Carney talks up rate rise

Just in case you wondered which central bank is going to be first to raise rates towards a vaguely normal level, Mark Carney is making sure no one’s in any doubt that the UK is on course for a small hike soon.

Mark Carney lays out interest rate hike

All smiles at the Bank of England, but when will rates rise?

Or, in typically cryptic and nuanced language, “sooner than markets currently expect”. Take what you will from that; the markets certainly saw it as a clear signal of intent and drove sterling towards a 19-month peak against the euro and back near a five-year high versus the dollar.

Markets had been primed for a rise in rates sometime in the spring of 2015, but Carney’s Mansion House comments suggest it could be before 2014 is out. As ever, he was keen to stress that any increase will be gradual and limited – “materially lower” than pre-crisis norms seems to be the idea.

Of course, the Bank of England is not actually the first central bank to raise rates – New Zealand did so this week for the third time this year, hiking its benchmark lending rate from three per cent to 3.25 per cent.

The effect was a surge in the kiwi as the carry traders piled in, desperate for any trace of yield in a low volatility market.

Meanwhile, over in Greater Germany, the ECB is only a about four years behind the curve. Draghi has finally taken some serious steps to tackle the onset of a deflationary cycle that seems worryingly hard to stave off. (Ian says Draghi’s steps are far from serious, other than to confirm the serious nature of the overall parlous state of the eurozone.)

The euro has fallen, but hardly by a lot – the problem for Draghi and co in weakening the single currency is dealing with the $4 trillion problem that is China’s efforts to diversify assets.

Steven Englander from Citigroup explained to Bloomberg: “One possible explanation relates yuan weakness to intervention by Chinese authorities. When this occurs, Chinese reserve holdings of dollars increase. In order to prevent the dollar share in reserves from rising, the authorities have to sell the dollar for other currencies, primarily the euro.”

Negative deposit rates probably won’t work either. “We have disagreed with the move to cut the deposit rate in the past, as we expect banks to simply pass on the costs to households and businesses, either by charging fees for savers, but more likely through higher interest rates on new borrowers – the opposite of what the ECB is trying to achieve,” says Schroders’ European economist Azad Zangana.

So while Carney looks to tighten, the ECB seems unable to do anything but slowly loosen policy without much effect on the eurozone economy.

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Copper in full-on meltdown mode

Copper – the commodity with a PhD in market economics – is in meltdown. Prices are in virtual freefall amid growing concerns about the health of China’s economy.

Shanghai traded futures fell by their daily limit on Wednesday morning, coming after a day of trading on Tuesday that saw prices slip to $6,500/t – a near four-year low.

On the Comex, copper futures slumped to $2.908/lb, the weakest since July 2010. Meanwhile, gold prices rose to a six-month high on Wednesday as copper collapsed.

China’s first corporate bond default seems to be have been the spark – the default on a bond payment by Chaori Solar last week has signalled “a reassessment of credit risk”, according to some newspapers. Copper used as collateral could be dumped on the market if loans are not renewed and financing deals unwind.

Given China’s whopping $24 trillion credit bubble, this should hardly come as a shock. Copper is seen as a key barometer for the state of the global economy and the shock to prices is noteworthy.

It’s not just copper, though, after figures showed China’s 18% dip in exports in February we saw iron ore post its biggest one-day fall in prices in four years, which in turn caused mining stocks to take a battering.

Miners have dismissed the fall in iron ore as temporary and expect steady growth for the next ten years. But as we have discussed before, the end of the commodity super-cycle seems to have arrived.

Indeed, Reuters reported that Baosteel, China’s biggest  steelmaker, described the price fall “inevitable”, adding that tightening credit conditions could force more mills to close this year.

Meanwhile wheat is trading at a three-month high as concerns about supply from Ukraine continue amid the ongoing stalemate with Russia in the Crimea.

And as concerns about China’s economy mount, it seems things are not much rosier over in Greater Deutschland, er Europe, I mean.

Industrial production in the 18-nation eurozone fell for a second straight month in January. An “island of stability” was how Mario Draghi described the bloc last week. If he means stable as in ‘not going anywhere’ then he might be right.

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Stocks plummet, rouble tanks on Ukraine war threat

The crisis in the Ukraine hit the markets hard on Monday as stocks plunged, commodities soared and the Russian rouble plumbed new depths.
Amid escalating tensions and a very real threat of war, investors were sent into a risk-off selling frenzy.

Russian stocks and the rouble tanked, but there was also a sharp dip in European equities as well as pre – market open prices in New York on Monday morning.

The Dax slipped three per cent, while the FTSE 100 dropped two per cent. Russia’s MICEX index fell 11 per cent.

Needless to say stocks with a heavy exposure to the Ukraine and Russia were the hardest hit – Carlsberg dipped nearly five per cent.

This came after a broad sell-off in Asian stocks overnight, with the Nikkei tumbling two per cent as investors flocked to the safe haven yen.

The Japanese currency rose sharply, with USD/JPY climbing 0.5 per cent. The Swiss franc was also on the front foot on safe haven buying.

After being caught with their pants down, the West now seems to be doing its best to stop a conflict  by focusing on urging the Ukraine to back down.

Meanwhile, the threat of an actual shooting match rose with Ukraine saying today that it will “never give up” Crimea and would use “all possible means” to defend itself.

Russia has issued an ultimatum to Ukrainian forces in the Crimea. It may just be a move to further unnerve troops, but the risks are ratcheting up.

All this has been positive for commodities. Ukraine was the bread basket of the Soviet Union, let’s not forget, so it’s hardly a surprise to see US corn and wheat futures soaring by four per cent as investors eyed possible supply disruptions.

We’ve also seen oil climbing, while gold prices were up two per cent to $1,350/oz, the strongest since last October. Gold had already been nudging upwards amid concerns about emerging markets, a situation that many feel could be made worse by the instability in the Ukraine.

Back in the world of vague normality, we have central bank Thursday to look forward to and the US non-farm payrolls report on Friday. 

But it’s hard to see the situation in the Ukraine getting much better soon, so expect a firmly risk-off environment being the key theme this week.

IW says: “War unlikely. Backdowns all round much more likely altogether.”
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What now for emerging markets?

So far, 2014 has been a torrid year for emerging markets, as stocks and currencies have tumbled across the board.

The Argentine peso took a beating, as did the Russian rouble. But it was Turkey, India and South Africa who set the tone for the EM sector.

Big rate hikes – a massive doubling in the Turkish benchmark to ten per cent, for example – were announced by all three. Clear signs of panic and not likely to do anything to help their currencies at the same time as smashing equities and bonds.

In the case of the lira, there was the predicted bounce against the dollar before the reality of what such a dramatic move actually means set in.

Of course what we are talking about here is the massive current account deficit, which no amount of central bank spin can hide.

There are others in the same boat and the unwinding of QE in the US has been the trigger for an exodus of capital from emerging markets.

Fed policymakers have been accused of not coordinating their monetary policy – ie, tapering – with other nations, in particular emerging markets. India’s central bank boss accused the US of disregarding other countries when deciding policy – hardly something that falls within the (ever-widening) remit of a central bank boss.

Draghi admitted that EM was a problem at his last press conference, but at the same time said the ECB had done rather better than other central banks. Hubris is not the word.

Going back to the US, as we saw with the first taper talk back in May 2013, the removal of the steroids from the world financial system can send the EM sector into a complete tailspin.

But there is a lot more at work here than just the Fed, which while convenient to blame, should not take all of the flak.

China’s impending credit catastrophe is a huge concern. Moreover, countries like Russia, as Saxo CIO Steen Jakobsen points out in a recent blog, have not been investing in the right areas while the funds were flowing in.

As interest rates normalise with the Fed’s tapering, all those burger joints and SUVs are not going to create much wealth in emerging markets.

The safe haven Japanese yen has a lot to deal with thanks to the BoJ’s own easing programme , which lest it be forgotten, is even more intense than the Fed’s. So the Swiss franc keeps on rising, and we have the new spectre of the euro becoming a safe haven currency.

Meanwhile, after the Bank of England’s sheepish backtracking over forward guidance and its upgrade of UK GDP growth to 3.4 per cent, the pound seems to be in vogue. Bets on a 2015 interest rate hike are supporting sterling, but that could simply see it in for an even larger fall this year than previously anticipated.

Indeed it’s fair to call 3.4% extremely wishful thinking that the BoE cut back several times.

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Aussie roars as emerging market rout continues

The Australian dollar was the big gainer on Tuesday.

Australian dollar up in forex markets

Hear the Aussie roar

It’s amazing what a slight change in tone from a central banker can do to the markets. A couple of words shifted here, another added there, and voila, you have a currency soaring by almost two per cent.

The currency and central bank in question is Australia’s. The Aussie surged by 1.70 per cent against its major rivals on Tuesday as the RBA left interest rates on hold at 2.5 per cent.

That piece of inaction sparked a rally in the embattled AUD, which has been festering close to a four-year low of late. Sterling is now close to ten cents below its January peak.

For forex traders, the key seems to have been the bank’s statement that seemed to ditch its easing bias.

The RBA said “monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target”, adding: “On present indications, the most prudent course is likely to be a period of stability in interest rates.”

Meanwhile, the continued pressure on stocks linked to the flight from emerging markets has put pressure on the dollar-yen cross.

USD/JPY sank to 100.76 at one stage, the strongest since November 21st, as the Nikkei tumbled by more than four per cent.

Monday’s data showing US manufacturing activity slowed sharply in January dealt a heavy blow to markets already on edge by the EM rout.

Still, Bloomberg’s survey of economists says the ADP Research Institute will tomorrow (Wednesday) show that US companies added 187,000 jobs in January.

Friday’s key Labor Department figures will, by the same estimates, show non-farm payrolls grew by 185,000 last month. That should further support yet more tapering by the Fed, but should also instil greater confidence in the markets.

Elsewhere, we’re looking ahead this week to Bank of England rate decision and the ECB’s equivalent announcement, which given another low inflation month (0.7 per cent), could be the catalyst for yet more easing by Super Mario.

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Stocks soar on Fed taper

The Fed finally chose to taper asset purchases, sending the dollar and stocks higher.

Fed taper spurs global stocks higher

Fed taper sends dollar and stocks higher.

At long last, after much gossip and speculation, the much-hyped Fed taper eventually came.

It was not as strong a move as many would have liked -a reduction in asset purchases of $10bn a month to $75bn – but it finally shows the bank believes the US economy is recovering enough to warrant coming off life support.

As one analyst put it, the doctors have cut the dosage, but the patient is not coming off antibiotics any time soon.

Of course the announcement caused some pretty wild moves in the markets, most obviously in the main USA stock markets where the Dow (DJIA) & S&P 500 nearly punched out record highs.

The DJIA is up close on two per cent at 16,167, while the Nikkei is 1.75 per cent higher at 15,859. The poor FTSE is only one per cent higher at 6,552.

In commodities gold and silver notched up some pretty extravagant losses – gold is down nearly 2.5% at 1,205, while silver is a whopping 4% down at 19.275. While some buyers might pile in at these prices, it has not exactly been the greatest year for precious metals – a 13-year winning streak is definitely over.

The dollar kicked higher, hitting a five-year peak against the yen, before paring gains on what many are describing as a ‘dovish taper’. Well, what else would you expect from Ben Bernanke?

And in case anyone thinks we’ll be free of QE by end of the first quarter, Big Ben also carefully left room for maneouvre.

“While we have passed or made significant progress on the labour market and growth hurdles, there is still this concern about inflation,” he said after the Federal Open Market Committee’s meeting. “If inflation does not show signs of returning to target we will take appropriate action.”

Appropriate action? That could mean a lot of different things, but it’s clear monetary policy is going to remain accommodative for a long time to come.

All eyes now turn to the Bank of Japan later this week and whether it will announce even more stimulus in its attempt to spur inflation.

Meanwhile, after all the talk earlier this year about the race to the bottom that is currency wars, let’s turn to Argentina, which seems to be teaching the rest of the world a lesson.

Argentina’s peso fell the most in four years on the Fed announcement and is now 23 per cent down for the year as the government willfully lets it depreciate to boost exports.

And of course the other side of that coin is that imports cost massively more, impoverishing the average citizen. There are those (who should know better!) suggesting that the UK should devalue in order to boost its exports – but in the same way, imports would become far costlier, and since Britain imports more than it exports, the reality is that a strong pound is what’s really needed. Don’t expect politicians to have the brains to work that out however.

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US debt ceiling deal averts crisis – but for how long?

US government debt ceiling deal

Is the US heading for another catastrophe?

A deal was done, amid all the drama exceptional even for Washington, which saves the US from defaulting on its debts. Europe’s ‘shutdownfreude’ barely got a chance to find a voice before catastrophe was averted.

Crisis over? No, not exactly. The eleventh-hour pact means the government is funded only until January 2014, while the debt ceiling will last only until February.

It’s hardly a great leap to expect to be back here in about three or four months’ time. Having said that, it will be four months closer to an election and the Republicans may be a little less willing to play the bad guy again.

The shutdown has shaved roughly $24 billion off GDP this quarter, says Standard & Poor’s. The Fed is almost certain to hold fire on tapering until March at the earliest now.

And the debt keeps on spiraling – just as well the US has the freedom to print the world’s reserve currency at will. But for how long?

As Republican Ron Paul explained a few years ago, this is not going to be the purview of the US forever.

Back in 2006, he discussed the collapse of the Bretton Woods system and the experiment with fiat money that replaced it. The speech was called The End of Dollar Hegemony. (Videos of the speech can be found here).

“A new system was devised which allowed the US to operate the printing presses for the world reserve currency with no restraints placed on it—not even a pretense of gold convertibility, none whatsoever,” he explained.

“Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.”

A deal was done with OPEC to price oil in dollars. Essentially, we emerged with a ‘petrodollars’ system whereby the greenback was ‘backed’ by oil rather than gold.

In return, the US backed oil-rich Gulf states against the threat of invasions or coups.

“The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished,” said Paul.

Now the crux of the problem facing the dollar:

“The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year,” said Paul.

“Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

“The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.”

After the debacle in Washington witnessed over the last few weeks, who knows, perhaps the case for an end to the dollar’s pre-eminence is gaining steam.We’ll probably get a little bit closer to finding out when the circus comes around again in the New Year.

IW says: “The so-called ‘debt ceiling’ had ALREADY been breached (by $48bn) BEFORE all the last few weeks’ shenanigans.  And it has been raised 15 times since the year 2000….. the entire thing – as always – was just political posturing & a total waste of everyone’s time & energy.

“The only viable solution would be massively to diminish the size of government, but of course that bunch – democrats and GOP - won’t fancy that notion if it makes them less powerful.

“But taper or no taper, money printing or no money printing, it would be very unwise to write off the dollar – at least not for ten years or maybe even more. There really is no alternative reserve currency on the horizon, whatever the fancy words from the media about China.”

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No Fed taper sends dollar tumbling

The dollar slides as the Fed chickens out on tapering in September.

Ben Bernanke and Fed monetary experiment and what it will mean to markets

Bernanke confounds markets by doing nothing

So, that was that. The Fed, despite every analyst in the land saying it would taper this month, is standing pat on asset purchases.

Bernanke and co will hold the bond buying at $85 billion a month, and interest rates will not move until 2015.

Cue the dollar tumbling to an eight-month low versus the pound and the dollar index taking a hammering.

In fact the dollar index fell off a cliff, plunging by more than one per cent to a level not seen since early February.

The S&P500 and the Dow Jones both soared to record highs after the announcement, which seemed to defy every prediction.

Gold is also up – in fact December futures climbed $11 in the 3 minutes before the Fed announcement. Someone clearly got the nod ahead of the rest of us, probably a big bullion bank.

So the easy money keeps coming and the US economy remains on life support. Apparently all the good data was not enough for the Fed.

“Conditions in the job market today still are far from what all of us would like to see,” Bernanke said after the Federal Open Market Committee voted.

He’s right: US full-time jobs versus the overall population are at their lowest since the early 80s.

Despite this most analysts had predicted a reduction in asset purchases of around $10-$15 billion a month. As evidenced by the plunging dollar, most of this had already been factored into the markets.

“We can’t let market expectations dictate our policy actions,” Bernanke added. “Our policy actions have to be determined by our best assessment of what’s needed for the economy.”

Bernanke also averred that QE is effective but it is not designed to lift the whole economy.

Practically, all this means we are not likely to see tapering happen until December at the earliest, when the monthly FOMC meeting is accompanied by a press conference for Bernanke to explain the decision.

As ever in the markets, communication – or lack of it – is everything.

With noted dove Janet Yellen now the prime candidate to take over Bernanke’s role following Larry Summers’s withdrawal, the hawkish voices could remain quiet for some time.

IW comments: “It’s all total nonsense of course, and I agree pretty much with all the above. Bernanke says interest rates will remain low till 2015, as if it’s in his gift to permit that.

“The markets set interest rates, not the Fed. Bonds will rise for a while now – maybe a month or so, in ‘safe haven’ terms, so rates will fall and Bernanke will claim the credit. However, they will resume their downwards trajectory before the year is out – ie interest rates will rise – and keep rising, leaving the Fed behind the curve as always in the bigger picture.

“Gold too will perhaps keep rising towards around $1500 (if it can get higher than $1375 soon) before falling away again. Any drop below yesterday’s low (18 September) will see the donwtrend gather momentum.”

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Where now for rhodium prices?

rhodium prices, commodity trading help, commodities, rhodium trading, ETF

Volatility is the norm for rhodium

Commodity trading: Rhodium prices are at a nine-year low.

Rhodium prices have slumped to a near-nine-year low on falling demand and oversupply in the platinum group metal sector.

Does this mean commodity traders have an attractive entry point for trading rhodium?

Compared to its platinum group metal peers, it would seem so. Prices are near their cheapest since 1997 versus palladium and in nearly a decade against platinum.

However, it seems the market for rhodium will remain lacklustre for some time to come and prices could have further to fall yet before they bottom out.

The problem with rhodium has been its extreme volatility – prices have swung from around $500 an ounce in 2003 to $10,000 an ounce in 2008. Such uncertainty saw automakers cut the amount of rhodium they use.

“Given the price and given that it’s heading towards parity with palladium, we could see some of that demand destruction unwind a bit, although the car manufacturers are very cautious,” Deutsche Bank analyst Grant Sporre told Reuters.

“It may take a while to reverse that trend. It could be another couple of years before we see rhodium prices move,” he added.

Inflows into Deutsche Bank’s rhodium exchange-traded fund (ETF) have climbed to 21,000 ounces since the beginning of April – a 25% gain – but prices have not reacted.

But the falling price is making car makers turn back to rhodium, according to Deutsche Bank.

“Rhodium does look interesting at these levels,” added Sporre.

“It’s likely to remain in the doldrums for a few years yet,” says IW.

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Gold tanks on Fed taper talk, copper upbeat

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Fed taper talk continues to affect gold

Commodity trading: Prices for gold and oil are on the slide.

Fed taper talk continues to be the only show in town as speculation the bank will dial back asset purchases as quickly as September has hit commodity prices.

Gold fell below $1,300 this week as the yellow metal heads for its longest slump in 11 weeks on bets Bernanke will scale back stimulus next month.

Gold futures for December delivery dropped 1.5 percent to $1,282.90 an ounce on the Comex in New York.

Carlos Perez-Santalla, a broker at Marex North America LLC, believes the “mood is very bearish”. He told Bloomberg: “The downward pressure in gold is testament to the belief that tapering is likely to start sooner rather than later.”

Crude oil futures are also down, while natural gas futures fell to the lowest level since February on Tuesday (August 6th).

Gold prices are already down by around a quarter since the start of the year as investors appear twitchy about the Fed’s potential to taper its $85 billion-a-month bond buying spree.

IW says: “Gold could still see $1450 or so before the next big drop, in a sharp countertrend retrace, but the drop today below last Friday’s low has lessened the odds of that happening – although the chart still shows a valid countertrend channel in the short term. Once below $1250, the chances of a significant rise will more or less disappear.”

The Fed’s most recent policy statement offered no fresh clues, but it seems the bets are firmly on for some movement on monetary policy come September.

But as analysts and officials are keen to stress, scaling back stimulus does not amount to tightening.

“The committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens,” the Fed’s statement read.

IW says: “If the markets allow. After all, QE has demonstrably failed, given its express purpose of holding down interest rates – ten year treasury interest has nearly doubled in the last 12 months for example.”

Doctor Copper administers relief

It was a different story for copper, however. Copper futures hit to a two-week high on Tuesday, following some relatively upbeat economic data from the US and the UK.

On the Comex, copper futures for September delivery traded at $3.203 a pound during European morning trade, a rise of little over one per cent. Nymex copper prices also rose to a session high of $3.207 a pound earlier in the day.

Copper traders are now looking ahead to later in the week for data on China’s trade balance as well as a report on inflation and industrial production.

IW says: “Copper is due a significant drop back.”

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