Friday, January 14, 2011
from Ambrose Evans-Pritchard
The exact role of China is unclear. Chinese vice-premier Li Keqiang promised to buy Spanish debt during a visit to Madrid last week, reportedly up to €6bn (£5bn).
China was the secret buyer in a private placement of €1.1bn of Portuguese debt last week, according to the Wall Street Journal. Finance minister Fernando Teixeira dos Santos said China "may well have been" a key buyer in this week's debt auction.
China was not the only force at work. Traders say the European Central Bank (ECB) acted aggressively behind the scenes, calling some 20 dealers to buy Portuguese debt in the secondary market.
This created what amounted to a "short-squeeze" in Portuguese bonds just before auction, causing spreads to tighten dramatically and inflicting damage on market makers acting in good faith. City sources say this has caused some bitterness.
Charles Grant, head of the Centre for European Reform and author of a book on EU-China relations, said China's top goal is to secure an end to the EU arms embargo, imposed after the Tiananmen Square massacre in 1989. It rankles as humiliating treatment for a global superpower that has since changed profoundly.
The EU has refused to move on the sanctions until China ratifies the International Covenant of Civil and Political Rights, and China's arrest of Nobel peace dissident Liu Xiaobo has further complicated matters.
Yet Brussels has suddenly begun to shift gear. Baroness Ashton, the EU's foreign policy chief, said the embargo is damaging EU-China ties and called for new thinking to "design a way forward".
Mr Grant said Britain, France and Germany are all wary of giving ground, cleaving closely to US policy. Washington views China's growing military might as a strategic threat to the Pacific region. There have already been hot words over the South China Sea, and the Pentagon claims that China has an "operational" ballistic missile able to sink aircraft carriers at long range.
A WikiLeaks cable from the US embassy in Beijing last January cites the EU's mission chief, Alexander McLachlan, saying Spain had tried to curry favour with Chinese leaders, "seeking advantage at other EU states' expense". He said China was fully aware of Madrid's game but was exploiting intra-EU divisions to gain leverage.
China's second goal is to secure market economy status from the EU. This would make it much harder for the EU to impose anti-dumping measures against Chinese imports. As it happens, the EU has just lifted its punitive tariff on Chinese shoes.
Mr Grant said Beijing will not risk much cash to woo Europe. "They are very hard-nosed. They may splash some money around for goodwill but they are not going to waste the hundreds of billions that may be needed. Nothing short of meaningful action by Europe's leaders can genuinely stabilise the eurozone," he said.
China's sovereign wealth funds, including the central bank's exchange fund SAFE, have been severely criticised at home for losing money on US investment banks during the credit crisis, or on dollar losses from US Treasury debt. They will be careful about fresh risks in euroland.
"It is debatable whether China would actually be willing to become buyer of last resort of the debt of a country close to default," said Julian Jessop from Capital Economics. "Chinese officials are acutely aware of past losses and will not want to be seen to risk their peoples' capital on a lost cause. Their actions frequently fall short of expectations raised by their words."
Simon Derrick, from the Bank of New York Mellon, said that China must find somewhere to recycle its fresh reserves or lose control of its own currency. It is already sated with US assets. Holdings are 65pc in dollars, 26pc in euros, 5pc in sterling and 3pc in the yen.
"They may start buying some emerging market bonds but basically the only place they can go is into euros, and buying €6bn of Spanish debt is a good investment if it helps protect their other euro assets," he said.
Mr Derrick said Beijing appears to take the view that the ECB's monetary policy is fundamentally more rigorous than the money-printing ventures of the US Federal Reserve. "The Chinese have made it clear that they don't see any meaningful shift in US policy."
In the global beauty contest, Europe's debt still looks less ugly than the main alternative.
With the U.S. unemployment rate at 9.4 percent and only tentative signs that businesses are beefing up hiring, Fed officials, including Chairman Bernanke, see a duty to prevent a further deterioration of economic conditions -- and have signaled a readiness to use all the tools at their disposal.
Last November, as the economic recovery appeared to falter, the Fed said it would buy a new round of $600 billion in Treasury securities through June of this year. That's on top of the $1.7 trillion in Treasuries and mortgage-backed securities it had purchased in response to the financial crisis.
Still, the pitfalls of the Fed's approach are almost as numerous as the lending facilities it undertook to stem the crisis. Perhaps most daunting, the Fed's purchases of Treasury debt and mortgage-backed securities have effectively turned it into a mammoth investor -- a thoroughly undiversified one.
"The biggest risk is losses on its portfolio on long-term debt if inflation rises," said Alan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh.
That threat is already apparent in the Fed's latest round of bond buying, or so-called quantitative easing. According to calculations by Reuters Insider credit analyst Ed Rombach two weeks ago, the average duration of the Fed's new portfolio of bonds is just under 5 years, and every 1-basis-point rise in 5-year to 6-year Treasury yields results in a loss of about $65 million.
The Fed is sitting on paper losses of about $2.3 billion on the purchases of U.S. Treasuries it made from November 12 until late last week, according to an analysis by Reuters Insider.
The Fed is also vulnerable to losses through its so-called Maiden Lane portfolios, a collection of investments it acquired when it brokered J.P. Morgan Chase's takeover of a floundering Bear Stearns and bailed out failed insurer AIG.
The portfolio will likely generate losses, according to many analysts. Still, the total Maiden Lane portfolio amounts to just $66 billion, a small slice of the Fed's growing pie of securities.
For most Fed officials, a concern over credit losses would be a luxury compared with the risk they see as predominant: that the economy will not grow quickly enough to return more than 14 million unemployed Americans to work, and inflation so low that it leaves the country exposed to possible deflationary shocks.
"The risks are worthwhile given that the economy would be in the toilet if the Fed never did anything to expand its balance sheet," said Michael Feroli, chief economist at JP Morgan and a former New York Fed staffer.
Feroli does not believe asset sales will be a primary avenue for the Fed's exit. Indeed, Bernanke appears to think the ability to raise interest rates on bank reserves might prove the most effective way to withdraw stimulus. But even that tool is not without its mechanical difficulties.
The problem lies in the basic workings of fixed income. By definition, bond prices decline when their yields or interest rates go up. That means that as the economy recovers and pushes inflation higher, the Fed will move to increase interest rates, pushing down the value of its giant bond portfolio.
"What would the international reaction be if the Fed suddenly had to go and be recapitalized?" said Bob Eisenbeis, chief monetary economist at Cumberland Advisors and a former head of research at the Atlanta Fed. "I don't think that would bode well for Treasuries, or for the dollar, or anything else. It would be embarrassing."
With attention focused on sovereign-debt worries in Europe, two major credit-rating firms reminded investors again that the U.S. has debt problems of its own.
"The warning on the U.S. rating is well-founded," said Brian Yelvington, chief fixed-income strategist at Knight Capital. "However, it will probably fall on deaf ears until the peripheral Europe story plays out."
Moody's Investors Service said in a report on Thursday that the U.S. will need to reverse the expansion of its debt if it hopes to keep its "Aaa" rating.
"We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," Sarah Carlson, senior analyst at Moody's, said.
Separately, Carol Sirou, head of Standard & Poor's France, told a Paris conference on Thursday that the firm couldn't rule out lowering the outlook for the U.S. rating in the future.
"The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Ms. Sirou said. "But that may change."
However, Ms. Sirou, who has an administrative role and has no say in sovereign ratings, was mainly reiterating statements the agency has made in the past. She specifically referred to a comment more than two years ago by John Chambers, chairman of S&P's sovereign-rating committee, suggesting that AAA ratings can always be changed.
The U.S. currently has the highest possible credit rating and a stable outlook at both raters, but both have warned repeatedly in recent years that the government's long-term budget headaches must eventually be addressed.
The firms' latest comments had no apparent impact on an auction of $13 billion in 30-year Treasury debt Thursday afternoon. The auction was slightly weaker than analysts expected, leading the government to pay 4.515% on the bonds, up from 4.492% before the auction.
But demand was higher than in other recent 30-year auctions, and this came at the end of a full week of new debt offerings that went off without a hitch.
Benchmark 10-year Treasury notes rallied on the day, lowering their yield, which moves in the opposite direction of price, to 3.307%. The cost of insuring U.S. debt against the risk of default in the credit default swap market was little changed, remaining well below that of Germany, the euro-zone benchmark.
Germany's elevated default-insurance price is based partly on its exposure to the nagging debt problems of countries on Europe's periphery. Those worries have also helped drive investors to U.S. Treasurys as a relatively safer alternative.
In its report, Moody's said the U.S., Germany, France and the U.K. still have debt metrics compatible with their Aaa ratings.
But all four countries must bring future costs of pension and health-care subsidies under control if they "are to maintain long-term stability in their debt-burden credit metrics," Moody's said in its regular Aaa Sovereign Monitor report.
These measures of the U.S. debt burden include federal debt to revenue, estimated to average 397% of gross domestic product until 2020. The ratio of interest to revenue, meanwhile, is expected to rise to 17.6% by 2020, nearly double last year's level. These are "quite high for an Aaa-rated country," Moody's said in its report.
The report also said that there is "a small but increasing likelihood that markets will demand a higher risk premium on government debt, in sharp contrast to the safe-haven status that the U.S. Treasury bond has long enjoyed."
Higher borrowing costs could make cutting deficits more difficult in the future, the Moody's report said.
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Thursday, January 13, 2011
from Zero Hedge:
As part of the most recent observations on the boil up (melt up is so QE1) in the S&P, we find something quite interesting. A quick glance at the chart below shows the general market 45% climb since Bernanke's leak of QE2 in August, as well as the market's 10 day (purple line) and 50 day (green line) moving averages. As a point of reference the S&P has been above the 10 day average for 30 days straight, and above the 50 day average for 92 days straight. What is remarkable are some statistical findings as pertain to the average's movement with respect to the SMAs. Sentiment Trader points out that while as part of the recent surge in the S&P, the market has gone for "92 days without closing below its 50-day average, which has been matched only 17 other times since 1928." Where it gets scary, is that as pointed out, the market has not closed below the 10 DMA once during the past 30 days. And as Sentiment Trader notes, "this has never happened before, in 82 years of history." Congratulations to the Centrally Planned Socialist States of America: its Chairman has just made the Guinness Book of Manipulation Records.
LONDON—Two leading credit rating agencies on Thursday cautioned the U.S. on its credit rating, expressing concern over a deteriorating fiscal situation that they say needs correction.
Moody's Investors Service said in a report Thursday that the U.S. will need to reverse an upward trajectory in the debt ratios to support its triple-A rating.
"We have become increasingly clear about the fact that if there are not offsetting measures to reverse the deterioration in negative fundamentals in the U.S., the likelihood of a negative outlook over the next two years will increase," said Sarah Carlson, senior analyst at Moody's.
Standard & Poor's Corp. on Thursday also didn't rule out changing the outlook for its U.S. sovereign-debt rating because of the recent deterioration of the country's fiscal situation. The U.S. currently has a triple-A rating with a stable outlook at both agencies.
"The view of markets is that the U.S. will continue to benefit from the exorbitant privilege linked to the U.S. dollar" to fund its deficits, Carol Sirou, head of S&P France, said at a Paris conference Thursday. "But that may change. We can't rule out changing the outlook" on the U.S. sovereign debt rating in the future, she warned. She added the jobless nature of the U.S. recovery was one of the biggest threats to the U.S. economy. "No triple-A rating is forever," she said.
Wednesday, January 12, 2011
from various tweets regarding the USDA's grain report this morning:
US soybean stocks at 140 mln bu equates to a 15.2-day supply - the tightest of the past 40 years!
China buys 40k tons US soyoil
USDA's tight soybean stocks est was only achieved by "assuming" that prices would ration beans available for domestic crush
Global corn stocks fall to just a 55.4-day supply; 2nd tightest of past 35 years; 2nd only to 54.9-day supply 4 yrs ago
Today's USDA #s are bullish long-term, altho we could see profit taking if buying int wanes today
Today's USDA data means that corn needs 93 mln and soybeans need 79 mln acres w little margin for bad weather
USDA tightens stocks leaving no room for error in next season's plantings and will require rationing of ethanol demand
from Futures Knowledge:
Cotton prices ended the day limit bid and are trading near limit gains this morning. The USDA January supply/demand report was supportive for cotton but was quite bullish for grains and soybeans which is causing cotton to rally. For the US, USDA raised US production of cotton by 50,000 bales to 18.32 million bales. Raised Use by 100,000 bales to 3.6 million and left exports at 15.75 million bales. And left ending stocks at 1.90 million bales. For the world, USDA lowered production by 70,000 bales to 115.46 million bales, raised World Use by 280,000 bales to 116.58 and reduced World ending stocks by 550,000 bales which puts them at 42.84 million bales. Whenever world ending stocks are reduced it is bullish on its face. The USDA left production unchanged in Australia, India, and China though they are likely to lower those estimates later. They raised Brazil’s production by 100,000 bales to 8.2 million. USDA raised India’s cotton consumption by 500,000 bales to 21.5 million. USDA lowered soybean ending stocks by 25 million bushels to 140 million. USDA lowered wheat ending stocks by 40 million bushels to 818 million. USDA lowered corn ending stocks 87 million bushels to 745 million. Today, the US Dollar Index is down 38 points at 80.75. Crude oil is up 55 cents at $91.65. March soybeans were up 14 cents overnight at $13.71. March corn was up 5 1/2 cents overnight at $6.12 ½. July wheat was up 11 ½ cents overnight at $8.19 ¾. China’s cotton futures and forwards were higher overnight.
Tuesday, January 11, 2011
The American Farm Bureau Federation has filed a lawsuit in federal court to halt the Environmental Protection Agency's pollution regulatory plan for the Chesapeake Bay. AFBF says the agency is overreaching by establishing a Total Maximum Daily Load or so-called "pollution diet" for the 64,000 square mile area, regardless of cost. The TMDL dictates how much nitrogen, phosphorous and sediment can be allowed into the Bay and its tributaries from different areas and sources.
According to Farm Bureau, the rule unlawfully "micromanages" state actions and the activities of farmers, homeowners and businesses. EPA's plan imposes specific pollutant allocations on activities such as farming and homebuilding, sometimes down to the level of individual farms. Farm Bureau contends the Clean Water Act requires a process that allows states to decide how to improve water quality.
Also, Farm Bureau says EPA's TMDL is based on inaccurate assumptions. Farm Bureau President Bob Stallman says there is a basic level of scientific validity that the public expects and that the law requires. That scientific validity is missing here, and the impact could starve farming and jobs out of the region.
And finally, Farm Bureau believes EPA violated a requirement to allow meaningful public participation on new rules. The suit alleges that EPA failed to provide the public with critical information about the basis for the TMDL and allowed insufficient time for the public to comment.
from No Money, No Worries blog:
The following chart should dispel the commonly held notion that we will be able to balance the federal budget by eliminating programs widely perceived as wasteful – the expenditures devoted to studying the mating habits of jellyfish and the like.
The above chart is a back-of-the-envelope calculation based on numbers published by the Congressional Budget Office. The sad truth is that according to current projections, we could eliminate ALL federal non-defense discretionary spending and still run a deficit.
The elephant in the room is entitlements – especially the fast growing Medicare and Medicaid programs.
Unfortunately, there is no sign that the public is ready to accept mathematical reality, despite all of the heated rhetoric, both at the federal and state levels.