We had to get back home
And when we opened up the door
We had to get back home
And when we opened up the door
Janet Yellen and company are discussing the wrong issue. A FED FUNDS rate hike has already taken place due to the increase in LIBOR rates, which has led to a pricing of the December eurodollar futures contract, currently trading at 99.08–an effective six month yield of 92 BASIS POINTS. This due to the Oct. 14 regulatory compliance deadline for money market funds. In order to ensure there’s enough liquidity to protect against unknown outflows, institutional prime funds are shortening the maturities of their commercial paper, CD holdings, pushing up the CP/CD rates and LIBOR with it. Some prime funds have converted to government-only to circumvent the impending regulations, which has created more demand for U.S. Treasuries. (According to the SEC’s July money market report, govt funds had inflows of $77 billion while prime funds saw outflows of $41 billion.) As a result, the TED spread has widened 15 BASIS POINTS during the past two months. The September eurodollar/fed fund futures spread is trading at 53 basis points. WHAT THE FED HAS TO DO IS BEGIN SHRINKING ITS BALANCE SHEET BY 100 BILLION ASSETS A MONTH. Why?
Some follow-through from yesterday: The DAX,Dow and Russell 2000 closed below their 200-day moving averages but it is early in the week so while a negative it is not definitive of any sustaining activity. Just another effort to be attentive to global developments. The Chinese markets were under assault last night, which led to a selloff in copper and silver prices although GOLD remained firm. Some analysts maintain that the selling in copper and silver was due to having meet margin calls with account collateral being liquidated. I have no argument with that analysis but if so silver should regain itself above 15.10 and GOLD should rise above its recent highs. If China’s recent market developments is the onset of global deflation the world’s central banks will be forced into renewed crisis mode and the precious metals will again be viewed as a “reliable haven.” Let the market be your guide for theory confirmation and have your technical levels ready especially for GOLD resistance.
Tomorrow the Bank of England’s Monetary Policy Committee meets to decide interest rates. Governor Mark Carney has recently confused markets by saying that interest rates would probably rise sooner than forecast. Then Mr. Carney changed directions by following the FOMC and suggesting that the slack in the labor market would allow the BOE to stay the present course and keep interest rates at present levels for an extended period. Overnight rates are currently at 0.50% and with the British pound strengthening against most currencies the BOE is expected to maintain the status quo.
Last night, the Reserve Bank of New Zealand raised the overnight interest rates as expected from 3.00 percent from 2.75 percent. This was no surprise as the market widely had anticipated it. The move by the Central Banks of India and Israel was also expected, although the probabilities of the Israeli move were less than the others. So New Zealand raised rates and the currency was sold off, which has significantly weakened on the crosses. The market had a very negative reaction to RBNZ Chief Alan Bollard’s very cautious comments about rates going forward. With KIWI inflation running at an annualized rate of 2 percent, the RBNZ feels it is now ahead of inflation and will watch global growth and see how it effects New Zealand. Bollard expressed concern about the recent strength of the Kiwi and in his statement said:
“The New Zealand dollar has appreciated in recent weeks.This appreciation is inconsistent with the softeningin the New Zealand’s economic outlook …”
Germany added liquidity but it was all directed at the British goalie David James–nothing austere about their World Cup peformance. The news from the G-20 was as expected: Nothing short of a waste of time and the resulting communique will be the paradigm of vacuousness. The Chinese took center stage in that they spoke up for the developing nations, stating they wanted input in the discussions about global problems. We agree with the Chinese that the G-8 is an atavistic appendage of a past colonial world and is merely the delusional forum for those wishing to hold onto a past that left the arena long ago. Yes, we are sure that Russia, Brazil and the others that make up the most robust members of the emerging world want to advise the likes of Italy, Spain and France who have certainly failed to get their own economic houses in order.
The British released their budget today and it was pretty much as advertised. George Osborne, the U.K.’s chancellor of the exchequer, announced VAT tax raises and other revenue enhancers in an attempt to trim the British budget. The discussion now turns to whether the budget will be too AUSTERE for the times. The fact that economic growth in the developed nations is anemic, at best, is raising concerns that the Brits and Europeans are removing fiscal stimulus at a time when the economic recovery is still too fragile.
Oh well, another day of market volatility emanating from the four corners of the globe. The Korean Peninsula sits on edge, the Chinese say that they are still investing in Europe, the U.S. Congress is still in the throes of financial regulation, and Treasury Secretary Geithner stops in Europe to add to confusion to a muddled mess. The Chinese denial of the SAFE rumor led to a sharp equity rally and in general a market profile of risk on: the dollar sells off as money searches for return rather than safety. The financial world is truly the soap opera “As the World Turns.” Volatility is here to stay and the most important task is to find the dynamic that is in play at any one time. Is it LIBOR, commodities, easy money? Which ultimately drives the risk-on/risk-off drama?
We are very sorry for the volcanic activity that has caused so much transportational havoc throughout Europe. It is rumored that the U.N. is looking to begin investigations to study whether or not Iceland set off the volcano in retaliation for the way the Dutch and British authorities treated the sovereign state. Governments seeking to outlaw, or regulate, non-predictable events, we have no doubt that earthquakes and volcanoes are next.