Thunderbirds Are Go! International Rescue (the IMF) are Primed and Ready to Launch

It’s so comforting to know that the ‘lender of last resort’ always has its priorities in the right place. On September 22nd, amongst the press releases issued from its headquarters in Washington, the IMF finally released the news that the markets, central banks, governments and the multi faceted worldwide collection of, investors, commentators and journalists had been waiting for with baited breath for months. Naturally to counter a situation so grave, so potentially and economically terminal, that strikes so deep at the core of the global economy takes months to ratify, but finally it’s here, ladies and gents we’re saved, the IMF iPad app is with us…

As the IMF met last week in Washington to thrash out the latest ‘thrash out’ there was a slip up that caught many media analysts and market commentators unawares. Just how much money has the IMF actually got? You know like real money, not fractional reserve fiat ‘make it up as you go along’ currency in any denomination you can think of, but actual reserves provided by ‘member’ nations? It turns out that the IMF only has $400billion..(actually it has closer to $600billion but under its articles can only lend $400billion).

When announced you can imagine Ms. Lagarde saying it with a stifling cough and blaming it on the Gitanes, “er..$400 bl..cough..next question please”. So the saviour of the masters of the universe, the Grand Inquisitor of the markets, the Lord Voldemort of the financial wizards only has enough to rescue Greece’s default, then it’s all out of spare change..?

So what does the IMF actually do? Here’s a quick resume..

The International Monetary Fund was conceived in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States, with the delegates to the conference agreeing on a framework for international economic cooperation. The IMF was formally organised on December 27, 1945, when the first 29 countries signed its Articles of Agreement. The statutory purposes of the IMF today are the same as when they were formulated in 1943.

Its stated goal is to stabilise exchange rates and assist the reconstruction of the world’s international payment system. Countries contribute to a pool which can be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF was important when it was first created because it helped the world stabilise the economic system. The IMF works to improve the economies of its member countries. The IMF describes itself as “an organisation of 187 countries (as of July 2010), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.”

The IMF’s influence in the global economy steadily increased as it accumulated more members. The number of IMF member countries has more than quadrupled from the 44 states involved in its establishment, reflecting in particular the attainment of political independence by many developing countries and more recently the dissolution of the Soviet Union. The expansion of the IMF’s membership, together with the changes in the world economy, have required the IMF to adapt in a variety of ways to continue serving its purposes effectively.

In 2008, faced with a shortfall in revenue, the International Monetary Fund’s executive board agreed to sell part of the IMF’s gold reserves. On April 27, 2008, former IMF Managing Director Dominique Strauss-Kahn welcomed the board’s decision of April 7, 2008, to propose a new framework for the fund, designed to close a projected $400 million budget deficit over the next few years. The budget proposal includes sharp spending cuts of $100 million until 2011 that will include up to 380 staff dismissals.

At the 2009 G-20 London summit, it was decided that the IMF would require additional financial resources to meet prospective needs of its member countries during the ongoing global financial crisis. As part of that decision, the G-20 leaders pledged to increase the IMF’s supplemental cash tenfold to $500 billion, and to allocate to member countries another $250 billion via Special Drawing Rights.

On October 23, 2010, the ministers of finance of G-20, governing most of the IMF member quotas, agreed to reform IMF and shift about 6 percent of the voting shares to major developing nations and countries with emerging markets. As of August 2010 Romania ($13.9 billion), Ukraine ($12.66 billion), Hungary ($11.7 billion), and Greece ($30 billion) are the largest borrowers of the fund.

So now the history lesson is over it’s time to concentrate our minds on the serious business and this is very serious. It’s the kind of serious that won’t mean anything to Jo or Joe ‘Six Pack’ (that’s my nod to political correctness, we’ve all met women that can drink as well as blokes) but the importance and gravity, given it is in effect potentially ripping up certain strict edicts that the IMF is supposed to adhere to, is stunning.

According to the Dow Jones newswire;

The International Monetary Fund, looking to assure markets that it has the financial firepower to deal with the deepening problems in Europe and crises elsewhere, is exploring how it can have at least $1.3 trillion in lending power, according to officials involved with the discussions. The IMF currently has about $630 billion in usable resources; about two-thirds of that could be lent under IMF rules. Under the plan being considered, the fund would need to make permanent a $590 billion temporary lending facility that was put in place in response to the 2008 financial crisis. The IMF is also counting on member nations to finally enact a doubling of IMF member country dues, totalling $750 billion, which have already been approved in principle. Approvals by national parliaments are expected in early 2012. The IMF is also weighing whether to sell bonds in private markets on short notice, a move that could bolster its safety net beyond $1.3 trillion. The IMF has never sold bonds of this sort, and the U.S. and Germany among others have resisted such moves out of concern that the IMF would have too much independence from its major shareholders. It’s not clear whether that opposition has lessened with the ongoing global financial turmoil.

There are very concerning aspects regarding this announcement, that the IMF ‘telegraphed’ the global sovereign debt crisis is about to get much worse, by tipping Dow Jones off and it dutifully reporting it is “exploring” ways to double its gross lending power to $1.3 trillion, is not unusual. A slow bleed into analysts’ consciousness is a well trodden path to prevent panic.

However, whilst not in itself a ‘bad thing’ adding this $1.3 trillion to the EFSF’s proposed $3 trillion expansion, means global bailout capacity will soon hit $5 trillion. How, why and who gets to pay interest on that monumental sum is the real issue, surely the IMF is not considering issuing its own bonds to pay for this mega bailout facility, has the system really reached this new nadir? Such a move would take the SDR (special drawing rights) one step closer to being an alternative gold-backed reserve currency, and in a stroke dilute the hegemony of the Western axis much to the delight of Russia and China. We do indeed live in interesting times.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/thunderbirds-are-go-international-rescue-the-imf-are-primed-and-ready-to-launch/

Ka Mate; The Haka Won’t be Enough to Rescue New Zealand from it’s Financial Malaise

So many of the sacred cows of the investment world and financial boom appear to be getting slain lately that it’s becoming increasingly difficult to keep up. Australia appears to have recently lost it’s edge and shine and now New Zealand’s economic growth is under intense scrutiny. Similar to the Aussie the Kiwi has been an incredible store of wealth during the turbulence since 2008 – 2009. Not necessarily due to the excellent fiscal and monetary policy put in place by their relative governments, but moreover due to their base rates being out of sync with other major developed economies.

It is now accepted that the benefits of Australia’s mineral boom wealth have been severely over estimated, both in terms of employment opportunities and GDP, New Zealand has relied heavily on its one dimensional ‘parasitic’ relationship with Australia in order to ‘chug’ along for decades. Any slowdown Australia experiences, however small, will intensify New Zealand’s predicament.

New Zealand has a market economy which is dependent on international trade, mainly with Australia, the European Union, the United States, China, and Japan. It has very small manufacturing and high-tech sectors, tourism and primary industries like agriculture being the main economic drivers.

New Zealand income levels used to be above much of Western Europe prior to their deep crisis of the 1970s, and have never recovered in relative terms. The New Zealand GDP per capita is less than that of Spain and about 60% that of the United States. Income inequality has increased greatly, indicating that significant proportions of the population have very modest incomes. New Zealand had a very large current account deficit of 8–9% of GDP in 2006, its public debt stands at circa 21.2% of the total GDP, which is small compared to many developed nations.

However, between 1984 and 2006 net foreign debt increased 11-fold, to NZ$182 billion, NZ$45,000 for each person. The combination of a modest public debt and a large net foreign debt reflects that most of the net foreign debt is held by the private sector. At 31 December 2010, net foreign debt was NZ$253 billion, or 132% of GDP. At 31 March 2011, net international debt was $148.2 billion.

New Zealand’s persistent current account deficits have two main causes. The first is that earnings from agricultural exports and tourism have failed to cover the imports of advanced manufactured goods and other imports (such as imported fuels) required to sustain the New Zealand economy. Secondly, there has been an investment income imbalance or net outflow for debt-servicing of external loans. The proportion of the current account deficit that is attributable to the investment income imbalance (a net outflow to the Australian-owned banking sector) grew from one third in 1997 to roughly 70% in 2008.

New Zealand has now lost its top credit grades at Standard & Poor’s and Fitch Ratings, the first Asia-Pacific nation in a decade to have its local-currency debt cut from AAA. Government bond yields rose by the most this year. The outlook is stable after the long-term local-currency rating was reduced one level to AA+ and foreign-currency debt was cut to AA from AA+, S&P said in a statement. New Zealand’s dollar extended its biggest quarterly drop since 2008 after Fitch announced similar moves yesterday.

New Zealand’s dollar slid for a third day, declining to 76.72 U.S. cents as of 6:03 p.m. in Wellington from 77.10 cents yesterday in New York. The currency has weakened 7.5 percent since June. The downgrade “follows our assessment of the likelihood that New Zealand’s external position will deteriorate further at a time when the country’s fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth,” S&P said in its statement. New Zealand’s economy grew 0.1 percent in the three months through June from the previous quarter, less than the 0.5 percent growth economists had predicted. The jobless rate has stayed above 6 percent since the second quarter of 2009, compared with the 4.8 percent average over the past decade. It be only a matter of time before Moody’s attaches a negative outlook to New Zealand in its rating.

New Zealand’s net external debt of 83 percent of gross domestic product in U.S. dollar terms at the end of last year compares with the median of 10 percent for AA-rated nations, Fitch said. The current-account deficit, the widest measure of trade because it includes services and investment income, is likely to widen to 4.9 percent of GDP in 2012 and to 5.5 percent the following year.

If you’re one of the directors of Fitch and Standard and Poor’s you’re unlikely to be welcomed with open arms once the rugby world cup gets to it’s final stages. If the greeters say Ka Mate it’s not a welcome..

Asian markets suffered a mixed experience in overnight and early morning trade, the Nikkei was virtually unchanged at the close at 0.01% up, the CSI closed down 0.26% and the Hang Seng closed down 2.32% having now lost circa 22% year on year. European markets are down in morning trade, the optimism of Germany finally ratifying the ‘doling’ out more money to Greece (who are still at DEFCON 2 stage in terms of probably defaulting) appears to have been replaced by reality. Whilst the troika meets to further flesh out ideas with regards to euphemisms such as “orderly default” the positioning the postulating simply drags on. At what point will the market makers and movers wake up the fact that no solution, or attempt at a short to medium term solution, has actually been put in place?

The UK FTSE is currently down 1.27%, the STOXX is down 1.49%, the CAC is down 1.37% and the DAX is down 2.35%. The SPX equity future is down circa 0.7%. The euro has fallen sharply versus most major currencies particularly the dollar. Sterling has followed this pattern with the exception of the CHF were it has rallied.

The data publications to be mindful off at NY opening (or thereafter) include the following:

13:30 US – Personal Income August
13:30 US – Personal Spending August
13:30 US – PCE Deflator August
14:45 US – Chicago PMI September
14:55 US – Michigan Consumer Sentiment Sep

Perhaps the most prominent is the Michigan consumer sentiment data, the 61 economists surveyed by Bloomberg yielded a median forecast of 57.8, compared with the previous release which was also 57.8. If it falls significantly it could affect market sentiment. The personal spending income figures could also prove to be revealing and of more importance than the income figures as investors are able to get an idea of market sentiment and economic direction as two-thirds plus of the USA economy is reliant on consumer spending. Economists polled by Bloomberg predicted 0.20% compared with a previous figure of 0.80%.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/ka-mate-the-haka-wont-be-enough-to-rescue-new-zealand-from-its-financial-malaise/

Market Commentary - Spain’s Bull Fighting Ends But The Fight In The People Lives On

As Spain suffers a general strike today, in opposition to the severe austerity measures, once again the mainstream news outlets choose to largely ignore the protests. Buried deep amongst the torrent of news relating to the Eurozone crises, there is one aspect that hardly ever merits a mention, the human angle.

Whilst countries such as the UK have (so far) escaped the viciousness of the austerity measures put in place by their governments, in order to meet pre-defined deficit reduction plans, other countries have been brought to their knees. What should be of concern is just how determined and united the majority of the mainstream media appear to be in deliberately ignoring the plight of European citizens in certain areas of: Spain, Italy and Greece. Up to ten million workers, approximately half of Spain’s workforce, have shown equal determination by withdrawing their labour today.

Picketers blockaded wholesale markets in Madrid, Barcelona and other regional capitals in the early hours of Wednesday, throwing eggs and vegetables at lorries attempting to deliver produce. Shops on Madrid’s main street the Gran Via were forced to close after protesters staged a march up the street at midday chanting “strike, strike”. Rubbish was left uncollected, leaflets produced by the unions urging workers to stay at home littered the streets. Scuffles broke out between police and strikers at factory gates across Spain, reports suggest at least 15 people were injured nationwide.

Major demonstrations were called outside banks and government offices in cities throughout the day with the biggest expected in central Madrid at 6.30pm. Spanish unions said 10 million, more than half the workforce, joined the action and claimed the first general strike in eight years was an “unquestionable success”.

Perhaps it’s the location of the areas worse hit and their distances from the major capitals that causes the international press to ignore their plight, but they don’t have to dig that deep in order to uncover some extremely worrying trends regarding the future of not only the local economies but also the scarred society that could be left in ruins once this Eurozone crisis is over. If it is to be the next ‘shoe to drop’ then Spain’s default and bankruptcy could make Greece’s predicament look like pocket money and there are worrying signs that the contagion has already spread.

Spain’s official unemployment rate is circa 22%, or 4.2 million. However, like many mixed methodology data measurements it’s subject to interpretation and could be higher given the vast swathes who have simply given up looking for work. Youth unemployment statistics are impossible to establish, but unemployment for adults under the age of 25 is now put at 45%, close on half of young adults are unemployed, a far bigger percentage than Greece were the corresponding number is still an equally shocking 30% for adults below the age of 29 and 16.1% as a total unemployment figure. The ratings agency Moody’s has warned that Spain’s regions, which account for half of all public spending, will not meet their deficit reduction targets for this year.

Moratalla in south-east Spain is in a deep financial hole. The local government used the petrol station there to fill up their official vehicles to dustbin lorries. But it has not paid for that fuel for a year, creating up a €42,000 bill. Jose Antonio explains on the forecourt of his family-run garage; “They say they’ve got no money, but the debt is intolerable now. We can’t serve anyone else from the town hall until they pay us what they owe. It’s a disgrace.”

Elderly men and women play dominoes and cards at a day-care centre, or work with therapists on memory games designed for children. The centre is run by the town hall, but like all public employees in the area the women who work there have not been paid their salaries for five months. Director Candida Marin explains;

“The situation is extremely serious. We’re having to borrow money off each other; even off our parents. We’re just living from day to day. The staff stay on mainly out of loyalty. The fact is, Moratalla is almost penniless.The town hall is in trouble, and has to tighten its belt. It has to cut all unnecessary spending.”

The cuts might put pressure on vital social services. Fees for the town’s public nursery have already doubled. The day-care centre was built during Spain’s illusory economic boom and outside stands the framework and shells of two unfinished blocks of flats symbolic of how the boom went bust.

As tax revenue to the regions fell, spending on education and health still increased. The number of public employees soared. The level of regional debt more than doubled from 2007-2010, putting additional pressure on government efforts to cut Spain’s overall budget deficit and convince investors the country won’t follow Greece in needing a bailout.

Moratalla’s mayor blames his Socialist Party predecessor for what he calls the “critical” situation. The 28.5m euros worth of debt he inherited after winning local elections in May was twice what he had expected. So he has made a series of dramatic spending cuts. Antonio Garcia Rodriguez explains; “Anything that is not essential, we don’t do. The police don’t conduct routine patrols by car anymore. They go on foot to save fuel and only take the car when the situation requires it.”

The town hall is no longer cleaned every day. Ten out of 90 members of staff were made redundant. Those kept on had their mobile phones cut off. The municipal pool remained closed over the summer and the fate of future town fiestas looks bleak. But the mayor says he still needs emergency credit to stay afloat, and he is sure Moratalla is not the only town in trouble. “We have brought our situation here to public attention. Perhaps other towns have not done so. They need to disclose their situation”

In Albacete, to the north, the power company cut the supply to municipal-owned buildings last week, becoming impatient that the local government was simply ignoring its million-euro debt. The library and swimming pool were plunged into darkness and remain closed.

Further west in Huelva, an entire town’s police force went on sick leave after four months without pay. Almost all of the entire police force of a small town in southern Spain have gone on sick leave in a dispute over payments. Fourteen policemen from Valverde del Camino say they are psychologically unfit for work after not receiving their salaries for four months. They spent the day staging a sit-in protest at the town hall, instead of working. However, they deny they are on strike, as that is illegal for police. It is the latest manifestation of a major problem in Spain, where the economic crisis has left many town councils and local governments with debts they say they are unable to pay.

We’re living on credit – getting help from our mothers, fathers, brothers, whoever” – Jose Manuel Gonzalez police officer. Finally, the patience of policemen in Valverde del Camino was worn out, 14 out of a total force of 16 officers signed off sick, producing doctors’ notes saying they were in no psychological state to work. There are only 13,000 residents in the town, in far south-western Spain. But successive mayors there have run up a staggering $74m (£47m) in debt: that’s the most in the country per capita. This month, clinics under contract to the Castilla-La Mancha region announced they would stop performing publicly-funded abortions. They are currently owed more than a year’s pay for almost 4,000 terminations.

In Moratalla, much of the money owed is to local small businesses and individuals, metal worker Juan Carlos Llorente has metal dustbin parts and park benches lying around his workshop, ordered by the town hall and never paid for.

"They owe me 15,000 euros and that’s an awful lot for me. I have a wife and two children, a mortgage, loans and a car to pay for from this business. The future looks very bleak."

Just how bleak that future will be will depend on whether or not the markets come hunting for Spain’s debt in the same manner Greece was attacked.

Source: FX Central Clearing Ltd. (FXCC BLOG)

Daily Market Roundup by FXCC - September 29 pm

In a late rally US stocks climbed to end the day in positive territory. The SPX closed up 0.81% to be back in positive territory year on year. Whilst the markets expected a unified vote by the German government to be duly ratified disappointing consumer confidence figures weighed heavily in mid afternoon trade. Consumer confidence in the USA slumped last week to the second-lowest level on record as Americans grew more concerned with their financial situation and the buying climate worsened. The Bloomberg Consumer Comfort Index dropped to minus 53 in the period ended Sept. 25 from minus 52.1 the prior week.

The full outcome of the latest troika meeting is still to be revealed. Presumably the markets have, in similar fashion to the German bailout vote, already priced in a positive outcome. The depth of the rabbit hole has been potentially exposed by the head of Europe’s markets regulator who is warning banks to be consistent in their valuations of sovereign debt amid concern some lenders have failed to record sufficient losses on Greek bonds. Quite where they’ll move the hidden losses to remains to be seen. Steven Maijoor, chairman of the European Securities and Markets Authority, likened the lack of transparency about banks’ individual holdings of government debt to the subprime mortgages that triggered the credit crisis.

Lack of transparency regarding exposures to subprime mortgages created a situation of uncertainty about the financial positions of banks, a lack of transparency from banks on their exposures to sovereign debt and related instruments are generating new suspicions about the conditions of individual banks and this requires similar answers in terms of transparency. We are currently looking at how banks are applying International Financial Reporting Standards for the valuation of sovereign debt, It is very important for ESMA that financial institutions apply IFRS correctly, and are consistent in their valuations of sovereign debt exposures.

The International Accounting Standards Board have accused banks of failing to write down the value of their Greek government debt to reflect market prices; the mark to model as opposed to market phenomena is alive and well. Lenders’ impairments on Greek government ranges from 6 percent to as much as 51 percent in the second quarter, according to analysts at Citigroup Inc.

Bigger challenges loom for the euro zone now. Financial markets are already anticipating a likely Greek default and demanding more far-reaching measures to prevent the crisis that began in Athens from spreading far beyond Europe and its banks.

Despite the German vote, developments in Spain and Italy highlight the challenges facing the euro zone’s sovereign debt crisis. Spain’s ruling Socialists shelved plans to sell part of the state lottery for up to 9 billion euros. Italy had to pay the highest yield on a 10-year bond since the introduction of the euro in 1999 at an auction on Thursday, the first long-term sale since Standard & Poor’s cut the country’s sovereign credit rating.

Rome’s funding costs remain under pressure. Analysts say the government’s tentative crisis response has harmed investor confidence. Italy sold 7.86 billion euros of long-term bonds, moving closer to a target of 430 billion euros for the year, but the 10-year yield rose to 5.86 percent at the auction, up from 5.22 percent a month ago.

“That’s eye-watering yield levels,” said David Schnautz, a rate strategist at Commerzbank.

Whilst there was a brief wave of market optimism regarding the latest USA job numbers an excellent report from Reuters has delved deeper to uncover the levels of harmful stagnation the jobs market is currently suffering. The major concern being that short term cyclical unemployment has in fact transformed into something not seen since the USA great depression, long term structural unemployment.

NFP figures due next Friday are likely to show the unemployment rate stuck at 9.1 percent in October (despite near-zero interest rates) as an unprecedented 30 percent of the jobless have been out of work for a year, a stagnant pool of workers whose job prospects can only decline as their skills rust. Having lost circa 9 million jobs since the onset of the great recession the USA has a massive fight back on its hands in order to recover to pre-crash territory, or accept that previous employment levels are unlikely to return in the medium term and organise policy accordingly. Perhaps time has finally come for Americans to think the unthinkable; full employment is a distant memory and may take a generation to return and only then by way of a complete re think by the incumbent politicians.

European markets mainly closed up on Thursday, the UK FTSE breaking the mould by closing down 0.4%. the STOXX closed up 1.64%, the CAC closed up 1.07% and the DAX up 1.10%. The UK FTSE equity index future is indicating a positive opening for the London session, currently up circa 0.4%. the SPX is currently up circa 0.3%. The Euro pared most its gains during the main indices retracement and late rally to remain fairly flat versus the major currencies. Sterling followed a similar pattern.

There is a raft of USA data publications that could be a sentiment changer on or after NY open, in the morning London and European session the key publications are;

10:00 Eurozone – CPI September
10:00 Eurozone – Unemployment Rate August.

A Bloomberg survey of analysts shows a median estimate of 2.5% year-on-year core inflation, unchanged from the previous figure. Economists polled by Bloomberg gave a median forecast of 10% for the Eurozone unemployment rate, which would be unchanged from last month’s figure. This static expectation should hold firm given Germany’s positive employment figures released on Thursday.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/september-29-pm/

Market Commentary - Why the Robin Hood Tax, Belongs With the Men in Tights

Not wanting to be left behind by various actors, pop stars and other members of the glitterati, the European Commission president Jose Barroso played his popular card in his EU address on Wednesday and lent his support to the zeitgeist of banker hatred by suggesting that a financial transaction tax, the Tobin tax, or what’s come to be known as the “Robin Hood” tax should be implemented. Apologies for over using the Rome burns whilst he fiddles analogy, but if Greece takes a bath and goes into an uncontrolled default spiral and it spreads to Italy, which is a $3 trillion bond market, then Barroso’s plan to raise €54 billion a year would be rendered impotent and irrelevant. Under Barroso’s proposal, which he claims has the support of 65% of European citizens, a minimum tax rate on trading of bonds and shares would be set at 0.1% and 0.01% for derivative products and be levied on trades where at least one of the institutions is based in the EU.

Opponents argue it could stifle growth and damage the City. Sam Bowman, head of research at the Adam Smith Institute, said: “The Tobin tax or financial transaction tax proposed by José Manuel Barroso would achieve exactly the opposite of what the EU wants. It would increase volatility by forcing traders to make fewer but bigger trades, which would create bigger lurches up and down on financial markets.”

This myth with regards to the transaction tax needs de-bunking, the reputation of the mythical Robin Hood and his merry band of vagabonds in tights may have gone uncontested for far too long, but that’s a story for another day, quite simply the FTT concept won’t ‘work’.

Amongst the many words you could immediately throw at the proponents of the tax would be “algorithm”, or how about these three words, ” high frequency trading”? The irony that the investment funds and other special investment schemes actors and pop stars prefer to buy into, in order to avoid tax, are probably under-pinned by HFT algo trading should not be overlooked. By value, HFT was estimated in 2010 by consultancy Tabb Group to make up 56% of equity trades in the US and 38% in Europe. According to data from the NYSE High Frequency Trading grew by approx. 164% between 2005 and 2009. As of the first quarter in 2009 total assets under management for hedge funds with high frequency trading strategies were $141 billion. Placing a number on the value of trading, or the volume of trades made, to leave this figure under management is incalculable. How would you tax billions of single trades that can be done in seconds or mili seconds?

Before debunking the idea completely it’s worth engaging in a short history lesson of the original idea behind the Tobin Tax, particularly as the original concept has no relationship with the ‘revenge and justice tax’ so many appear to want implemented. Specifically he saw it as a solution to smooth out international imbalances, not to raise tax internally from the banking sector in isolation. Whilst he proposed that the IMF or world bank should be the custodian of the tax receipts it (the tax) was to be used as a mechanism to counter the imbalance caused by excessive trading of spot currency transactions only. Both he and Keynes before him saw a transaction tax as a reforming tool. It must also be noted that the financial world is unrecognisable now from that which Tobin and Keynes knew, the monitoring and regulatory framework they visualised to oversee such a complex initiative would have been considerably ‘lighter’.

James Tobin – “currency exchanges transmit disturbances originating in international financial markets. National economies and national governments are not capable of adjusting to massive movements of funds across the foreign exchanges, without real hardship and without significant sacrifice of the objectives of national economic policy with respect to employment, output, and inflation.”

Tobin saw two solutions to this issue. The first was to move towards a common currency, common monetary and fiscal policy, and economic integration. The second was to move toward greater financial segmentation between nations or currency areas, permitting their central banks and governments greater autonomy in policies tailored to their specific economic institutions and objectives. Tobin’s preferred solution was the former one but he did not see this as politically viable so he advocated for the latter approach:

“I therefore regretfully recommend the second, and my proposal is to throw some sand in the wheels of our excessively efficient international money markets.” Tobin suggested a tax on all spot conversions of one currency into another, proportional to the size of the transaction.

“It would be an internationally agreed uniform tax, administered by each government over its own jurisdiction. Britain, for example, would be responsible for taxing all inter-currency transactions in Eurocurrency banks and brokers located in London, even when sterling was not involved. The tax proceeds could appropriately be paid into the IMF or World Bank. The tax would apply to all purchases of financial instruments denominated in another currency from currency and coin to equity securities. It would have to apply, I think, to all payments in one currency for goods, services, and real assets sold by a resident of another currency area. I don’t intend to add even a small barrier to trade. But I see offhand no other way to prevent financial transactions disguised as trade.”

In the development of his idea, Tobin was influenced by the earlier work of John Maynard Keynes on general financial transaction taxes. Keynes’ concept stems from 1936 when he proposed that a transaction tax should be levied on dealings on Wall Street, where he argued that excessive speculation by uninformed financial traders increased volatility. For Keynes (who was himself a speculator) the key issue was the proportion of ‘speculators’ in the market, and his concern was that, if left unchecked, these types of players would become too dominant. Keynes wrote;

“Speculators may do no harm as bubbles on a steady stream of enterprise. But the situation is serious when enterprise becomes the bubble on a whirlpool of speculation. The introduction of a substantial government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States”.

Whilst a terrific political soundbite and theory politicians, actors and other celebrities would be best avoiding championing the idea before consulting with the banking fraternity. In every other way the banking and political elite are wedded at the hip, it therefore wouldn’t require much imagination for Mr Barroso’s office to call, for example, Nat Rothschild of the Rothschild banking dynasty and have a quick chat, or another of the many contacts he’ll have on speed dial..”hey, Nat, sorry to interrupt your general ruling of the universe gig, how’s things? This Robin Hood tax idea, what d’ya think, can I make it fly?..Nat…Nat?”

Failing that Barroso could call Tim Geithner’s office who would simply say “no”. The USA admin’s opposition to such an unworkable tax has been unbroken since it was first muted. How can a financial transaction tax be applied in Europe and not in the USA, or China, or the other BRICS nations? Once again the original concept put forward by Tobin required total cooperation from all central, investment and retail banks. Would the PIIGS get special dispensation? There’s also another issue, looking at forex transactions in isolation the tax would have to be applied to all retail exchanges, therefore the cost of basic ‘holiday money’ would go up, you can bet Barosso’s 65% public support would vanish then. Also would the cost spread to writing cheques, credit card payments? It’d have to and if not you can bet the banks would introduce it to recover the implementation cost of the Robin Hood tax. You’d think that half of one percent wouldn’t really create a dent, however, the cost to implement such a scheme would have to be underwritten somewhere by some shadow NGO, what that figure would be and ultimately who’d pick up the tab is anyone guess. As a can of worms it’s best left unopened, you’d have more chance of herding cats than to put the theory into practice.

Robin Hood was a highly skilled archer and swordsman known for “robbing from the rich and giving to the poor”assisted by a group of fellow outlaws known as his “Merry Men”. Robin Hood became a popular folk figure starting in the medieval period continuing through modern literature, films, and television. In the earliest sources Robin Hood is a yeoman, but he was often later portrayed as an aristocrat wrongfully dispossessed of his lands and made into an outlaw by an unscrupulous sheriff.

If it’s more tax we’re collectively after then there’s a simple mechanism already in place which has been operated since the days Robin Hood decided he didn’t want to be ‘in the club’ of tax payers anymore he just wanted revenge and his own form of justice. Raising personal taxes and clawing back the taxes avoided by employing the best accountants will equal more far revenue than the FTT can raise annually, I’m sure the wealthy members of the celebrity industrial complex won’t mind chipping in.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/why-the-robin-hood-tax-belongs-with-the-men-in-tights/

Market Commentary - The First of Many D Days for Europe, Decision Days

The euro has reversed it’s overnight, early morning bearishness versus the major currencies to make strong gains ahead of two crucial meetings; the troika meeting to rubber stamp Greece’s next proportion of bailout funds and Angela Merkel’s government vote on just how far Germany is prepared to support this and further bailouts for the seventeen members of the Eurozone who are using the euro and as a consequence locked into the mechanism and governance. Ms Merkel may be helped in her mission by the good news released this morning concerning Germany’s unemployment levels.

German unemployment declined more than economists forecast in September. The number of people out of work fell by 26,000 to 2.92 million, the Nuremberg based Federal Labor Agency has reported. Economists had forecast a drop of 8,000, according to a median estimate of 24 estimates in a Bloomberg News survey. The adjusted jobless rate slipped to 6.9 percent from 7 percent in the previous month. Germany’s unemployment has now reached the lowest level since reunification two decades ago after increasing global export demand prompted companies to spend and hire.

Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $28 billion told Bloomberg – “Investors appear to be pinning their hopes on the German vote on euro-area rescue fund. They seem to be betting that the region’s debt troubles, though there will be sporadic bumps, will eventually be resolved.”

That resolution optimism may only be short term, Bloomberg have also run a fascinating poll this week amongst key global investors who anticipate that Europe’s debt crisis will lead to an economic slump, a financial meltdown and social unrest in the next year. Seventy two percent predict a country abandoning the euro as a shared currency within five years. Approx. three quarters of those questioned said the euro-area economy will fall into recession during the next 12 months and 53 percent said turmoil will worsen in a banking sector laden with government bonds, according to the quarterly Global Poll of 1,031 investors, analysts and traders who are Bloomberg subscribers. Forty percent see the 17-nation currency bloc losing at least one member in the next year. Economists at Pacific Investment Management Co., JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc have all stated in the past week that the euro-area is entering recession.

However, contrarian views have emerged from the Citigroup Inc. Chief Executive Officer Vikram Pandit who has stated that in his opinion Europe’s crisis is about sovereign debt, not the euro’s survival, and the bank’s level of risk in the region is extremely manageable. “This is an issue of leverage, it’s not a euro issue. The Europeans will figure it out. They’ll get through the debt crisis and get to the other side being fully committed to the euro and the euro zone.”

Whilst Bloomberg’s survey is undeniably Euro centric the pace at which IPOs are currently being abandoned worldwide could also give an indication as to the state of the economy globally and where the smart money isn’t headed, companies have cancelled or postponed $8.9 billion in initial public offerings in the third quarter putting the market on pace to set a record for pulled deals. The value of withdrawn and delayed IPOs this year has risen to $34 billion, approaching the $40 billion witnessed in 2010.

The Nikkei closed up by 0.99%, the Hang Seng closed down 0.66% and the CSI closed down 0.86%. China’s benchmark Shanghai Composite Index has now fallen to a 14 month low. Hong Kong shut financial markets after the city raised its highest storm signal this year. The Hong Kong Observatory said a No. 8 gale signal will remain for most of the day.

European markets are still subdued due to the relative enormity of the latest decisions and votes which are taking place today. The UK FTSE is currently down 0.7%, the STOXX is up 0.78%, the CAC is up 0.74% and the DAX is up 0.5%. Brent crude is up $145 a barrel and gold is up circa $21 an ounce. Silver is up circa 3%. The SPX equity future index is currently up circa 1%. The Euro has made significant moves up versus yen, dollar and franc, sterling has appreciated significantly versus the USA dollar and yen but remained fairly flat versus the franc. The USA dollar has fallen sharply versus the franc.

Data releases to be mindful of for the NY opening and session include the following;

Thursday 29 September

13:30 US – GDP Annualised 2Q
13:30 US – Personal Consumption Expenditure 2Q
13:30 US – Initial and Continuing Jobless Claims
15:00 US – Pending Home Sales Aug.

For GDP the economists polled by Bloomberg gave a median prediction of 1.2%, from the previous release of 1.0%. The initial jobs claims prediction from a Bloomberg survey forecasts Initial Jobless Claims of 420K. A similar survey predicts 3730K for continuing claims. For pending home sales a survey of analysts yielded a median estimate of -2.0% month-on-month, compared with last month’s figure of -1.3%. The year on year figure predicted was 6.3% from 10.10% previously.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/the-first-of-many-d-days-for-europe-decision-days/

Elliot Wave Theory and the Madness of Crowds

Elliot Wave Theory and the Madness of Crowds

The famed analyst and market technician Robert Prechter came across Ralph Elliott’s work while working as a market technician at the investment bank Merrill Lynch. His prominence as a forecaster, during the bull market of the 1980s, brought the greatest exposure to Elliott’s work.

Prechter remains the most widely known Elliott analyst. Robert Prechter is an author and co-author of 14 books, his book “Conquer the Crash” was a New York Times bestseller. He published his monthly financial commentary in the newsletter “The Elliott Wave Theorist” from 1979 and is the founder of Elliott Wave International. Prechter served on the board of the Market Technicians Association for nine years. In recent years Prechter has supported the study of socionomics, a theory about human social behaviour.

Ralph Elliott was a professional accountant, who discovered the underlying social principles and developed the analytical tools of what was later to be known as the Elliot Wave Principle in the 1930s. He proposed that market prices unfold in specific identifiable patterns, which practitioners today call Elliott waves, or simply “waves”. Elliott published his theory of market behaviour in the book “The Wave Principle” in 1938 and covered it comprehensively in his major work, “Nature’s Laws: The Secret of the Universe” in 1946. Elliott stated that “because man is subject to rhythmical procedure, calculations having to do with his activities can be projected far into the future with a justification and certainty heretofore unattainable”.

The Elliott Wave Principle is a detailed description and ‘formula’ of how groups of people think and as a consequence behave. EWP reveals that mass psychology causes swings from pessimism to optimism and back in a natural rhythmic sequence, thereby creating specific and measurable patterns. The Elliott Wave Principle can be clearly seen ‘at work’ in the financial markets, where changing investor psychology is recorded in the form of price movements. If you can identify the repeating price patterns and figure out where price is in those repeating patterns you can hopefully predict (with reasonable levels of probability) where price is headed next.

The EWP is, however, still fundamentally an exercise in probability. An Elliottician is someone who is able to identify the markets’ structure and anticipate the most likely next move based on the position within those structures. By knowing the wave patterns, you’ll know what the markets are likely to do next and just as importantly what they will probably not do next. By using EWP it’s possible to identify the highest probable moves with the least risk.

In Elliott’s model market price alternates between an impulsive motive phase and a corrective phase on all time scales of the trend. Impulses are subdivided into a set of 5 lower-degree waves, alternating between the motive and corrective character, waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3. Corrective waves subdivide into 3 smaller waves starting with a five-wave counter-trend impulse, a retrace, and another impulse. In bear markets the dominant trend is downward, so the pattern is reversed, five waves down and three up. Motive waves always move with the trend, while corrective waves move against it.

THE WAVES
Five Wave Pattern; Dominant Trend
Wave 1:
Wave one can be difficult to identify at its inception. When the first wave of a new bull market begins fundamental news is generally negative. The previous trend can still be in force. Sentiment surveys are bearish. Volume might increase as price rises, but not by enough margin to alert technical analysts.

Wave 2:
Wave two corrects wave one, but never extends beyond the starting point of wave one. As price retests the previous low, bearish sentiment is building, positive signs appear for those who are looking. Volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% of the Fibonacci of the wave one gains, price should fall in a three wave pattern.

Wave 3:
Wave three is generally the largest and most powerful wave in a trend. The news is now positive. Price rises quickly, any corrections are short-lived and shallow. As wave three starts news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend.

Wave 4:
Wave four is typically corrective. Price might move sideways for an extended period, and wave four typically retraces less than the 38.2% Fibonacci of wave three. Volume is below that of wave three. This can a good place to buy a pull back, fourth waves can often be frustrating because of their lack of progress in the larger trend.

Wave 5:
Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. This is when many traders finally buy in right before the top is reached. Volume is often lower in wave five than in wave three, and many momentum indicators can show divergences (price reaches a new high, but the indicators do not reach a new peak).

Three Wave Pattern; The Corrective Trend
Wave A:
Corrections are harder to identify than impulse moves. In wave A of a bear market, the news is still positive. Technical indicators that accompany wave A include increased volume.

Wave B:
Price reverses higher many see this as a resumption of the now gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. Fundamentals are probably no longer improving, most likely they have not yet turned negative.

Wave C:
Price moves impulsively lower in five waves. Volume picks up, and by the third leg of wave C a bear market is firmly entrenched. Wave C is at least as large as wave A.

EWP RULES
There are three principal rules needed to interpret Elliott Wave. There are many guidelines, but only three ‘hard and fast’ unbreakable rules. Guidelines are subject to interpretation. These rules only apply to a 5 wave impulse sequence. The corrections, which are much more complicated, are given more leeway when it comes to interpretation.

RULES

Rule 1: Wave 2 cannot retrace more than 100% of Wave 1.

Rule 2: Wave 3 can never be the shortest of the three impulse waves.

Rule 3: Wave 4 can never overlap Wave 1.

GUIDELINES

Guideline 1: When Wave 3 is the longest impulse wave, Wave 5 will approximately equal Wave 1.
Guideline 2: The forms for Wave 2 and Wave 4 will alternate. If Wave 2 is a sharp correction, Wave 4 will be a flat correction. If Wave 2 is flat, Wave 4 will be sharp.
Guideline 3: After a 5-wave impulse advance, corrections (abc) usually end in the area of prior Wave 4 low.

Among market technicians, wave analysis is widely accepted as a component of their trade. EWP is on the exam analysts must pass to obtain the Chartered Market Technician (CMT) designation, the professional accreditation developed by the Market Technicians Association (MTA).

Robin Wilkin, Ex-Global Head of FX and Commodity Technical Strategy at JPMorgan Chase; “the Elliott Wave principle provides a probability framework as to when to enter a particular market and where to get out, whether for a profit or a loss.”

Jordan Kotick, Global Head of Technical Strategy at Barclays Capital and past President of the Market Technicians Association; “EWP discovery was well ahead of its time. In fact, over the last decade or two, many prominent academics have embraced Elliott’s idea and have been aggressively advocating the existence of financial market fractals.”

Paul Tudor Jones, billionaire commodity trader, calls Prechter and Frost’s standard text on Elliott one of “the four Bibles of the business.”

Criticisms
The belief that markets manifest in recognisable patterns actually contradicts efficient market hypothesis, which states that prices cannot be predicted from market data such as moving averages and volume. By this reasoning, if successful market forecasts were possible, investors would buy (or sell) when the method predicted a price increase (or decrease), to the point that prices would rise (or fall) immediately, thus destroying the profitability and predictive power of the method. In efficient markets, knowledge of the Elliott Wave Principle among traders would lead to the disappearance of the very patterns they tried to anticipate, rendering the method, and all forms of technical analysis, useless.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/elliot-wave-theory-and-the-madness-of-crowds/

Daily Market Roundup by FXCC - September 28 pm

“Love Letters Straight from the Heart” – of Greece’s Turmoil

Investors are wary as inspectors from the EU and IMF head to Greece in order to forensically scrutinise their revised austerity plans. German Chancellor Angela Merkel has her own issue, attempting to defuse a revolt within her own government ahead of the absolutely crucial vote on Thursday to expand Europe’s bailout fund. The international auditors return to Athens on Thursday to deliver a verdict on whether or not Greece’s tougher austerity measures qualify for aid to avert a default that would plunge the country into bankruptcy.

Inspectors from the European Union (EU) and International Monetary Fund (IMF) quit Greece on September 2, after the government failed to convince its measures were robust enough (in terms of deficit cuts and economic reforms) to deserve further payments under its €110 billion bailout. Before returning, the EU/IMF mission, known as the “troika,” demanded written assurances by Greek authorities that the new pledges will be met. Prime Minister George Papandreou and Finance Minister Evangelos Venizelos provided assurances in letters they sent to the troika. The contents were not made public, but the troika visit is conditional on the letters being convincing. Analysts expect the talks to smooth the path for the sixth bailout tranche for Greece, money the country needs to quite simply avoid running out of cash next month plunging the euro zone into an even deeper crisis.

Joerg Kraemer, an economist at Commmerzbank;

I think euro zone finance ministers will in the end release the next tranche of bailout payments for Greece. They will not dare turning off the tap on Greece right now, it’s a political decision.

Commodity stocks drove Wall Street down in late Wednesday trade, the declines in energy and metals prices hit investor concerns regarding overall global economic weakness and Europe’s debt crisis. A seven percent drop in the price of copper (a leading indicator for the global economy) led to a drop of 4.5 percent in the S&P materials index. Silver plunged 5 percent to lead losses in 23 of 24 commodities tracked by the S&P GSCI Index. This commodities gauge has slumped circa ten percent since the end of June, heading for its worst quarterly loss since a 44 percent plunge in the fourth quarter of 2008

Wednesday’s final declines places the SPX on course for its worst quarter since the financial crisis in the fourth quarter of 2008. The four day rout last week erased $1 trillion from U.S. equities amid concern Greek insolvency and default is inevitable. The decline left the S&P 500 trading at 12.4 times earnings in the past 12 months, 4.4 percent below its average valuation at the lowest point during the last nine bear markets – Bloomberg.

The euro also reversed early gains versus the dollar, investors watched for signs of progress in Europe’s efforts to stem the debt crisis. Treasuries trimmed losses, the 10-year note’s yield capped the biggest four day increase since January 2009. The SPX lost 2.1 percent to 1,151.06 at the close in New York after climbing 0.8 percent earlier and rallying 4.1 percent over the previous three sessions. The euro weakened 0.2 percent erasing a 0.8 percent advance. Ten-year yields rose two basis points to 1.997 percent. Oil lost 3.8 percent after U.S. supplies increased last week.

Man Group Plc crashed a stunning twenty five percent, the most since November 2008, after the world’s biggest hedge fund said its assets under management will decline by $6 billion amid the “suppressed” demand for its investment products.

The SPX closed down 2.07%, the Russell index collapsed by 4.51% to leave it negative year on year. The UK FTSE closed down 1.44%, the DAX, CAC, STOXX, closed down by a mean of approx.1%. The FTSE equity future is currently down circa 1% and the SPX future is flat. The CAC future is down circa 1% and the DAX future down 0.53%. Sterling is down versus dollar, yen and flat versus the franc. The Aussie dollar has fallen hard versus the USA dollar. The euro has fallen versus all the major pairs.

Publications of note that may affect the morning London session sentiment include the following;

07:00 UK – Nationwide House Prices Sept
09:30 UK – Net Consumer Credit Aug
09:30 UK – Mortgage Approvals Aug
09:30 UK – M4 Money Supply Aug
10:00 Eurozone – Consumer Confidence Sept
10:00 Eurozone – Economic Confidence Sept
10:00 Eurozone – Industrial Confidence Sept.

Notwithstanding the troika ‘visit’ the various Eurozone consumer publications could affect market sentiment. Industrial confidence is expected to fall sharply – a survey of analysts by Bloomberg predicts a figure of -5, from last month’s figure of -2.9. Predictions for the other two surveys suggest similar readings to previous months.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/september-28-pm/

Does the Premier League have the X-Factor of Rome’s Bread and Circuses?

“Bread and Circuses” is regarded as a metaphor to explain the superficial means of appeasement. In politics the phrase is used when describing the synthetic creation of public approval. Not through exemplary public service and policy creation, but through immediate satisfaction by pandering to the shallow requirements of the populace. The phrase also suggests the erosion and ignorance of civic duty amongst the common man. In modern use the phrase has become an adjective to describe a populace that no longer values civic virtues and public life. The phrase also highlights the triviality and frivolity which characterised the Roman Empire’s death spiral.

The phrase originates from Rome by the topical and satirical poet and commentator Juvenal. He identified the only remaining cares of the Roman populace which had seemingly given up on its birthright of political involvement. Roman politicians devised a plan in 140 B.C. to win the votes of the poor: giving out cheap food and entertainment, “bread and circuses” being the most effective method to rise to power.

Already long ago, from when we sold our vote to no man, the People have abdicated our duties; for the People who once upon a time handed out military command, high civil office, legions…everything, now restrains itself and anxiously hopes for just two things: bread and circuses – Juvenal

Juvenal makes reference to the Roman practice of providing free wheat to Roman citizens as well as costly circus games and other forms of entertainment as a means of gaining political power through populism. The film Gladiator includes a scene where the crowds are showered with loaves of bread as gladiators enter the ring…

It’s that time of year again in the UK, despite the late Indian summer, the nights are drawing in and the traditional seasonal activities are taking shape. As Britons we now shrink back into our caves in order to cope with the ‘winter blues’ and prole-feed is back in abundance. Premiership football is back on television as is the latest series of X-Factor. I should be careful in mocking the X-Factor as prole feed, as my family immediately accuse me of indulging in the same by watching premiership football. I’ve often wondered if the UK govt would hold emergency debates if both the X-Factor and the Premiership were in danger of imploding, would they bail these ‘institutions’ out for the general good, fearing the very fabric of UK society could be in danger? Similarly when the UK experienced a few days of rioting in August I wondered if the government would pass into law a motion bringing forward the X-Factor schedule in order to ‘hose down’ the masses.

When you consider the historical democratic fabric and structure created by Rome and Athens during their pains of evolution it’s a tragedy that, centuries later, we often feel more disillusioned and marginalised were political decision makers and their decisions are concerned. In Europe we have a current situation for which the word “crisis” doesn’t adequately explain the magnitude of the problem. Debates are taking place regarding monumental incalculable debt, which will impact present and unborn generations with arguably insoluble problems and yet we, as citizens, have no opportunity to engage in the debate. Instead their appears to be a media blackout on discussing the relevant issues using context and concepts Joe Public could comprehend.

Our policy makers and leaders are discussing a €2-3 trillion mega QE style bailout (as the first stage) for the insolvent banking system and countries faced with default yet the general populace is denied any input in the decision making process. Who gave the IMF, ECB, EU the mandate to put in place such structures without reference to voters? If you argued that we have surrendered such decisions to them via our democratic process then surely a full explanation of the impact trillions of euros of fresh debt would have on the union needs to be carefully explained, or is the belief that explaining a €3 trillion debt as a starting point would discourage folk from even bothering to turn up to work? Whilst sages can explain that, with clever financial architecture the massive re-capitalisation of banks and countries is not simple debt, for the sceptical it appears that private interest groups are once again being protected at the expense of the majority.

Whilst there are minor protests on Wall Street, and pockets of civil disobedience in Greece, overall the acceptance and compliance with what the ‘clever people’ do is all too evident. And who can blame the majority when in, for example, the UK unemployment hasn’t exploded and the overall standard of living has remained fairly static given zirp QE and the bailouts has firstly kept mortgage payments low and secondly hasn’t impacted visibly on the majority…for now.

Tell ya what though, that Kelly Rowland is lovely, much better than the sullen Cheryl Cole and good fun too..And what about Louie getting the oldies again..hahaha..Anyway, what time’s Match of the Day on, I wonder if Mancini plays Tevez..?


Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/does-the-premier-league-have-the-x-factor-of-romes-bread-and-circuses/

Relief Rally Fades as the Reality Bites

It was inevitable that the very strong relief rally the markets enjoyed yesterday was unsustainable. Has there ever been a time in recent trading history were merely the mention of possible solutions by European policy makers can lead to such wild swings of sentiment? We’re still some distance away from implementation of the various mechanisms to firstly avoid a Greek default and secondly contagion of the sovereign debt crises and yet the markets’ collective desire for solutions appears insatiable. This surely indicates that we have reached a crucial tipping point, an equilibrium from which the main stock markets could either rally to the year highs experienced in Jan 2011 or potentially crash to 2008 levels.

He acquired the nickname Doctor Doom during the 2008-2009 crash, I always felt that was a bit unfair on Nouriel Roubini, he was doom laden alright, but the X-Men reference didn’t work for me. He had a touch of the night about him, I visualised him more as The Count from Sesame Street, carefully and with a perfect Transylvanian accent, explaining how the numbers ‘worked’, and doing the ‘face palm’ when we didn’t get it. It became an increasingly cheap shot to label Nouriel as batty in 2008-2009, and the mainstream media did a cracking hatchet job on him, describing his Manhattan apartment as a lair, listing his female ‘conquests’, following him to bars and night clubs. Perhaps he wasn’t enjoying his notorious reputation, simply drowning his and our sorrows in anticipation of the events about to unfold.

The ‘stopped clock is right twice a day” analogy is often hurled in Mr. Roubini’s direction, well hey, guess what? He was right in 2008 and he’s right now. His prediction then; that ‘saving the system’ in 2008 by using one dimensional QE tactics, zirp and bailouts, would cause sovereign debt crises within a couple of years has been proven spot on. Arguably the first renowned economist to put forward the words “avoiding this recession will create a depression” was only bettered by his summation that “main street needed rescuing before Wall St”. The inference being that no discipline would be attached to the major players, the masters of the universe, if ‘they’ got away with it once they’d simply do it again and again. His reference to main street was also apt, the belief being that if you re-primed average Joe, and allowed him to write off or re-set his debt, his life, his optimism, then the economy would recover and flourish far more quickly.

Roubini is now, once again, being quoted in the mainstream media and is being treated with respect. However, this may change and follow the pattern witnessed in 2008-2009. His own website is subscription only for his major clients, which is a shame, in my humble opinion he could and should create a ‘lite’ version for public consumption. So for now we have to contend with quotes and soundbites from the usual suspects. In the Telegraph recently he’s suggested that the USA and UK are already back in recession, further he appears to suggest elsewhere that technically recession was exited but fundamentally both the UK and USA never escaped recession. He also has interesting views on inflation versus deflation, believing that inflation will soon be the last problem that central banks will fear.

Nouriel Roubini:

“While monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures.”

The European Union faces the biggest challenge in its short history, as the crisis of confidence compounds economic and social problems, the European Commission President Jose Manuel Barroso has stated in his annual State of the Union address during a session of the European Parliament in the French city of Strasbourg.

“It’s a crisis of confidence that has not happened for decades”. Barroso also re-affirmed that Greece would remain a member of the euro single currency area and that if there had to be deeper economic integration among European Union member states, if not the 27-member bloc faced break up.

Tuesday’s relief rally did not overlap to Asian markets as overnight and early morning the main indices faded. The Nikkei ended flat, the CSI closed down 1.03%, the Hang Seng closed down 0.66%. The ASX closed up 0.87%. In European markets morning trade has been subdued, the FTSE is currently flat, the STOXX is down 1.05%, the CAC is down 0.98%, the DAX is currently down 0.88%. The SPX daily equity future is currently up marginally at 0.3%. Brent crude is down $65 a barrel, gold is flat.

Data publications for the New York session to be aware of include;

12:00 US – MBA Mortgage Applications Sept
13:30 US – Durable Goods Orders Aug

The durable goods orders could affect sentiment as focus shifts back to the USA’s domestic travails. It’s a government index that measures the quantity of new orders placed with US manufacturers for delivery of durable factory goods, such as machinery, vehicles and electrical appliances. Durable goods are defined as items that have a normal life expectancy of three years or more. Analysts surveyed by Bloomberg gave a median forecast of -0.2%, compared with the last release which was 4.00%. Excluding transportation, the expectation is -0.20% (previous =0.7%).

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/relief-rally-fades-as-the-reality-bites/

Spread the Word, Headline Forex Spreads can be Misleading

A friend of mine is a director of a leading UK spread betting firm. He has every right to be incredibly proud of his and his company’s achievements over the past two decades. That industry has also made massive strides to improve its quality of service and moreover the basic cost of doing business – the spread. Financial spread betting firms can no longer be regarded as the ‘bookies’ of the trading world. It’s not uncommon for spread betting firms to offer spreads similar to Forex brokers, for example, one pip spread on the Euro. The SB firms offer a wide range of products to bet on; indices, CFDs, shares, commodities and the huge attraction (for UK based traders) is the apparent tax free element of any trading profits.

If you regularly visit any trading forums (where spread betters exchange views) you quickly realise how they not only wear their trading naivety on their sleeves, but also betray their overall levels of ignorance towards the forex industry in particular. The constant battles, with any representatives of the industry who venture onto the forums, generally concern the cost of the spread. “ABCD firm is doing cable at one pip but you’re still at two, when are you going to get competitive?” is a typical question which is met with good humour and grace through gritted teeth by the firms’ representatives. But alas the same question keeps on coming, day after day, month after month from the inexperienced, those locked in a ‘denial loop’ and those who are desperately in need of a reboot of their badly corrupted personal trading hardware. If you interject by suggesting that; “anyone that rate sensitive must be either attempting to scalp or day trading off low time frames, the absolute death of a spread better”, the answers are incomprehensible and very defensive.

Similarly suggestions that anyone using a spread betting firm for anything but swing and position trading is “picking up pennies in front of a steam roller” is met with equal hostility. But the facts (straight from the horse’s mouth) are incorruptible; only 20% of spread betters’ trades are winners and 80% of those winners are swing and position trades. Therefore no one should ever contemplate using a spread betting firm for any trading other than swing and position. If swing trading, aiming for perhaps a minimum return of 100 pips profit per trade, but ideally 200 with a R:R of 1:2, why would a spread of 1 pip or max 2 pips be relevant, would the spread better be happy with 99 pips profit as opposed to 100? Or consider it this way; if the spread better’s set up worked perfectly on GBP/JPY would the spread better avoid the trade given the spread on that currency pair was minimum 6 pips? Whilst spread betting has its place in the trading world arguably it has no place in forex trading, particularly if you’re a specialised scalper or day trader, and judging by the majority of responses from spread betters on trading forums sadly they have no business trading on any time frames until they have gained a thorough education.

With ECN NDD straight through processing you know your broker is dealing your trade through to the liquidity providers, there is no intervention, it’s an instant fill (depending on market conditions which we’re all subject to), and that fill, as instantaneous as state of the art technology can deliver, is one of the most important differences between the spread betting industry and the ‘pure play’ forex provider. Is there any point in a spread betting firm publicising spreads of 1pip if they have a delay of second causing your fill to actually make the spread two to three pips? The inexperienced, obsessed with headline spreads, would have no metric or technique to judge the efficiency of the spread. Whilst they’re constantly seduced by the narrow ‘headline spread’ they could be getting poor fills and no ‘designer’ slippage, only a true reflection of market conditions but be none the wiser, still believing they’re getting zero spreads.

The overall quality of execution measured over a protracted period of time is just as important as the headline spreads you’re trading on. low spreads should simply be an absolute given with a true ECN NDD broker, FXCC are amongst the best for spreads if not the best in the industry, but that small cost of business only illustrates one aspect of the quality of execution. With ECN NDD execution, there are no re-quotes, there’s no dealer referral, and no restrictions on how close you can place stops and limits to the current market price. These are tools that market makers (such as spread betting firms) can use to manage their own risk and these tools can be used to disadvantage the individual trader.

If you’re an experienced forex trader you’ll have no doubt experienced positive slippage, you’re very unlikely to experience that from a market maker or spread betting firm and it’s actually a brilliant test to ensure the probity of your broker. You’ll only ever experience true marketing behaviour which, as experienced traders will testify, can be quite random at times, quite simply a broker such as FXCC doesn’t ‘make the market’ for forex transactions. The pricing engine from FXCC’s liquidity providers automatically takes the quotes from the liquidity providers and offers the best bid/ask with a pip “mark-up”’, the small profit for transacting the business. The spreads can and do vary due to liquidity and market volatility, but when you can click on the ticket from an ECN NDD broker you can have absolute confidence in the clarity and cleanliness of your trade.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/spread-the-word-headline-forex-spreads-can-be-misleading/

Voodoo or Juju? The Mystical Nature of Fibonacci

Like followers of religious cults there are traders and analysts utterly devoted to their views on certain indicators or patterns. There is one ‘indicator’ that, irrespective of its proficiency, manages to capture your imagination far more than those invented in the late twentieth century by esteemed mathematicians and statisticians. This indicator pre dates, by some considerable margin, anything we’ve come to accept as a modern financial market. To say that no one quite knows why or how Fibonacci retracement actually ‘works’ in trading is a massive understatement and if you admit to actually using Fib in your trading you’re often met with a combination of scepticism and bewilderment.

There are beliefs that in fact ‘Fibs’ only work as a self fulfilling prophecy; because they’re so widely used and correlate closely to support and resistance that gives them an edge. But there’s another theory on why Fibs work and it’s a bit ‘trippy’, it has to do with the re-occurrence of Fibonacci numbers and sequence in nature. Many analysts and traders will point to Fib, point to the randomness of the markets, the infinite possibilities that price can move in any direction at any given time and wonder if there’s isn’t actually some universal consciousness at play.

Fibonacci sequences appear in many biological settings. For example, in two consecutive Fibonacci numbers, such as the branching in trees, the arrangement of leaves on a stem, the fruitlets of a pineapple, the flowering of artichoke, an uncurling fern and the arrangement of a pine cone. The Fibonacci numbers are also found in the family tree of honeybees, according to the following ‘rules’; if an egg is laid by an unmated female, it hatches a male or drone bee. If, however, an egg was fertilised by a male, it hatches a female. Thus, a male bee will always have one parent, and a female bee will have two. If the ancestry of any male bee is traced, he has 1 parent, 2 grandparents, 3 great-grandparents, 5 great-great-grandparents, and so on. This sequence of numbers of parents is the Fibonacci sequence.

Not convinced by the honeybees? Then let’s use two other examples to demonstrate the ‘wow’ factor. Sunflowers and ferns.

The sunflower is the perfect example of the Fibonacci sequence and the corresponding “golden ratio” appearing in nature. The florets are arranged in a spiral pattern both in a clockwise and counterclockwise fashion. There are 34 spirals that turn clockwise and 21 spirals that turn counterclockwise. The counter-clockwise spirals appear to grow according to the golden ratio. An approximate measure of this is that the radius of the spiral doubles with every 90° of rotation.

Spiralling growth also occurs on the stems and branches of plants. Ferns were the first land plant to use vascular structures. The fern branch uses a fractal pattern of growth, each smaller branch resembles a copy of the whole. Fern branches do not have spiralling growth, but the branch growth from the trunk of a fern tree does.
Leonardo Fibonacci

Leonardo Fibonacci, most commonly referred to as Fibonacci, lived from 1170-1250. He was an Italian mathematician, considered to be “the most talented western mathematician of the Middle Ages.” Fibonacci is best known for the spreading of the Hindu-Arabic numeral system in Europe through the publication in the early 13th century of his Book of Calculation, the Liber Abaci; and for a number sequence named after him known as the Fibonacci numbers, which he didn’t discover, but used as an example in the Liber Abaci.

In the Liber Abaci (1202), Fibonacci introduced the modus Indorum (method of the Indians), today known as Arabic numerals. The book advocated numeration with the digits 0–9 and place value. The book illustrated practical uses of the new numeral system; using lattice multiplication and Egyptian fractions, applying it to commercial bookkeeping, converting weights and measures, calculating interest, money-changing, and other applications. The book was well revered throughout educated Europe and had a profound impact on altering European thought and consciousness.

Liber Abaci posed and solved a problem involving the growth of a population of rabbits based on idealised assumptions. The solution, generation by generation, was a sequence of numbers later known as Fibonacci numbers. The number sequence was known to Indian mathematicians as early as the 6th century, but it was Fibonacci’s Liber Abaci that introduced it to the West.

In the Fibonacci sequence of numbers, each number is the sum of the previous two numbers, starting with 0 and 1. This sequence begins 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987. The higher up in the sequence, the closer two consecutive “Fibonacci numbers” of the sequence divided by each other will approach the golden ratio (approximately 1 : 1.618 or 0.618 : 1).
Using Fibonacci to Trade

Fibonacci retracements are a method of technical analysis for determining support and resistance levels. They’re named after their use of the Fibonacci sequence. Fibonacci retracement is based on the simple concept that markets will probably retrace a predictable portion of a move, after which they will then continue to move in the original direction.

Fibonacci retracement is created by taking two extreme points on a chart and dividing the vertical distance by the key Fibonacci ratios. 0.0% is considered to be the start of the retracement, while 100.0% is a complete reversal to the original part of the move. Once these levels are identified, horizontal lines are drawn and used to identify possible support and resistance levels. These S&P levels relate to 61.8% 38.2% 23.6% retracements.

Price will often pull back, or retrace a percentage of the previous move before reversing. Fibonacci retracements often occur at four levels: 23.6%, 38.2%, 50%, and 61.8%. Actually, the 50% level has no relation with Fibonacci, traders use this level due to the tendency of price to reverse after retracing roughly half of the previous move. When you draw a fib grid on a chart, you’ll notice that the grid lines up roughly with support and resistance areas. Therefore you don’t need to draw the S&R lines. Instead, you could just look at a chart and estimate where the levels are.

There is one key issue with Fibonacci which renders it far more useful for swing and position trading as opposed to intraday trading. In fast moving markets (working off lower time frames) it’s extremely difficult to pick the top and bottom of the recent moves, but for swing trading it’s relatively straight forward and most charting packages will ‘auto write’ Fib for you. As with all indicators, despite it’s ‘charm’ using Fib still requires sound money management and discipline to make it work. You don’t have to think that deeply when using it, but deep thought is what caused the Fibonacci sequence to be discovered, and no traders ever failed through applying deep and intellectual curiosity to their trading.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/voodoo-or-juju-the-mystical-nature-of-fibonacci/

Daily Market Roundup by FXCC - September 27 pm

Stocks retraced their earlier gains on Wall Street on Tuesday closing 1.33% up on the day having spent the majority of the day up circa 200 points or 2%. Despite the waves of optimism due to the various solutions floated by the official bodies in Euroland the question of Greece once again reared its head to extinguish some of the hope.

However, that was not the only issue to dampen positive sentiment. Confidence among U.S. consumers stagnated in September to reach a new two-year low. The share of households stating it was increasingly difficult to find a job climbed to the highest level recorded in almost three decades. “Consumers remain very concerned about their income, employment and the state of the economy,” – John Herrmann, a senior fixed-income strategist at State Street Global Markets LLC in Boston. “All of these factors point to even weaker labor market conditions as we get closer to the end of the year.”
“We are in the midst of the Second Great Contraction” and the U.S. economy is on a “knife edge” Dallas Federal Reserve Bank’s top economist said on Tuesday. “The economy is moving along at stall speed,” Dallas Fed research director Harvey Rosenblum told a forum at the San Antonio Chamber of Commerce. “Unless we start moving a little bit faster, we are at a tipping point where things may not go the right way.”

The Financial Times reports that up to seven of the seventeen nations using the euro believe private creditors should absorb bigger losses on their Greek bond holdings, a division that may threaten an agreement reached with private investors in July. The paper cited unnamed senior European officials. This once again suggests that the fifty percent haircut option is still not ‘off the table’.

Chancellor Angela Merkel hosted Greek Prime Minister George Papandreou for talks in Berlin on Tuesday as credit default swaps indicate a more than 90 percent chance that Greece won’t be able to meet its debt commitments. Given its 2-5 year borrowing can be at rates of circa 70% this should come as no surprise. Papandreou tested the strength of his parliamentary majority on Tuesday evening as lawmakers voted on a property tax that was key to persuading the European Union and International Monetary Fund to release an aid instalment of circa €8bl in order to avert default. It passed, much to the ire of the gathering protesters outside the Greek parliament in Athens. Some officials are suggesting that plans are now under way to boost the assets available to cut Greece’s debts and recapitalize banks. But Germany said there were no plans to increase the size of the fund for a regional bailout. Berlin faces a key vote on Thursday to increase the facility’s scope.

German Chancellor Angela Merkel may fall short of the majority she needs in her coalition for a reform of the euro zone rescue fund meant to stop the sovereign debt crisis spreading. Proposals to leverage up the €440 billion bailout fund to multiply Europe’s financial firepower make it harder for Merkel to unite her fractious centre-right coalition. The Bundestag is sure to approve a widening of the scope of the European Financial Stability Facility agreed by European leaders in July, the opposition Social Democrats and Greens indicate that they will vote for the measure on Thursday.

European markets recovered ground on Tuesday buoyed by the apparent positive steps European policy makers were making towards the resolutions being floated. The FTSE closed up 4.02%, the STOXX up 5.31%, the CAC up 5.74% and the DAX up 5.29%. Brent crude closed up circa 3.30%. The FTSE equity future is currently down 0.75% and the SPX down 0.1%. The dollar has made significant gains versus yen but faded versus sterling and the euro. The euro exploited weakness versus yen and also made slight gains versus the dollar having retraced its one percent gain. It lost ground versus the franc and remained fairly static versus sterling. Sterling made significant gains versus yen which overall was the weakest currency in Tuesday’s trading sessions.

There are no significant data releases to be published tomorrow that may affect the morning and early afternoon session.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/september-27-pm/

Schadenfreude

Schadenfreude can be described as deriving pleasure from the misfortune of others. This German word has no real direct comparison or translation in the English language. We could extend this word and it’s meaning to trading. As traders we fully accept that, to all intents and purposes, our industry and profession is a ‘zero sum game’; for us to win there must be losers. The fit survive the unfit decay..well obviously not in the case of failed banks, they’re simply rescued with mega bailouts and the bill ‘stiffed’ onto us, the untermensch, another German word that has no direct English correlation.

UK pensions have been trashed by circa 12-14% during the recent sell off, no doubt investment schemes have also suffered badly. All other ‘normal’ investments have been trashed over recent years and this latest main markets’ correction will prevent recovery for some time. However, you can be sure that pension fund and investment fund managers will still take their ‘mismanagement’ fees. They don’t go short, they buy and hold, similar to a huge swathe of hedge funds who don’t actually hedge they invest and only profit when the markets rise. If you choose to hand over your investment decisions to a third party then during market sell offs you’ll be hurt.

The individual trader has no chance of a bailout, or a personal QE programme, our accounts are self governed ‘pension pots’, only we don’t have to hand over 20% fees. In times of market crisis it’s therefore crucial that we take (wherever and whenever possible) advantage of this volatility in order to potentially boost our account value. If the global economy does go to ‘hell in a handcart’ no doubt that handcart will be leased, put into a basket of other handcart leases, bundled up and sold as a handcart subprime security asset, that the Fed then takes as an asset swap when the handcart lease business fails, but that’s not our problem singularly, it’s collective. Our responsibility as professionals is to see this volatility and crisis as an opportunity to make more money from the forex market. If that means we have more and standard pensioners have less in times of crisis then that’s unfortunate, but the pensioner hasn’t suffered the cuts and bruises we have in order to become proficient and profitable.

But how can you profit from FX in this kind of market, it’s relatively straight forward to see how traders can profit from, for example, treasures in such times, but FX? Do we have to be more aggressive, up our lot size, see this as a once in a decade/twice in a lifetime opportunity that we’ll always regret if we didn’t take advantage of it?

Here’s the thing, with FX we actually don’t have to do a thing, that’s right, we don’t have to “chase the market and feel the rush”. If we had an edge that worked in calmer markets, that has been rigorously back and forward tested, that has positive expectancy and has delivered regular profits over a reasonable length of time, then the probability is that the edge will continue to work, perhaps even more efficiently with certain adjustments, the market will come to us. You could/should adjust your take profit targets in such volatile times, perhaps widen your stop, go up or down a time frame, but essentially if you have developed a working edge, based on those oft mentioned crucial 3Ms, then the increased volatility experienced over the past two weeks, which will undoubtedly re-appear in waves over coming weeks and months, should not corrupt your trading principles. As such you could put forward an argument that Forex is absolutely without question the best security sector to trade during volatile periods.

We’re used to change as FX traders, there are very few securities that constantly react to news events or data publication in the way FX pairs do. We are in fact constantly primed for change, our whole trading philosophy is centred on the unexpected, particularly once we’ve accepted the phenomena that we have no idea or control over what price will do next. Ironically we are perhaps the best equipped traders ready to exploit market volatility because of the very unpredictable sector we choose to trade in.

I’ve had to develop a technique and edge over recent years that still permits me to trade without compromising my responsibilities as a financial content and features writer. Therefore I swing trade major FX pairs. As part of my overall brief I also refine trading techniques on many time frames from scalping to position trade strategies, some of which, with FXCC’s assistance, we’ll eventually offer to our customer base. These techniques are ‘played out’ on EUR/USD, EUR/JPY, GBP/USD and AUS/USD. In terms of correlation and liquidity these pairs provide ample scope for comparison and research, ergo the spreads, the fills and slips are all considered good.

I regularly monitor these techniques (which are indicator and pattern recognition based) to discover any changes and what (if any) fine tuning and adjustments need to take place to accommodate seismic market events, it’s similar to being a lab technician, and monitoring statistical results. Having taken time out this morning to evaluate the various techniques, (ten currently under observation) they’ve all stood up well to the recent volatility bar the micro adjustments mentioned earlier of; stop, limits, time frames etc.

The win rate is circa 60%, roughly one loser for every two winners which historically is, in the opinion of many experienced traders, an excellent return. Does this ‘lab conditions experiment’ prove that FX as a trading sector is always tradable, whatever the conditions? Well the untradable CHF over recent weeks has surely scuppered that theory. However, what is fair and reasonable to state is that given our exposure to constant change, our willingness to accept randomness in the market, our ability to adapt, and the constant liquidity of the major FX pairs we’re in as good a place as any other traders to make the most of the current conditions. As a consequence, when calmer times inevitably re-appear, as dedicated FX traders we can quickly and readily adapt to profit from the new and different conditions.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/schadenfreude/

Market Commentary - Buying the Rumour but Will We Also Buy the News?

“Buy on the rumour sell on the news” is a tried and tested market trading approach, traders often make trading decisions based on what they calculate may happen due to any given economic report or event (the rumour). Once the event passes or the report is released (the news), they then ‘dump’ their positions and the market moves. The markets and traders have currently ‘bought the rumour’ of financial stability due to the platitudes mouthed by the IMF, ECB and G20. Once the full plan is announced and that plan is put into action will the markets then ‘enjoy’ another secular bear market rally similar to that of 2009-2010, will we also collectively ‘buy’ the solution?

It’s quite a revelation to learn that the rumour of the creation/injection of up to €2-3trillion of liquidity, in order to protect the solvency of sovereign states and banks, has created mass market optimism. The debasing of the globe’s second reserve currency will cause money flight into equities and commodities and an inevitable rise in those two sectors, not because the fundamentals are good, but because they represent the least worst option. Perhaps a form of zero equilibrium will be reached if the USA Fed then conducts a similar exercise.

USA treasury secretary Tim Geithner is talking tough now back on ‘safe’ territory; “They heard from everybody around the world in Washington meetings last week. Europe’s crisis is starting to hurt growth everywhere, in countries as far away as China, Brazil and India, Korea. And they heard the same message from us they heard from everybody else, which is it’s time to move.” However, once the Euroland problem is fixed (temporarily or otherwise) focus will once again shift to the deep problems the USA domestic economy is still mired in, the united states of America’s problems are equal to (if not greater) than that of the united states of Europe.

Chris Weston, an institutional trader at IG Markets in Melbourne; “traders are suddenly becoming increasingly confident that European leaders can now reach an agreement to successfully contain the debt crisis. Investors must hold their nerve and at the same time central banks and finance ministers need to remain ‘on message’ as any suggestions that the rescue plans may go away will likely be enough to see markets take fright once again.”

In overnight/early morning trading Asian markets reacted positively to the steps apparently announced by European finance leaders, the Nikkei closed up 2.82%, the Hang Seng closed up 4.15% and the CSI closed up 1.03%. The ASX closed up 3.64% and Thailand’s main bourse index closed up 4.38%. The UK FTSE is currently up 2.0%, the STOXX is up 2.83%, the DAX is up 2.87%, the CAC up 1.75% and the Italian index is up 2.54% but still down circa 29.78%. The SPX daily index future is currently up circa 1%. Brent crude is up $195 a barrel and gold and silver have clawed back recent losses, gold up 46 and silver a spectacular 20.8% per ounce. The euro is flat versus the dollar, sterling, yen and the Swiss franc. Sterling is up versus the dollar and Swiss franc. The Aussie dollar has made strong gains versus the US dollar.

Data publications that could affect market sentiment on or after the New York opening include;

14:00 US – S&P/Case-Shiller Home Price Indices July.
15:00 US – Consumer Confidence Sept.
15:00 US – Richmond Fed Manufacturing Index Sept.

Case Shiller house price sale prices anticipate 4.5% year on year fall. The USA consumer confidence survey is expected to make a slight improvement up to 46 from 44.5. The Richmond Fed manufacturing is expected to reveal a fall from -10 to -12.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/buying-the-rumour-but-will-we-also-buy-the-news/

You Take the Red Pill and You Stay in Wonderland and I Show You How Deep the Rabbit Hole Goes

The “rabbit hole” is an accepted metaphor for the conceptual path which leads to the true nature of reality. Infinitesimally deep and complex, venturing too far down is probably not too clever an idea, you have to wonder if beginning to expose just how deep the global economies’ rabbit hole is burrowed will now irreversibly spook the markets.

There’s been a collective denial during the past three to four years and despite the dizzying amount of meetings of the good and the great of the financial world over recent weeks, the reluctance to actually put a figure on the total stability ‘bill’ has not gone unnoticed. There’s two reasons for this, firstly the mention by the IMF and ECB of €2-3 trillion to protect Spain, Italy and Greece is a number that doesn’t compute with the electorates of the seventeen member countries of the Eurozone.

It’s confusing given it’s such a large sum, it could be €5 trillion it’s that ‘stellar’, most of us cannot comprehend the reality of such sums and what the impact will be. At that level ‘money’ actually loses meaning to the ordinary man and woman in the street. However, that new reality may, in the short term, be explained by the media outlets who choose to be off side with the various politicians and the decision makers. When they ‘do the math’ and explain in basic digits the impact such bailouts will have coming so close after the 2007-2009 economic crash, the mood of the electorate may change.

The second reason the politicians and decision makers have avoided the mention of cold hard facts is they know the inevitable focus will then be on those figures and very quickly the question will be asked; “is that enough, at what point do you come back and ask for more?” Naturally the inquisition then moves forward by asking how these crises differ from 2008-2009 and naturally the IMF and ECB will go to any lengths to avoid stating the truth; ” oh..this is much, much worse, we didn’t know how deep the rabbit hole went back then and we have absolutely no idea now..this €3-4 trillion is just the start.”

On the subject of the IMF (and without clumsily mixing up Alice in Wonderland and the Wizard of Oz) the IMF has been pushed as a lender of last resort bulwark over recent years, the evangelical, mystical saviour of the system. As the curtains were accidentally moved back by Christine Lagarde during the IMF’s weekend meeting she revealed that the IMF has circa €400 bl at its disposal, barely enough to ‘solve’ the short term Greek issues..

Asian markets reacted badly to the various proposals put forward by the IMF and the general mood of gloom which has cast a shadow over the global economy. The Nikkei closed down 2.17%, the Hang Seng closed down 3.08% and the CSI closed down 1.80%. The most spectacular fall was on Thailand’s main bourse the Bangkok SET which closed down 7.82% down and is now in negative territory year on year.

In late evening the ftse and SPX futures pointed towards positive openings, however, the overall ‘nervousness’ of the markets was illustrated by both futures indices being negative by over 1% pre the London open. The ftse is in positive territory now as is the SPX future. The ftse is currently up 0.5% and the SPX future is up 0.75%. the STOXX is up 1.52%, the CAC is up 1.02% and the DAX up 0.63%. Brent is down $15 a barrel gold down $43 an ounce and silver, which has imploded as an alternative investment recently, is down $234 or ten percent.

Sterling is up circa 0.5% versus the USD, EUR and CHF and relatively flat versus yen. The euro has clawed back earlier losses versus the dollar but is down circa 0.7% versus yen and down circa 0.5% versus the dollar. The Euro is very erratic versus CHF but is currently flat. There are no scheduled data releases that are likely to impact the markets today.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/you-take-the-red-pill-and-you-stay-in-wonderland-and-i-show-you-how-deep-the-rabbit-hole-goes/

Daily Market Roundup by FXCC - September 27 am

The Zloty Loses its Slot

Please no laughing at the back of the class, the Polish currency, the zloty, is apparently falling out of favour with investors and speculators. Are you thinking what I’m thinking, that it’s a shame they didn’t ditch their sovereign currency in 2002 and join the euro?

Trading humour can be so cruel. The zloty is down 16 percent against the dollar and 9.9 percent versus the euro this quarter as the worst performer amongst the European currencies. “The zloty was not so long ago the darling of Europe, Middle East and Africa regions but these days are gone,” Benoit Anne, the head of global emerging-market strategy at Societe Generale SA in London, said in a phone interview with Bloomberg, “It used to be a very strong fundamental story and you don’t have it anymore.”

Poland’s was the only European Union economy to avoid recession after the global credit crisis in 2008 caused record purchases of government’s bonds. The economy expanded an average 4.4 percent a year since 2007, compared with 0.1 percent in the EU. However, that artificial ‘growth’ came at an obvious price; Poland’s budget deficit has more than quadrupled since 2007 to 7.9 percent of GDP last year, the widest gap since at least 1996, according to data compiled by Bloomberg.

Contagion thoughts took a twist in an unfamiliar direction yesterday, with news that Danish banks are experiencing their own crisis and it’s deepening due to the new government’s plans to impose taxes on lenders, this threatens to deplete capital at a time when most of the country’s banks have no access to funding markets.

“The banks are under severe stress,” said Jesper Rangvid, professor of finance at Copenhagen Business School, in an interview with Bloomberg. Imposing extra taxes on the country’s banks “definitely does not contribute to banking stability.”

Stocks rallied yesterday, rebounding from last week’s slump. Commodities reversed losses and the Dollar Index declined. The Standard & Poor’s 500 Index jumped 2.3 percent to close at 1,162.95 at 4 p.m. in New York. The S&P 500 is down circa 12 percent since the end of June, heading for its worst quarterly performance since 2008. Ten-year U.S. Treasury note yields added six basis points to 1.90 percent, rising from a close to record low. The Dollar Index lost 0.5 percent, while the euro fell against 12 of 16 major peers. Financial shares ranked among the session’s best performers, with the KBW Bank Index up 5.3 percent. Dow component JPMorgan Chase & Co advanced 7 percent to $31.65 while Citigroup Inc gained 7 percent to $26.72.

Turning attention back to Europe, Greeks are facing up to a miserable existence due to the austerity measures. Greece will deepen pension cuts, extend the painful property tax and put tens of thousands of workers on notice in order to secure new aid and stave off bankruptcy, causing more pain for an increasingly embittered electorate. With civil servants suffering swingeing 15% salary cuts and core inflation hitting hard the experience is exacerbated by the random rolling transport strikes. Talk of plans for a 50 percent write-down in Greek debt and improvements in the euro-zone rescue fund buoyed the market, however, European officials called the talk premature. The plans could involve using leverage and the European Investment Bank to buy sovereign debt to save European banks. A solution cannot come quick enough for Greece’s battered and embittered population.

Gold lost circa 4% on Monday, hit by liquidation by commodity hedge funds triggered by another sharp margin hike. The metal has lost 11% during its recent four-session sell-off, its worst four-day drop since February 1983. There was widespread talk of possible selling by big hedge funds to cover their losses in other markets. Gold was down 3.4 percent at $1,600 an ounce by 1:17 p.m, having fallen earlier by more than 7 percent to a 2-1/2-month low of $1,534.49. The difference between the session high and low of $128 marked the largest daily price swing on record. Silver fell as much as 16 percent and was set for its sharpest three-day fall on record of more than 25 percent. Silver eventually dropped 3.2 percent to $30.05 an ounce.

Looking towards this mornings London and European session the European bourses equity futures indices look positive, the FTSE up 1%, the STOXX up 3% and the DAX likewise. The SPX future is currently flat. Brent is up $69 a barrel. Will Asian markets feel the wave of premature optimism felt by Europe and the USA? Talk may be regarded as cheap, until action is taken Asian markets and policy makers will remain sceptical as to the will and ability to rescue both Europe’s and the USA’s debt crises.

Key morning announcements include; at 09:00 the Eurozone – M3 (Money supply) for Aug. And at 11:00 UK – CBI Industrial Trends Survey for Sept. Nether of which publications are likely to affect sentiment greatly.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/september-27-am/