Financial Market Report for April 18, 2011
1) … The Euro Fell Lower to close at 141.76
Currency traders commenced competitive currency devaluation, that is competitive currency deflation in currencies other than the US Dollar, as the seigniorage of neoliberalism failed once again.
It failed once before on February 22, 2011, with the exhaustion of QE, as the value of distressed securities traded by the Fidelity Mutual Fund FAGIX traded lower and the value of the US 10 Year US Government Bond, TLT, traded lower.
The currency yield curve, that is the ratio of the Small Cap Pure Value Shares relative to the Small Cap Pure Growth Shares Weekly, RZV:RZG Weekly, communicates that competitive currency devaluation commenced in late December 2010 and early January 2011 when the US Dollar, $USD, last topped out at 91.
This time it its not the seigniorage of quantitative easing, and QE 2, that failed, but rather the seigniorage of world government bonds, BWX, that have turned lower on failing currencies, DBV, and CEW, and falling European Financial shares, EUFN as the Telegraph reports European Sovereign Debt Crisis Worsens As Investors Bet Against Ireland, Portugal and Greece.
Chart of world government bonds, BWX
Between the Hedges reports The Spain sovereign cds is jumping +4.9% to 246.79 bps, the Italy sovereign cds is soaring +10.36% to 158.08 bps, the Ireland sovereign cds is climbing +6.64% to 608.38 bps, the Portugal sovereign cds is rising +3.47% to 623.88 bps, the Belgium sovereign cds is rising +6.24% to 145.64 bps, the UK sovereign cds is rising +4.0% to 57.94 bps, the Russia sovereign cds is jumping +7.92% to 139.0 bps and the Greece sovereign cds is surging +6.19% to 1,297.50 bps. The Greece and Portugal sovereign cds are making new record highs. Moreover, the Spain sovereign cds continues to surge. The Eurozone Investment Grade CDS Index is jumping +5.51% to 70.08 bps. The US sovereign cds is soaring +18.9% to 49.33 bps and the US Muni CDS Index is climbing +3.0% to 154.38 bps. … Zero Hedge reports Greek 2-Year Bond Yield Passes 20%.
Chart of European Financials EUFN
Open Europe reports Greek restructuring fears send shock waves across European financial markets. The Greek cost of borrowing reached record highs yesterday and the euro weakened significantly following German Finance Minister Wolfgang Schaueble’s acceptance that Greece may need a debt restructuring in the near future. In an interview with Il Sole 24 Ore, ECB Executive Board member Lorenzo Bini-Smaghi said that a debt restructuring would result in the “failure of a large part of Greece’s banking system”, and that consequently the Greek economy would be “on its knees, with devastating effects on social cohesion and the resistance of the country’s democratic system.”
Handelsblatt reports that Cyprus might be dragged into the eurozone’s debt crisis, because of the dependence of its banks on the Greek market and their high exposure to Greece’s government bonds – up to 37% of Cyprus’s GDP.
The Irish government agreed a revised version of its bailout conditions last night. The new version is reported to include an increase in the minimum wage as well as reductions in employer insurance and VAT in low paid sectors. However, it is also expected to impose further job cuts. Michael Noonan, Irish Finance Minister, suggested that the deal showed that the EU/IMF were willing to negotiate on “unpopular” areas of the bailout agreement. Meanwhile, this morning Moody’s has downgraded Ireland by two notches, leaving its credit rating one notch above junk, and put it on a negative outlook.
EUobserver Irish Times Telegraph FT FT 2 FT 3 FT 4 WSJ WSJ 2 Guardian CityAM Times BBC: Today Le Monde Les Echos DN WSJ 3 CityAM 2 Irish Times 2 Irish Times 3 FT 5 WSJ 4 WSJ 5 CityAM 3 FT 6 FT:Mallaby Jornal de Negócios Diario Económico Express: Forsyth Economist Economist 2 Economist 3 FT 7 WSJ: Cottle EUobserver 2 Il Sole 24 Ore Handelsblatt Handelsblatt 2 Handelsblatt: Solms Frankfurter Allgemeine Zeitung MNI
The failure of seigniorage globally is seen in the chart of world stocks relative to world government bonds
Now, debt deflation, that is currency deflation, is at work, driving currencies, treasury bonds of the world’s governments, country stocks and stocks lower despite the onset of earnings season.
Bible prophecy of Revelation 13: 3 communicates that out of soon coming Götterdämmerung, that is an investment flameout, an adept global leader such as Olli Rehn or Tony Blair, will arise out of a German led European federation of nations, (Revelation 13: 11-18) to provide a new seigniorage, that is, a new moneyness. He will be known as the Banker or Seignior. He will be complemented by the global Chancellor, the Sovereign, who will oversee a revived Roman Empire in Europe, similar in power and scope to that of Charlemagne, (Revelation 13:5-10) Failed seigniorage world wide, will lead to the rise of ten regions of global trade and economic governance as called for by the Club of Rome in 1974, Revelation 13:1)
2) … The European Financials and the World’s Banks led world stocks lower
World Stocks, ACWI –1.4
European Financials, EUFN -3.8%
KB Financial Group of Korea KB
Banco de Chile BCH
HDFC Bank of India, HDB
Bank of America, BAC
Emerging Market Financials, EFN
China Financials, CHIX,
Brazil Financials, BRAF
Panel Display, PANL and Kemet, KEM
Small Tools: Welding and cutting tools
Lincoln Electric, LECO,
NVIDIA Corp, NVDA
Kulicke and Soffa Industries, KLIC, and Aixtron, AIXG,
DRAM Chip Manufacturers
Micron Technology, MU,
Metal Manufacturing, XME,
Printed Circuit Boards
Vishay Intertech. VSH,
Vodafone Airtouch, VOD
Real Estate: Asset Management
Blackstone Group. BX,
BE Aerospace, BEAV,
The Morgan Stanley Cyclical Index:Basic Materials Component
Alcoa Aluminum, AA
The Morgan Stanley Cyclicals Index: Paper:
International Paper, IP
The Morgan Stanley Cyclical Index Agriculture Industry Component
The Morgan Stanley Cyclicals Index Building Systems Component
United Technologies, UTX,
The Morgan Stanley Cyclical Index: Industrial Component
The Morgan Stanley Cyclicals Index: Packaging:
Temple Inland, TIN
The Morgan Stanley Cyclicals Index Chemical Component
PPG Industries, PPG
The Morgan Stanley Cyclicals Index: Automobiles:
Johnson Controls, JCI
The Morgan Stanley Cyclicals Index:Basic Materials,
Freeport McMoran Copper and Gold, FCX,
Processing Systems And Equipment:
Computer Task Group, CTGX,
Memory Storage: Flash storage
Small Cap Information Technology PSCT
Agricultural stocks, MOO
Apple Ecosystem ETF: Smarthphone, FONE
American Tower, AMT
Environmental And Waste Services , EVX
Networking shares, IGN
World Real Estate Excluding US WPS
Internet Retail, HHH
Basic Materials: Steel Industry: Recycler
Basic Materials: Energy Services
Hercules Offshore, HERO
Industrial: Machine Tools
Solar Stocks, KWT
MGM Resorts, MGM
Health Care: Biotechnology:
Cytori Therapeutics , CYTX
Healthcare: Specialized Healthcare
Kindred Healthcare: KND
Industrial: Design And Build
Foster Wheeler, FWLT
Copper Miners, COPX
US Healthcare Provider
Well Care, WCG,
Health Care Services
United Rentals, URI
Basic Materials: Natural Gas:
Chesapeake Energy, CHK
China Energy, CHIE,
Consumer Discretionary: Television:
EchoStar, SATS and Liberty Media, LCAPA,
Diversified Equipment: Cummins, CMI
Select Comfort Corporation, SCSC
Basic Materials: Small Cap Energy, PSCE
Clayton Williams Energy CWEI
Industrial: Industrial Automation:
Rockwell Automation, ROK
FactSet Research Systems, FDS
Global Listed Private Equity (Leveraged Buyouts) PSP
Wood Producers, WOOD
Hard Asset Producers, HAP,
Health Care: Health Care Services:
HMS Holding HMSY
Health Care:Psychiatric Services
PHC Inc, PHC
Harley Davidson, HOG
China Materials, CHIM
3) … World Government Bonds and Emerging Market Bonds Fell Lower as bond vigilantes called interest rates higher globally as credit default swaps rose on sovereign debt. A global sovereign debt crisis has commenced.
World Government Bonds, BWX
Emerging Market Bonds, EMB
4) …. Base Metals and Timber Fell Lower
Base Metals, DBB
5) … Countries Fell Lower As the bond vigilantes called world government interest rates higher and as the BRICS’ central banks raise interest rates in response to inflation, all of which causes demand destruction, investment flight, and corporate profit destruction. Risk appetite turns to risk avoidance.
Best BRIC Stock Rally Since 1997 Seen Doomed as Rates Increase. The longest rally in developing- nation stocks since 1997 may be ending as higher interest rates in Brazil, Russia, India and China curb earnings growth. For the first time in two years, emerging-market analysts are cutting profit estimates more than they’re raising them, consumer stocks are trailing energy producers and shares of smaller companies are losing to larger equities, data compiled by Bloomberg and Morgan Stanley show.
The same reversals foreshadowed the end of the emerging-market rally in 2008. While the benchmark MSCI Emerging Markets Index has gained 0.9 percent this year and mutual fund investors are buying developing-nation equities at the fastest pace in five months, the gauge is valued at about 2.1 times net assets, 11 percent higher than the 15-year average. Societe Generale SA and Barclays Wealth are advising clients to reduce emerging markets investments as inflation erodes record-high profit margins. “Inflation risk is much more visible” in emerging markets than the developed world, said Kevin Gardiner, the global head of investment strategy at London-based Barclays Wealth, which oversees about $266 billion. “Growth is beginning to slow. Meanwhile, valuations look full.” China has increased borrowing costs four times since October, while India raised rates eight times since March 2010 and Brazil boosted its rate five times. Russia lifted its main rate in February. China’s benchmark one-year lending rate is 6.31 percent, while India’s repurchase rate is 6.75 percent and Brazil’s Selic rate is 11.75 percent. Russia’s refinancing rate is 8 percent. Rising costs and interest rates are starting to take a toll on company profits. Gross margin, or the percentage of sales remaining after product expenses, has slipped to an average 31 percent for companies in the MSCI emerging-market index, from 33 percent last year, the highest level since Bloomberg began tracking the annual data in 1996.
Rising commodity prices are “triggering second-round effects via higher wages,” Alain Bokobza, the head of asset allocation strategy at Paris-based SocGen, wrote in an April 11 report titled “The EM Party Is Over.” He recommends switching to developed-nation equities from emerging markets. Infosys was the seventh-biggest contributor to the MSCI index’s 2 percent retreat last week. The gauge’s decline yesterday pared the gain from its March 2009 low to 145 percent. The 21-country index has rallied for 777 calendar days without a drop of at least 20 percent, the longest stretch since July 1997, according to data compiled by Westport, Connecticut-based research firm Birinyi Associates Inc. and Bloomberg. Mutual-fund investors are also reviving bets on a rally. They poured about $10 billion into developing-nation stock funds during the past three weeks, the most in five months, data compiled by Cambridge, Massachusetts-based research firm EPFR Global show. That compares with $28 billion of outflows in the previous nine weeks, EPFR data show.
Analysts are cutting more profit forecasts than they’re raising them for seven of 10 industry group. Small- cap companies, which have market values of less than $2 billion and get a higher proportion of their revenue from consumers, trailed the biggest emerging-market stocks by 5.5 percentage points last quarter, also the most since 2008. In the MSCI emerging-market gauge, with the biggest reductions on health care, telecommunications and technology companies, according to Morgan Stanley. Consumer stocks in the MSCI emerging-market index trailed energy companies by 10 percentage points in the first quarter, the most since the second quarter of 2008, when emerging-market equities began tumbling amid the global financial crisis. “It’s quite difficult for equity markets to rally if you have negative revisions to the earnings outlook,” Jonathan Garner, the chief Asia and emerging-market strategist at Morgan Stanley in Hong Kong, said in an interview. “This is quite an important moment and we don’t think the situation will improve in the coming months.” China International Capital Corp., the country’s biggest investment bank, predicts slowing economic and earnings growth will limit equity gains in the biggest emerging stock market. (Hat Tip to Between The Hedges)
South Africa, EZA
Latin America: Cement Company: Cemex, CX
Canada Small Caps, CNDA
New Zealand, ENZL,
India Small Caps, SCIN
Latin America Small Caps, LATM,
The United Kingdom, EWU
Australia Small Caps KROO
South Korea Small Caps SKOR
Brazil Small Caps, BRF
Emerging Market Small Cap Dividend DGS,
Emerging Market Small Cap, EWX
United States Small Cap Growth Stocks, IWO
United States Russell 2000, IWM
Emerging Markets, EEM
World Small Cap, VSS
6) … The US Dollar Rose and Currencies Fell Lower
The $USD rose as Bloomberg reports S&P Puts ‘Negative’ Outlook on U.S. AAA Credit Rating. My comment is that the rating agencies are always behind the curve. Currencies falling lower included,
FXS -1.7, XRU -1.6, FXE -1.3, BNZ -1.0, SZR -0.8, CEW -0.8, FXM, -0.7, ICN, -0.6, FXF -0.5,
FXC -0.4, FXA -0.4, BZF -0.4, FXB -0.2. The failure of seigniorage is seen in developed currencies relative to emerging market currencies, DBV:CEW topping out as the the world’s developed country Treasuries such as the 10 Year US Government bond, TLT, top out.
7) … Dow Theory relates that a global bear market is underway as industrial shares, IYJ, and transportation shares, IYT have fallen lower in Elliott Wave 3 Down.
DIA -1.2%, NYC -1.5%, SPY -1.1%, The Morgan Stanley Cyclicals Index, $CYC, -1.2%,
8) … Gold and silver are well established as global sovereign currency possessing universal seigniorage. Gold, GLD +0.6%, Silver, SLV +1.4%, Precious Metals, JPP +0.9%. The failure of traditional seigniorage is seen in the fall lower of the HUI Precious metal mining stocks, $HUI, relative to 30 Year US Government Bond, EDV, $HUI:$USB. and in the fall of the silver mining stocks, SIL, especially Silver Standard Resources Inc, SSRI. -0.9%, GDX -1.0, SIL,, -2.4%
The world is transitioning from … an age of leverage, characterized by
and neoliberalism led by democracies
… and into … an age of deleveraging, characterized by
lack of moneyness,
and the rise of sovereign authority led by the feudal state corporatism and privatization of government as described by Mike Mish Shedlock in article Dissolving Government in Michigan
9) … Utilities, XLU, entered an Elliott Wave 3 Down.
10) … Junk Bonds, JNK, turned parabolically lower, confirming the failure of the seigniorage of neoliberalism and the end of credit as it has been known.
11) … Biotechnology, XBI, and IBB, and Health Care Small Caps, PSCH, turned lower manifesting bearish at the top of an ascending wedge.
12) … Inflation Destruction starts demand destruction as Bloomberg reports Iron-Ore Ship Rents Fall to Six-Week Low on Surplus Vessels. Rents for capesize ships that haul iron ore fell to the lowest level in six weeks on excess vessel supply. Hire rates dropped 2.9 percent to $6,655 today, according to data from the Baltic Exchange in London. That’s the lowest since March 7 and the 11th straight decline. Rentals fell 36 percent in the three weeks to April 15. “Ship supply continues to outpace demand for most asset classes,” Jonas Advocaat Kraft, an analyst with Pareto Securities AS in slo, said in a note today. The carrying capacity of the fleet of ships to haul commodities such as coal, iron ore and grains will expand 13 percent this year, compared with a six percent increase in demand, according to forecasts from London-based Clarkson Plc. Companies ordered too many ships in 2007 and 2008, when the Baltic Dry index, a measure of commodity shipping costs, averaged 6,730 points. The index then plunged 60 percent during the next two years, according to the exchange. The gauge fell 0.9 percent to 1,284 points today, a 15th straight drop. Hat Tip to Gary Of Between The Hedges)
Chart of Iron Ore Manufacture Cliffs Natural Resources, CLF
13) … Doug Noland in article Making Room for China writes on the Global Government Finance Bubble which is coming to full expansion at the end of the Age of Leverage heralding the emergence of a global sovereign debt crisis. I fully expect the value of world government bonds, BWX, to begin to tumble quickly. Mr. Noland states:
“When it comes to Bubble Analysis, the stunning expansion of Treasury debt and Federal Reserve Credit offers an easy target. Yet I’ve posited for two years now the emergence of something quite more expansive – a “Global Government Finance Bubble.” The key dynamics involve an extraordinary expansion of government borrowings and central bank balance sheets around the world – developed and “emerging.” I have argued that China is in the midst of the “terminal phase” of Credit Bubble excess, a circumstance that has created powerful financial and economic interplays with respective U.S. and global Bubbles.
The current environment could not be more fascinating from the standpoint of analyzing Credit and Bubble dynamics. Most everyone is dismissive of the notion of some new Bubble, in the U.S. or elsewhere. Few are willing to see anything resembling huge excess or market distortions. Meanwhile, charts of Treasury debt, the Fed’s assets, and Chinese reserve holdings confirm that something unique in the history of finance is unfolding right before our eyes.
It’s worth a brief review of the week’s economic data out of China. At 9.7%, first quarter Chinese growth was stronger-than-expected – and the fastest pace of expansion since 2008. March exports were 35.8% higher y-o-y, outpacing imports that expanded 27.3%. Also above consensus forecasts, industrial production advanced 14.8% and retail sales jumped a brisk 17.4%. The value of first quarter home sales increased a notable 26% from the year ago period. New home construction was up 20% during the quarter. It all points to another record year of Credit growth.
There is not yet much to show for Chinese government efforts to impose some monetary restraint. March bank lending increased to $104bn, 16% ahead of estimates. At almost $380bn, first quarter bank lending was significantly above target. March M2 money supply growth of 16.6% was also above estimates. In its warning this week on Chinese debt, Fitch noted that loans to the Chinese corporate and household sectors last year jumped to 140% of GDP, up from 111% back in 2008. At 5.4%, March year-over-year consumer price inflation was the highest since 2008, with food inflation jumping to 11.7%. And while on the subject of inflation, consumer prices have been rising at an almost 9% pace in India.
It is a tenet of Credit Bubble analysis that Bubbles over time become progressively impervious to government tightening measures. A key facet of a Bubble’s “terminal” phase is that only aggressive intervention will work to restrain broadening lending, speculating, and spending excesses. Excess begets excess. Meanwhile, the perception of escalating risks associated with intervention virtually ensures policymaker timidity. This remains my expected course for China.
China has clearly reached the point where it plays a critical role as marginal buyer of global energy, commodities and, increasingly, goods and services, while at the same time operating as a key source of liquidity for global financial markets. Central to the global Bubble thesis is that government stimulus from Washington to Beijing has boosted growth, while also profoundly impacting marketplace liquidity, global financial flows and the perception of risk throughout the markets. The global liquidity backdrop is increasingly a serious problem for China, and Chinese inflation is a growing issue for the world.
The weak dollar, in particular, has been critical to the unleashing of Credit and speculation excess throughout the so-called “emerging” markets. China and the other Bric countries continue to operate in a highly unusual environment of rampant Credit growth and mounting imbalances, while at the same time enjoying rock solid currencies relative to the soft dollar. QE2 incited a whirlwind of “hot money” flows out to various “undollar” destinations, including energy and commodities, the emerging economies and China. And the incredible growth in Chinese international reserves is confirmation of the scope of today’s global “hot money” flows. It is worth noting that Chinese reserve growth had slowed markedly in 2010, before accelerating rapidly after the Fed’s decision to proceed with another round of quantitative easing.
The Fed is keen to absolve its rate policy and “QE2” as responsible for surging energy and commodities prices – pointing instead to robust Chinese and the developing world demand. I would be curious to hear how they see zero rates and quantitative easing as having impacted the dollar, as well as what role the weak dollar has played on global speculation and financial flows. Do they see a connection between their monetization of Treasury debt, resurgent speculative trading and asset inflation, enormous “hot money” flows, the rapid expand expansion of Chinese reserve holdings, and the “recycling” of these dollar balances right back to the Treasury market? Are they oblivious to the self-reinforcing nature of these Monetary Processes – to such Bubble Dynamics?
Pronouncements from this week’s meeting of the Brics countries (Brazil, Russia, India, China and, included in meetings for the first time, South Africa) made it rather clear where they stand: “Excessive volatility in commodity prices, particularly those for food and energy, poses new risks…” “We call for more attention to the risks of massive cross-border capital flows now faced by the emerging economies.” Brics leaders are calling for more regulation of derivatives markets. They also seek a modified global monetary system with a reduced role for the dollar and less dictated by U.S. and developed world monetary policies. And one of these days they may actually impose their will.
count me skeptical on their capacity to manage an increasingly complex inflation problem. It is today unclear that they are succeeding in attempts to slow rapid bank lending. At the same time, they confront massive inbound financial flows. I am not convinced that they have a handle on the myriad sources of non-bank Credit expansion (domestic and international) impacting their economy and various price levels. The overall financial environment remains too loose, yet aggressive rate hikes would lead to only more destabilizing “hot money” inflows.
Chinese authorities have apparently achieved success in reducing trade imbalances. One could argue that they are meeting the global call to boost consumption, a least partially accomplished through the rapid inflation in wages and incomes. Indeed, the historic inflation of system Credit, incomes, corporate cash flows, asset prices, and household net worth greatly surpasses even the Japanese Bubble experience. And, increasingly, this enormous expansion in purchasing power is stoking inflationary pressures at home and abroad – and risks an inflationary wage-price spiral.
Pimco’s Mohammed El-Erian, while espousing a bullish view on China, suggested that there was a potential issue with the “world making room” for China. This is a good way of thinking about it.
Until recently, the ultra-loose liquidity backdrop ensured that China (and others) invested enormous amounts in manufacturing capacity. Despite global Credit Bubble excesses, price pressures were mainly relegated to securities and real estate prices. Many argued that China – and the emerging economies – were “exporting deflation.” There are indications that the nature of inflationary forces is changing.
I am of the view that we have likely passed a tipping point where China and the “emerging” economies now exert increasingly strong inflationary pressures upon the global economy. Rapidly growing developing world incomes would tend to support elevated energy and commodities prices, while ensuring an upward inflationary bias in much that is produced globally. The cheap wages and low cost structures that combined with cheap finance to ensure seemingly endless goods seem to have run their course. It is worth noting that U.S. March import prices were up 9.7% y-o-y, with Producer price inflation trailing somewhat at 5.8%.
The Fed sees things altogether differently, clinging to the notion that the recent jump in energy and commodities prices will have only a “transitory” impact on inflation. They view “inflation” through a myopic focus on “core CPI” – and just don’t discern much having changed in the world. But when I examine global price pressures, I see important dynamics that have been years in the making.
The confluence of a persistently weak dollar, booming real and speculative demand for commodities, massive “hot money” flows, and rapid Credit and wage growth throughout the increasingly powerful “developing” world is in the process of fundamentally altering global price structures. Meanwhile, developed world structural debt problems and vulnerable recoveries ensure unrelenting monetary looseness.
Yield charts for Greek, Irish and Portuguese debt suggest that the world is neither oblivious to structural debt problems nor the difficulties in trying to rectify them. At the same time, expectations for ongoing near-zero Fed funds place a low ceiling on Treasury (and related) yields. I would argue that a heavily distorted “Bubble” market for determining U.S. Treasury yields disregards risks associated with U.S. structural debt issues and a rapidly deteriorating inflation backdrop. One of these days, China and fellow Brics nations may arrive at the conclusion that the best hope they have for reining in “hot money,” surging commodities prices, and increasingly unwieldy inflation is to back away from supporting our debt markets.”