Oil, Commodities, And Stocks Fell Massively Lower As Currency Traders Sold Their Yen Based Carry Trades Over Concerns Of Sovereign Debt Worldwide

Financial Market Report for October 19, 2010

Before the market opened today October 19, 2010, the currency traders sold the Emerging Market Currencies, CEW, the Australian Dollar, FXA, the Swedish Krona, FXS, the Canadian Dollar, FXC, the South African Rand, SZR, the Brazilian Real, BZF, the British Pound Sterling, FXB, the Euro, FXE, and the Mexican Peso, FXM, against the Yen, FXY.  They also sold, but to a lesser degree, the Indian Rupe, ICN and the New Zealand Dollar, BNZ.  This as European finance ministers met in the Herman Van Rompuy led task force, for the sixth time, in an attempt to settle recommendations for European economic governance, to present at the European Leaders Summit next week.

The euro yen carry trade, that is the EUR/JPY, FXE:FXY, traded lower as did all the major currency carry trades, ie the Mexico Peso carry trade, FXM:FXY, the Swedish Krona Yen carry trade, FXS:FXY, the Canadian Dollar Yen carry trade, FXC:FXY, the British Pound Yen carry trade, FXB:FXY, the Brazilian Real Yen carry trade, BZF:FXY, the Australian Dollar Yen carry trade, FXA:FXY and the Indian Rupe Yen carry trade, ICN:FXY.  

The developed currencies carry trade, DBV:FXY, fell more than the emerging markets carry trades, CEW:FXY .

The degree of currency losses today shows that there was a sudden and massive sell off of the world’s currencies against the Japanese Yen.
FXY, -0.4%
FXE,  -1.9%
FXA, -2.6%
FXS,  -2.6%
FXC,  -3.5%
SZR,  -2.2%
FXF,  -1.4%
FXB,  -1.5%
BNZ,  -1.8%
BZF,  -1.0%
ICN,  -0.9%
FXM, -1.1%  
BNZ -1.85%
DBV, -1.6%
CEW, -1.3%

The EUR/JPY traded sharply down from 113.58 to 119.91.

The Euro, FXE, closed massively lower at 136.81. The Yen, FXY, closed lower at 121.35.

The US Dollar, $USD, traded up 1.3% to 78.25; its leveraged EFT, UUP, closed up 1.3% as well.

The USD/JPY traded up from 81.28 to 81.40; its inverse ETF, JYN, traded unchanged.

Volatility,VXX, traded up; S&P Mid Term Futures Volatility, VXZ, traded up; and Inverse Volatility, XXV, traded down.

Markets and sectors falling the most include the following; those highlighted have the greatest short selling opportunity (EPOL, BRF, DNH, TAN, KROO, SKOR, EWD, PXN, PNQI, BRF, EWP, XLYS, FAA, RZV, IWM, BJK, and RTH)
Junior Gold Mining Companies, GDXJ, -6.2%
Poland, EPOL, -5.1%
South Korea, EWY, -5.7%
Steel Manufacturers, SLX, -4.3%
South Africa, EZA, -4.5%
Copper Miners, COPX, -4.9%
Gold Mining Companies, GDX, -4.6%                                                                                                                                                       Billiton, BHP, -4.3%
Brazil Small Caps, BRF, -4.0%
Asia Pacific, Excluding Japan, High Yielding Equity, DNH, -4.2%
Solar Energy, TAN, -5.3%
Ireland, EIRL, unreported %
Austria, EWO, -3.4%
Australia, EWA, -3.4%
Australia Small Caps, KROO, -3.2%
Turkey, TUR, -3.9%
Peru, EPU, -3.8%
India Earnings, EPI, -3.1%
India, INP, -2.5%
South Korea Small Caps, SKOR, -3.2%
Sweden, EWD, -3.0%
Emerging Markets, EEM, -3.1%
United Kingdom, EWU, -2.4%
Emerging Markets Small Cap Dividends, DGS, -2.4%  New Zealand, ENZL, -3.7%
Nanotechnology, PXN, -3.0%
Nasdaq Internet, PNQI, -2.6%
Semiconductors, SMH, -1.2%
Oil Services, OIH, -3.0%
Brazil, EWZ, -3.0%
Brazil Small Caps, BRF, -4.0%
European Shares, VGK, -2.3%
Spain, EWP, –  2.3%                                                                                                                       

Emerging Europe, ESR, -3.7%
Small Cap Consumer Discretionary,  XLYS, -2.6%                                                                                                                  
Airlines, FAA, -1.9%
Gaming, BJK, -3.0%,  
Retail Holders, RTH, -1.7%
Russell 2000, IWM, -2.0%. The US small caps fell less than their world wide peers as the US Dollar, $USD, rose. One might think that as the great world wide currency deflation, that is currency devaluation, bear market gets underway, that the people in the emerging markets like Peru will suffer the most; but this will not be the case. The small cap businesses in America which depend upon easy access low cost capital from financial firms such as Nelnet, NNI, and American Express, AXP, will be quickly eliminated by a dearth of lending. Thus the United States will be the epicenter of hardship, suffering, adversity and austerity.     

Those short the leveraged ETFs prospered.
Emerging Markets, EET -6.5%
Financials, UYG, -2.2%

Oil, USO, -4.6% The 4.6% fall in oil shows the massive amount of speculation in oil at the current time stemming from yen based carry trade investing.
Oil, UCO, -8.5%
Gold, GLD, -3.1%
Silver, SLV, -4.7%
Base Metals, DBB, -3.5%
Nickle, JJN, -4.4%
Copper, JJC,  -3.8%
Lead, LD, -4.2%
Tin, JJT, -3.8%
Timber, CUT, -2.4%

World Government Bonds, BWX, -1.9%                                                                                                                                         

Emerging Market Bonds, EMB, -0.2%
10 to 20 Year US Government Bonds, TLT, +0.6%
Zeroes, ZROZ, +1.0
Junk Bonds, JNK, -0.4%
Bonds, BND, +0.2%

The small cap pure growth shares, RZG, -3.1%, fell more than the small cap pure value shares, RZV, 2.5%, as banks, KBE, fell only 0.35%; and financials, XLF, fell 1.4%.  

The chart of RZV:RZG has rebounded to the August 10, 2010 level. Having fully regressed, the small cap value shares will now fall faster than the small cap growth shares as debt deflation gets under way in stocks.     

The world wide rise in developing Europe, emerging markets, small cap, country, natural resource and basic material stocks, that came with the destruction of the US Dollar, $USD, and the rise in Euro, FXE, with the announcement of the EFSF monetary authority in early June 2010, and subsequent European Financial Institution, EUFN, Stress Tests, and subsequent anticipation of QE II, rally is done and over.     

An investment inflection point was reached yesterday. Peak fiat wealth was achieved October 18, 2010, as world shares, ACWI, closed at 45.12, and the S&P, SPY, closed at 118.28.  

The debt deflationary bear market that commenced with the onset of the European Sovereign Debt Crisis on April 26, 2010, has recommenced today October 19, 2010, as the currency traders, acted as currency vigilantes, and bond vigilantes, by selling their investment in yen based currency trades, on concern over sovereign debt globally, BWX, which fell 1.9% lower today.

The US 30:10 Sovereign Debt Yield Curve, $TYX:$TNX, moved to its highest ever value at 1.58, expressing investor’s increasing rejection of sovereign debt.

As currencies fall lower, genuine and lasting wealth will be preserved by investing in gold, GLD. I recommend that one invest in and take physical possession of gold bullion, $GOLD.

The chart of the gold mining shares relative to gold, GDX:GLD, shows that the gold mining stocks have disconnected from the price of gold, and no longer provide leverage over physical gold. In my articles, I have consistently encouraged people to invest in the real thing to avoid the kind of disconnect that happened today.

The age of profiting from the HUI Precious Metal Mining Shares, ^HUI, is finished; a spectacular chapter of investment science has been closed, as the HUI closed lower at 495.15. The HUI topped out at 533.53 on October 13, 2010. I provide a topping out chart for posterity sake below.

Research shows that the HUI Precious Metal Mining Shares almost always make market turns lower with US sovereign debt as is seen in the chart of  $HUI:$USB. I am certain that many for fee newsletter authors will encourage buying of gold mining stocks soon, I hope that readers of this document will resist their grandiose claims of future gains.   

A fair amount of carry trade investment in the junior gold mining shares, GDXJ, washed out today as these fell 6%.

In today’s news

Tyler Durden relates that Jody Shenn, Bloomberg report that Pacific Investment Management Co., Pimco, BlackRock Inc. and the Federal Reserve Bank of New York, are seeking to force Bank of America Corp to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. Bank of America, BAC, fell 4.5%; the too-big-too-fail-banks, RWW, fell 1.5% and Banks, KBE, fell 3.5%.

FinFacts reports The Franco-German agreement requires President Van Rompuy to submit proposals for “a robust crisis resolution framework” by March 2011, with a final treaty change to be agreed by 2013. German Deputy Finance Minister Jörg Asmussen said the deal represented a “clear strengthening of the rules of the Stability and Growth Pact.”

The latest proposals will allow the European Commission to place countries on watch for sanction even if they aren’t violating the budget rules, which require countries to keep their budget deficits below 3% of GDP (gross domestic product) and total debt below 60% of GDP. The agreement proposes  a two-step enforcement process: first, the Commission would designate countries that are close to or already violating the rules, a step that will require the assent of a qualified majority of EU countries.  The second step will enable the Commission to impose sanctions automatically, unless a qualified majority of countries votes to block the sanctions.

Van Rompuy said in a statement that the task force also agreed to recommend the creation of a mechanism for broader economic surveillance, an early warning system to detect risks of such problems as real estate bubbles or strong differences in competitiveness. “The crisis has shown that sound budgets are not enough to guarantee sustainable economic growth. That’s why we recommend this surveillance mechanism. Ultimately, this may result in sanctions for countries in the Eurozone only,” he said.

The finance ministers also agreed establishing public institutions at a national level to provide independent analysis and forecasts on domestic fiscal policy matters. Van Rompuy said he would now report to the European Council to get the backing of heads of state and government next week. The agreements would then be turned into legislation. “These measures should be in place as quickly as possible,” he said

FXZillion carries the Ian Taylor of the Guardian report that European Commission officials concede that there has been a Franco-German stitch-up over new euro rules. Germany and France have agreed to soften a rigid new regime of fines for countries breaking the eurozone’s budget rules a week before a crucial EU summit is supposed to ratify a punitive system aimed at shoring up the single currency. Senior EU officials preparing the new rules, which have been devised to immunise the euro against a similar kind of collapse that it faced as a result of the Greek debt crisis, put a brave face on the sudden Franco-German hijack. But European Commission officials conceded that there had been a Franco-German stitch-up to weaken the way the new euro regime would operate and to leave it more vulnerable to political horsetrading. In a another highly contentious move, Angela Merkel, the German chancellor, Nicolas Sarkozy, the French president, also agreed to reopen the Lisbon Treaty, the EU’s quasi-constitution, in order to force countries that find themselves in a crisis such as the one suffered by Greece to declare insolvency and to forfeit their voting rights in EU councils. At a summit on the Normandy coast on Monday evening, Sarkozy yielded to German pressure to reopen the treaty in return for Berlin dropping its insistence that sanctions for fiscal sinners in the eurozone be automatic. The call to reopen the treaty will run into strong resistance, with European leaders exhausted by the bad-tempered nine years it took to finalise the Lisbon pact which came into force last year. It could also spell trouble for David Cameron, the prime minister, who opposed the treaty and will come under pressure to hold a referendum in Britain if it is renegotiated. “If EU politicians want a new treaty, they must first give the people a referendum. Now is the chance for cast-iron Dave to make good on his reneged promise to hold an EU referendum. I’ll believe that when I see it,” said Marta Andreasen, the Ukip MEP. Cameron will argue that even if the treaty is reopened, the changes affect only the eurozone countries and not Britain, meaning there is no need for a British vote. For the past six months, EU leaders have been drawing up plans for “European economic governance” as a response to the sovereign debt crisis in Greece that nearly destroyed the euro and produced an unprecedented €750bn (£658bn) euro crisis fund. Insisting that the Greek disaster must never be allowed to repeat itself, they stressed there would be new disciplines for the 16 countries using the euro, entailing swingeing fines for debt and deficit delinquents. Herman Van Rompuy, the EU council president, was put in charge of a “task force” of finance officials from across the EU to draft the new regime. It met for the last time on Monday and its proposals go to an EU summit next week. In parallel, the European Commission delivered legislative proposals. Under the draft laws last month from Olli Rehn, commissioner for monetary affairs, countries would face fines of 0.2% of GDP for flouting the stability and growth pact, the euro rulebook which limits budget deficits to 3% of GDP and national debt levels to 60%. The penalties would come almost automatically, decided by the commission and could only be stopped subsequently by a qualified majority vote of EU governments. The system was designed to try to avoid the kind of political trade-offs inevitable if the decisions were taken by EU governments. Germany, as the EU’s fiscal disciplinarian, was the strongest supporter of the automatic fines and the commission. Sarkozy led the opposition, arguing for the primacy of politics and elected governments over national budgets. The Franco-German agreement said any sanctions applied would be “automatic”, but made clear that any decision to fine would be by EU finance ministers and not the commission, increasing the likelihood of political dealmaking. “Back in 2004 it was France and Germany that weakened the stability pact. Now they are doing it again,” said a senior commission official. The German media despaired of Merkel’s concessions. “The government has failed grandiosely,” said FT Deutschland, “in its campaign to make the new stability pact a real instrument of budget discipline.”

EuroIntelligence reports A political stability pact in exchange for an uncertain Treaty change on voting rights withdrawal  A decision to impose sanctions must be preceded by a vote in the European Council on the basis of QMV; once that the vote is taken, the procedure becomes semi-automatic, but sanctions can only be imposed after a delay of six months; France in turns pledged to support Germany’s request to change the Treaty to allow a temporary suspension of voting rights for deficit sinners; Jorg Assmussen claims that Germany prevailed with its automaticity request; Tremonti says that the pact is, and remains, political at its heart, and it also more flexible in its definition of fiscal sustainability than before.

Xinhua reports Eurogroup chief: Exchange rate volatility harms global economy. Excessive volatility in the exchange rates could harm global economy, the Eurogroup chief said on Monday October 18, 2010 as the euro touched a nearly nine-month high against the U.S. dollar recently. (Now, the elites tell us something that I’ve been trying to communicated for the longest time).

Business Week reports Vicious Cycle Worsened By Fed, Yu Yongding Says

EconomicPolicy Journal reports US Commercial Property Prices Drop to 8 Year Low.

Shaun Richards reports on Greece’s Current Fiscal Situation: Whilst the Greek government continually trumpets improved figures and targets met I am afraid the situation in reality is a lot less rosy. In fact her position is if anything worse than that conceived back in May and this is the real reason why the term of the aid package is looking like it will be extended. Indeed let me be clear I feel that there is no choice for the EU, as they have endgamed themselves, or more specifically Europe’s politicians and officials have endgamed her taxpayers.

If we look at what has been happening recently I wrote on the 1st October about Greece passing new tax amnesty legislation which is a way of robbing the future to pay the present and a return to her bad old ways on which the EU has been strangely silent. On the 7th October I wrote about the upcoming report on Greece’s finances from Eurostat which is expected to raise her deficit and her national debt to GDP ratio. Well expectations are still deteriorating on this front. According to Kathimerini.

The general secretary at the Finance Ministry, Dimitris Georgakopoulos, suggested yesterday that the 2009 deficit may eventually close at 16 percent of GDP. In absolute numbers, the Eurostat revision adds 3.7 billion euros to the deficit and 28.8 billion euros to the debt  … .and will reportedly reveal that the Greek state debt for last year actually came to 127 percent of GDP.

The official Greek figures were for 13.4% and 115% respectively. For those projecting this forward let me help this means that the ratio of national debt to GDP could rise as high as 160% in 2013. This compares with original estimates of 150% back in May. So she looks even more insolvent than before, no wonder the EU is thinking of extending its programme!

Also I have written in the past that Greece’s improvement in its public spending may be due to the fact that it is not paying its bills on time. Indeed on July 7th I wrote this.

However Greek contributors to my comments column have indicated to me on several occasions that this has been achieved in their opinion by the Greek government simply not paying its bills. One has translated an article from the Greek Kathimerini newspaper which suggests the following bills are currently unpaid. According to this the Greek state has unpaid bills of 10 billion Euros in 2010 which can be broken down into 6 billion to hospital suppliers, 1.6 billion to construction companies, 1 billion in unpaid VAT refunds, and rather curiously 0.1 billion to Media all around the world whatever that is, and the rest for bills such as the financing of investment programmes. Other sources at that period claimed the figure to be even higher, probably 11 or 12 Billion Euros.

So if you factor the problems with tax collection with the way it appears that Greece has improved expenditure by not paying the bills you get a completely different picture for Greece’s fiscal situation, from that given by her government. By the time that Eurostat issues its report on Friday it will be plain to everyone that at the end of the current aid package Greece will be even more insolvent than it appeared as recently as May 2010.

In my view the current aid package will not only have to be extended in terms of its length it is likely to have to be increased in size too. I would imagine that the euro zone will use its “shock and awe” vehicle the EFSF to do this as this will be the least embarrassing route for them. However it leaves taxpayers in the euro zone with an eminently predictable problem as I wrote on the 3rd of May.
Now if you put my more realistic forecasts for economic growth into the national and fiscal deficit forecasts above I think you can come to only one conclusion. At the end of this plan Greece is likely to be  insolvent.

So adding development since then I feel that the euro zone’s taxpayers would be best off considering their existing loans to be permanent and that they ready themselves for demands for more which will be along soon enough. As a suggestion when this happens then they should ask whoever gets the job of implementing this,exactly how things are ever going to improve under the current strategy?


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