Today was a very slow news day and thus little news to slow the steady rise of equities and the sell off in other asset classes. There was a story in the Financial Times about the Brazilian government cutting the tax on ethanol producers. The government is going to cut the tax on sugar-based ethanol producers by 80%–from 120 REALS per cubic meter to 25 REALS. It is an effort “… to support ethanol producers, many of whom are facing bankruptcy because of heavy debts and DIFFICULTIES COMPETING WITH SUBSIDISED PETROL PRICES IN BRAZIL.” There has been a global sugar surplus, which has kept pressure on sugar prices, but this move may help lift sugar prices and allow Brazilian growers to grab some of the agricultural profits that have supported the Brazilian economy. The U.S. economy is a corn-based ethanol producer and this has helped put upward pressure on global grain prices which has benefited Brazil’s farmers.
Posts Tagged ‘Brazil’
Thursday brings the announcements from two of the major rate setters in Europe: the Bank of England and the European Central Bank. First the BOE will announce at 6:00 a.m. CST and consensus says the bank will keep rates steady at 0.50% and the QE program at 375 billion pounds. Though the U.K. economy is soft, Governor Mervyn King will maintain a steady path so to keep his options available in case the global economy begins a new downturn. The present BOE head is retiring July 1 so it would be prudent to let his successor have as many tools to work with in a new regime.
Notes From Underground: Mario Draghi Reveals He’s A Fleetwood Mac Fan; Says GOLD IS A “Mystery to Me”November 8, 2012
As today was central bank day in Europe, both the ECB and the BOE had rate decision meetings and left their current policies in place. The BOE did announce that it was “halting” the expansion of the QE program at 375 billion pounds as it deems the recent increases in its bond buying program to be less effective. Recently, BOE Deputy Governors Paul Tucker and Charles Bean have stated that “asset purchases may no longer have the same impact on the economy as when first introduced.” (Bloomberg) The market had different interpretations as to the reason that why the BOE was curtailing the QE bond purchases. 1. The recent rise in inflation was causing the halt; or 2. the lessened impact of recent QE was going to mean that the bank was going to increase the funding for lending scheme in which the BOE provides incentives for commercial banks to lend more money to small and medium businesses. This is of interest for FED watchers because BOE Governor Mervyn King has been a trail blazer for creative central bank actions and the FOMC may mimic some of the BOE actions to get a boost to a low velocity of money situation.
Following up last night’s post, Arthur left a note on the blog linking an article from Bloomberg Businessweek, written by Brendan Greeley. The language of the article is crystal clear and provides another example of a Euro policy maker claiming far more insight than the collective wisdom of Mr. Market. “Investors ,he told the Bundestag, are ‘charging interest rates to countries they perceived to be the most vulnerable that [go] beyond levels warranted by economic fundamentals and justified risk premia. This fear is “unfounded. The market is wrong.’”
It seems that we have covered the major themes ad nauseam–European debt, U.S. fiscal cliff, Japanese lethargy in confronting an overvalued currency, Chinese slowdown–and the list goes on and on. Today, the IMF let loose a report that detailed the need for Europe to deleverage its banks to the tune of a possible 4.5 TRILLION EUROS. This is not the aid and comfort that a financially stressed European economy needed. The pains of austerity will be minimal compared to the massive selloff of what ever assets will be dumped on the market. Government retrenchment coupled with private sector rebalancing will undoubtedly lead to a new thrust downward in the adverse feedback loop. The significance of the yield curves will be a critical indicator as the quarter begins to reveal all of the potential hazards with which the global financial system has to contend.
The interest rate variable is alive, well and affecting global markets. Mario Draghi has played the “WIZARD OF FRANKFURT” as he has sought to forestall a financial implosion of Europe. Draghi’s comments in London on July 26, in that the ECB would stem the crisis at end with the tools at its disposal, markets had to believe that ECB policy would be “SUFFICIENT.” As we all know by now, President Draghi has been successful as the Spanish and Italian yield curves have steepened and the 2-YEAR NOTES have seen its yields dramatically drop–the Spanish went from 7% to 3.73%.
It is startling to think that the S&P downgrades could have any sort of effect on the markets. The sovereign debt markets have been telling those who are attentive that not all countries in the European Union are equal. Several of the GIIPS have had interest rate yields far above those of the German benchmark for almost two years. Even the French 10-year note has widened to 150 BASIS POINTS over the German 10-year BUND during the last six months. DO WE REALLY NEED S&P OR OTHER RATING AGENCIES TO CERTIFY WHAT THE MARKETS HAVE BEEN SAYING?
THERE WAS CERTAINLY NO SURPRISE FROM THE FED TODAY EXCEPT THAT THE FOMC STRESSED THAT THERE ARE SIGNIFICANT DOWNSIDE RISKS TO THE ECONOMY. It appears that this phrase caused the markets to sell everything after the release of the most important outlook for U.S. economic policy. The market’s response must have left Mr. Bernanke wondering just what the FED could actually do to lift the “animal spirits” of the investor and business community.
The media has made the idea of a TWIST by the FED a sure thing. Okay, can’t argue with consensus, but of course that is why this blog exists: To question the thought process of the purveyors of conventional wisdom and to try to profit in a real-time world from challenging the status quo. If the FED TWISTS will the markets turn? BUT TURN TO WHAT? What will a lowering of the rate on the 10-year note do to a stalling economy with zero interest rates? Bernanke himself alluded to the BALANCE SHEET REPAIR taking place in the private sector, which was holding back consumer demand. Even though corporate balance sheets are healthy, capital investment lags as the corporations fear lackluster demand so there is no rush to create new supply.
Chinese and U.S. officials have been meeting in Washington for the past two days under the aegis of the annual forum of Strategic and Economic Dialogue (SED). All the news releases from these meetings sound so hopeful about increased cooperation between the world powers. The Chinese feed the U.S. policy makers with words of promise about the SINO economy becoming more market-oriented and the American delegation tells the Chinese that they will be fiscally responsible and do all they gain to maintain the value of U.S. paper assets that fill the vaults in Beijing. An hour after the Chinese head home, the financial media will no doubt be hungry for some more morsels of hope. So it goes and it will continue: Both sides pledging fidelity the vibrancy of the global economic order.