the math in the Spanish stress tests should cause one’s eyes to glaze over.
When the Greeks under Papandreou suggested a referendum on the GREEK AUSTERITY plan, the Greek PM was met with great consternation by the ruling elites in Brussels. A giant don’t-you-dare-call-a-referendum greeted PM Papandreou and basically forced his abdication. I warned then that the idea of a referendum on any issue of economic austerity was anathema to the EUROCRATS for the denizens of Brussels were/are fearful of testing the “PUBLIC WILL.” Every time a referendum was held it resulted in a decision opposite of the elite’s will: Another referendum was called until the “correct” result was realized. (It was usually preceded by warnings that all financial and budgetary agreements would be rendered null and void.)
Tonight at 11:30 CST, the Reserve Bank of Australia (RBA) will announce its interest rate intentions. Readers of NOTES know that I place a high value on the RBA as a barometer of the global macro economy. Australia’s huge trade with China provides the best look at the Asian growth story as Australia’s reserves of natural resources provides China with its own COMMODITY HOME DEPOT WAREHOUSE. During the last 12 years, massive foreign investment has poured into the energy, mining and agricultural sectors of the AUSSIE economy and provided the best consistent growth of any of the developed economies.