Market Commentary by FXCC - 2011 Was Not A Vintage Year, But Is The Phenomenon Of Vintage Over-Rated?

A vintage wine is made from grapes that were all, (or primarily), grown and harvested in a single specified year. In certain wines it denotes quality, as in Port were Port houses make and declare vintage Port in their best years. From this tradition, a common (though incorrect) usage applies the term to any wine perceived to be particularly old, or of a particularly high quality.

Most countries allow vintage to include wine not from the year denoted on the label. In Chile and South Africa, the requirement is 75% same-year content. In Australia, New Zealand, and the European Union, it’s 85%. In the USA it’s 85%, unless the wine is designated with an AVA in which case it is 95%. The 85% rule in the United States applies equally to imports. The opposite of vintage wine is nonvintage wine (NV), usually a blend from two or more years. This is a common practice for winemakers seeking consistency year on year.


The importance of vintage, however, is varied and disputed. In many wine regions growing seasons are more uniform. In dry regions controlled use of irrigation contributes to uniform vintages. Wines of superior vintages from prestigious producers command higher prices than those from average vintages particularly if wines improve by age in the bottle. Some wines are only labelled with a vintage in better-than-average years, to maintain their quality and reputation, while the vast majority of wines are produced to be drunk young and fresh

The importance of vintage may be exaggerated, New York Times wine columnist Frank J. Prial declares the vintage chart to be obsolete;

winemakers of the world have rendered the vintage chart obsolete, winemakers now have the technology and skills to make good and even very good wines in undistinguished years

Roman Weil, co-chairman of the Oenonomy Society of the US and Professor at the University of Chicago, tested the hypothesis that experienced wine drinkers;

cannot distinguish in blind tastings the wine of years rated high from those of years rated low, or, if they can, they do not agree with the vintage chart’s preferences

Dr. Weil used wines ranging from 4 – 17 years beyond their vintage with 240 wine drinkers and found that the tasters could not distinguish between wines of good and bad vintages, (except Bordeaux wines), when they could make a distinction, the match between the tasters’ individual assessments and the charts’ rankings were little better than tossing a coin. When the tests were replicated with wine experts, including French wine academics, the results were again the same as chance.

Weil does not consider a vintage chart to be useless. He suggests using one to help “find good buys in wine. Buy wine from the appalling years,” which may be priced far below actual quality. The subject of the importance of vintage is one about which disagreement can be expected to continue.

There are some fascinating parallels between forex trading and the description of what may (or may not) be considered a vintage year for those with vinous tendencies, the most obvious being the subjectivity. One man’s meat is another’s poison; if we class intraday day traders as Beaujolais drinkers they may have experienced a good harvest, similarly trend traders may have fared well in the months when confidence in the Euro reached a recent nadir. If we distinguish position traders as traders above and beyond trend they may have also fared extremely well from September onwards. Whilst according to a recent HSBC report for the biggest beasts in our jungle, hedge fund managers, it’s been a terrible year, finishing the year being flat would be considered a good position for the ‘shining lights’.

I was particularly drawn to and wanted to highlight the parts in our short précis were Dr Weil tests the ability of wine experts in order to determine what is and what isn’t vintage. His reference to charting being next to useless should also raise an eyebrow and smile amongst our trading community. In a blind test the experts failed, he declared that the experts would have provided a better result had they simply tossed a coin, even were wine tasting is concerned probability over rules the expert opinion once again. Presumably Dr Weil didn’t disclose the names of the experts, watching wine snobs being disrobed of their honour and reputation would have been a cruel sight.

Dr Weil even suggested counter intuition; buying the most appalling wines can be a ‘strategy’, a notion that may fit well with traders who choose random entries, but concentrate on other key aspects of their overall edge and method. And that’s the subject I’d like to finish on with this final musing of 2011. Despite all the expert opinion available we have to make our own decisions as to why and when we pull the trigger. We can have the quickest multi monitor/gaming set up, pay for the fastest squawk, have a ‘lite’ version of Bloomberg, be on the mailing list of greatest traders and analysts, be constantly on message as to what fundamentals are shaping our ‘forex universe’, have absolute conviction in our latest trading method and technique, but all that intelligence and the required intuitive skill to put it to good use can be rendered useless unless we have control over our money management and self control.

“Trading what you see not what you think” is a trading phrase often trotted out without proper reflection. Perhaps our wine experts’ noses had become impaired, perhaps they’d lost touch with their instincts and senses becoming too desensitised to their environment, or perhaps they’d begun to believe their own hype and self importance. As we’ve witnessed in 2011 the market can appear to be random and unpredictable, in order to capitalise you need all your senses to be in tune. It doesn’t have to be a vintage year for the markets to give up profit, the market simply has to exist. You need to see, give yourself time to think and have the commitment and courage in your conviction to act. Despite the massive amounts of opinion and intelligence available to us trading can be best summed up by one liners from charismatic old timers;

“you can’t know ’til you bet!” Jesse Livermore 1877 – 1940

Market Commentary by FXCC - Euro Continues Falling Versus The Yen And Dollar

The euro weakened for a sixth day in series versus the yen in the morning session, heading for its second annual drop whilst European stocks shed their advances amid the mounting concerns that the severe austerity measures, imposed by the technocrats in order to counter the region’s debt crisis, will inevitably slow growth or send certain countries’ economies and the wider Eurozone into recession.

Europe’s shared currency fell to 100.06 yen yesterday, the lowest level since June 2001, and traded at 100.19 yen today. That psychological level of 100 may act as a ‘magnet’ for weeks to come. Data next week from a department of the EU may confirm that European manufacturing contracted for a fifth straight month.


The Global equity market lost circa $6.3 trillion in value this year according to Bloomberg data as the debt crisis and slowing global economic expansion weighed on demand for riskier assets. The Stoxx 600 retreated 12 percent in 2011, bank shares dropped 33 percent, the worst performance sector among the key 19 industry groups. The Stoxx 600’s decline this year compares with an 18 percent drop in the MSCI Asia Pacific Index and a 0.4 percent increase in the S&P 500. Exchanges in London, Dublin and Frankfurt will close early today but based on current pricing these bourses’ year on year performance will be mainly negative. Here’s a quick snapshot of the year on year figures.

EURO STOXX 50 – down 18.36%
UK FTSE – down 6.98%
GERMAN DAX – down 15.52%
FRANCE CAC – down 18.84%
ITALIAN MIB – down 25.92%
GREECE ASE – down 52.74%

Market Overview
The euro slid 0.5 percent versus the yen and weakened 0.3 percent against the dollar at 9:45 a.m. in London. The Stoxx Europe 600 Index rose 0.1 percent, having earlier climbed 0.5 percent. Standard & Poor’s 500 Index futures fell 0.1 percent. Yields on U.K. government bonds fell to a record low and Italian 10-year yields remained at more than 7 percent. Gold and copper rebounded as natural gas fell to a two-year low.

Gold rose 1 percent to $1,562.01 an ounce, the first gain in four days, and copper climbed 1.2 percent to $7,514.50 a metric ton, the first increase this week. Natural-gas futures dropped as much as 0.8 percent to $3.001 per million British thermal units, the lowest since September 2009. S&P’s GSCI Total Return Index of raw materials slipped 1 percent this year.

The Shanghai Composite Index climbed 1.2 percent, its biggest gain in two weeks. The gauge has collapsed by 22 percent this year, the most since 2008 and extending last year’s 14 percent drop, on concerns that increases in borrowing costs and Europe’s debt crisis will derail the economic growth in the world’s second-largest economy. The index’s 33 percent drop since 2009 makes it the worst performer among the world’s 15 biggest market.

Market snapshot as of 11:00 am GMT (UK time)

The Nikkei closed up 0.67%, the Hang Seng closed up 0.2% and the CSI closed up 1.2%. The ASX 200 closed down 0.36% finishing the year down 15.32%. The main European bourse indices are experiencing mixed fortunes in morning trade; the STOXX 50 is up 0.15%, the UK FTSE is down 0.22%, the CAC is up 0.05% and the DAX is up 0.12%. The SPX equity index future is up 0.15%. ICE Brent crude is up $0.22 a barrel at $107.79 whilst Comex gold is up $32.4 per ounce bouncing back from its six month low.

Market Commentary by FXCC - Is Another Credit Crunch Inevitable?

There’s a cast iron tradition which has been woven into the fabric of the UK psyche over the holiday period; we all get together after the main two days have passed, and moan about the rubbish that was on television. Moving aside the fact every news broadcast is occupied for the first fifteen minutes with tedium regarding what the UK royal family are up to, the media failing to point out that shooting on their several hundred acre estate during Boxing Day is their preferred ‘party game’, the overall schedule is full of repeats and old films which hardly merits the purchase of that 50″ plasma television without which your life and Xmas won’t be complete.

However, there is one other repeat that the mainstream channels never tire of; reporters in various shopping malls counting the footfall and interviewing shoppers and outlet store management. It’s always the same tired story, retail managers swear how great their stores are doing and giddy shoppers, who can’t bag a wild animal with a shotgun on Boxing Day, rejoice in the bargains they’ve just bagged with their fantastic laminated rectangular pieces of plastic.



In the USA 70% of the economy is consumerism, the UK is quickly approaching this level, naturally channels with political leanings will therefore be under orders to stoke up a feel good factor. The ‘bigging up’ of retail as a quasi religion at every turn did however backfire spectacularly during one sojourn by the BBC; turning to a small business woman in Covent Garden London the cheerful interviewer asked how business was, the woman replied “dire”, she’d only sold two items in the morning and overall her business sales were down half vis a vis the direct comparison with last year. The interviewer had no answer, this interview wasn’t in the pre-ordained script and the metallic clatter of pins being dropped on the BBC studio floor could be heard via those 50″ plasmas throughout the UK..

There were a couple of significant potential retail bankruptcies in the UK pre the Xmas shopping period which raised eyebrows in the financial sector, particularly amongst retail analysts. It wasn’t that the failure of these businesses came as a shock, selling shoes at the lower end of the retail market or lingerie is a business model prone to the economic weather, moreover it was the sudden drying up of alternatives to administration that should be raising alarm bells, not just in the retail sector but from a wider perspective. The businesses in question were Barratts and La Senza.

This is second time Barratts shoes have gone into administration in the past two years. The lazy media narrative will suggest that it’s become the latest victim of cut-throat competition on the high street and that its failure to adapt to web retailing has caused its demise. It was forced to call in the administrators on Thursday 8th December, threatening almost 4,000 jobs as Christmas loomed. Barratts has 191 shops, including one on Oxford Street in London that opened only last year, and 371 concessions. Deloitte has been appointed the administrator.

But given that this model rose from the ashes due to a “pre-packaged” arrangement in 2009 it’s unlikely to be given a second reprieve although that really is the ‘litmus test’ for many high profile retail businesses currently on respirator. If they rise again, the administrators manage to find buyers and satisfy the creditors, then it could indicate that a degree of optimism still lingers on the high street. If not then it could signal that a fresh wave of closures is about to crash into the sea wall defences of the high street, particularly if (despite the bluster) Xmas sales were in fact a false mirage beyond the intense public relations exercises so many retail operations seem wedded to.

The news concerning Barratts arrived as speculation grew that a huge round of store closures is under discussion at Peacocks, the struggling clothes retailer chaired by Allan Leighton, formerly an Asda director and chairman of Royal Mail. Sources suggested that 200 shops could be axed in a bid to turn around the business, which has £240m of debt. Shareholders include the US investment bank Goldman Sachs and lenders include Royal Bank of Scotland. The company was unwilling to comment on any closures. It said: “We continue to progress our restructuring discussions and plans, with no decisions taken at this point.”
The outdoor clothing retailer Blacks Leisure said it was looking for an emergency buyer, Blacks Leisure has closed 101 stores in the recent past but this year issued two profit warnings and put itself up for sale.
Electrical retailer Comet announced first-half losses of £23m in December underlining why its parent group Kesa had recently agreed to hive off the 248 store chain to a business turnaround specialist for a nominal fee of £2.
Last month the American retailer Best Buy said it was pulling out of Britain, while Focus DIY collapsed into administration earlier this year after defaulting on loan payments.
In June furniture store Habitat went into administration before some of its stores and the brand were bought out by Home Retail Group.
Struggling sports retailer JJB Sports narrowly avoided administration three months earlier after agreeing a new deal with landlords and agreeing to close up to 89 of its stores, in addition to the 140 stores it shut in 2009.
The lingerie chain La Senza and the gift retailer Past Times were both on the brink of administration on Xmas Eve, leaving thousands fearing for their jobs over the reminder of the Christmas holiday. La Senza, which has 146 stores and is owned by Lion Capital, hired a restructuring team at KPMG earlier this month in a desperate attempt to reshape its burdensome debts. Meanwhile, Past Times, the retro-themed gift chain with more than 100 stores is also working with the accountancy firm. It made a loss in 2010 and has been struggling for years.

There is a pattern developing here (if analysts care to indulge in an exercise of closer inspection) and it burrows far deeper than the simple realisation that the ’tills aren’t ringing’ anymore; normal lines of credit for these business are being withdrawn as lenders refuse to lend good money after bad. The normal course of action for these businesses is to access funding to keep the model intact or to expand further. However, now they have to cut costs in order to survive, they’re locked out of normal credit facilities as the prevailing attitude is that the high street is, despite the rows of empty units in every mall and high street, still far too crowded for the levels of business anticipated in 2012.

The UK is not alone in having many retailers who will close if the Xmas and new year sales don’t open the battle weary customers’ pockets, recently Sears, the owner of the K Mart brand in the USA announced the closure of up to 120 of its stores citing poor Xmas sales as the underlying reason. There was also another indirect news item yesterday which although not directly related to retail might also indicate that major businesses, previously thought of as robust, are having to rationalise and reduce as opposed to expand or contain..

The New York Times Co said it will sell 16 regional newspapers spread across the U.S. Southeast and California to Halifax Media Holdings for $143 million in cash as it looks to cut costs and focus on its most important papers and their websites. The rhetoric will be that without these papers, the firm will be able to focus on its flagship The New York Times and monetize its digital content. However, similar to consumers, retail outlets and major stores raising debt, in order stand still or expand, is proving incredibly difficult in the current climate which could be the first indication that a new version of the 2009 credit crunch is about to hit.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/is-another-credit-crunch-inevitable/

Market Commentary by FXCC - Pre Xmas Optimism Blown Away Due To The ECB’s Swollen Loan Book

The major market sell off experienced yesterday ‘across the board’ was due to the ECB revealing that it’s balance sheet had swelled to record highs as a consequence of its successful loan tender in the week preceding Xmas. As the deadline looms for bids in the Italian debt auction the bond markets reaction is bearish, the yield on Italy’s 10-year bonds has once again moved past the significant 7% mark.

The ECB’s balance sheet soared to a record 2.73 trillion euros after it lent financial institutions more money last week in order to keep the credit flowing to the Eurozone economy during the debt crisis, the Frankfurt-based bank said yesterday. The euro slid to its lowest level since January 2011 versus the dollar, curbing investor demand for commodities priced in the U.S. currency.



Market Overview
The euro has now weakened to a decade low versus the yen before Italy auctions as much as 8.5 billion euros of debt. European shares and U.S. equity-index futures are flat or have risen marginally. The 17-nation euro fell as much as 0.5 percent versus the yen before trading at 100.50 yen as of 8:03 a.m. in London. German two-year note yields fell one basis point, approaching a record low. The Stoxx Europe 600 Index rose 0.3 percent, while Standard & Poor’s 500 Index futures rose 0.4 percent after the gauge sank 1.3 percent yesterday. Gold futures retreated for a sixth day, set for the longest slump since 2009.

Italian 10-year yields rose three basis points to 7.03 percent. They were little changed yesterday after the Treasury sold 9 billion euros of 179-day bills at a rate of 3.251 percent, down from 6.504 percent at the previous auction on Nov. 25.

Gold for February delivery fell as much as 1.2 percent to $1,545 an ounce before trading at $1,551.50. It is set for the longest losing streak since March 2009. Silver for immediate delivery slid 0.5 percent to $26.9625 an ounce, a fourth day of losses. Three-month copper retreated 0.8 percent to $7,402 a metric ton in London, extending yesterday’s 2.3 percent drop.

Oil rose 0.3 percent to $99.64 a barrel in New York, following a 2 percent slide yesterday. U.S. inventories increased 9.57 million barrels last week, according to the industry-funded American Petroleum Institute. An Energy Department report today was forecast to show supplies fell 2.5 million in a Bloomberg News survey.

Market snapshot at 9:45 am GMT (UK time)

The main Asian/Pacific markets fell in overnight early trading with the exception of the CSI which closed up 0.15%. the Nikkei closed down 0.29%, the Hang Seng closed down 0.65% and the ASX 200 closed down 0.43%. The Sensex 30 index, the main Indian gauge closed down 1.31%, down 22.92% year on year.

European indices are flat or marginally down in the morning session; the STOXX 50 is down 0. 10%, the UK FTSE is down 0.16%, the CAC is down 0.11% and the DAX is up 0.23%.

Economic calendar releases that may affect sentiment in the afternoon session

There are three crucial data releases this afternoon which could impact the afternoon session significantly.

13:30 US – Initial & Continuing Jobless Claims Weekly
14:45 US – Chicago PMI December
15:00 US – Pending Home Sales November

A Bloomberg survey forecasts initial jobless claims of 375,000, compared with the previous estimate of 380,000. A similar survey predicts 3,600,000 for continuing claims, the same as the previous figure.

For PMI a Bloomberg survey of analysts yielded a median estimate of 61.0, compared to the prior reading of 62.6.

For pending home sales a Bloomberg survey of analysts yielded a median estimate of +1.50% month-on-month, compared with the previous figure of +10.40%.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/pre-xmas-optimism-blown-away-due-to-the-ecbs-swollen-loan-book/

The USA Has No Option But To Play ‘Soft-Ball’ With China Over The Yuan

The “currency war” appears to be experiencing a truce for now, the USA admin. is using a far more conciliatory tone and employing improved diplomatic language when describing the value of the Yuan and the supposed harm it’s inflicting on the USA economy.

The U.S. Treasury avoided labelling China a currency manipulator on Tuesday, but instead gently questioned and probed the country for not moving quickly enough on exchange rate reforms. The United States did, however, criticise Japan for stepping into the currency market in order to stem the yen’s rise, whilst urging South Korea to use such interventions sparingly. The Treasury is obvious deeply concerned with regards to the value of the dollar in 2012, particularly after the announcement that the second part of the combined $2.4 trillion debt ceiling requires enactment.


The USA admin. and Treasury does appear to be very concerned with regards to the recent concord entered into by China and Japan and rightly so, I highlighted this in my forex market commentary of yesterday. This direct trade, circumnavigating the use of dollars, should not be overlooked or underestimated given it’s the most significant agreement of its type China has entered into.

The value of the yuan has risen 4 percent versus the dollar in 2011 and 7.7 percent since China dropped a firm peg against the greenback in June 2010. The Peterson Institute for International Economics recently estimated the yuan was undervalued by 24 percent versus the dollar, down from 28 percent earlier in the year. It attributed the change to both Beijing’s policy of gradual currency appreciation and higher Chinese inflation.

The central point of the friction between the two countries is the U.S. trade deficit with China that swelled in 2010 to a record $273.1 billion from about $226.9 billion in 2009. The cumulative Jan-Oct deficit with China is on track to top that this year, running at around $245.5 billion. However, that trade deficit number could swell once more if the value of the dollar is severely impacted in 2012, a value that China can’t prop up if the USA self inflicts its own FX wounds.

The Treasury’s decision not to label China a currency manipulator sent a “clear and positive signal” that would soothe the market and benefit trade, according to a commentary in Xinhua, the Chinese state news agency, on Wednesday.

Beijing continually warned the United States throughout 2011 not to “politicise” the currency issue, some economists have pointed out that nations such as Japan and Switzerland have intervened in currency markets recently without drawing Washington’s criticism, until now. China is the biggest foreign holder of U.S. Treasuries, with about $1.1 trillion, a position that gives it leverage in international economic negotiations. Foreign exchange traders had not expected a change of U.S. tactics.

Market Overview
European stocks extended their gains, the benchmark index rising for a fourth day, as Italy’s borrowing costs fell at an auction of 179-day bills. U.S. index futures advanced, while Asian shares dropped. The Stoxx Europe 600 Index gained 0.5 percent to 243.16 at 10:16 a.m. in London. The gauge rallied 2 percent in the previous three sessions as investors turned attention from the euro-area debt crisis to U.S. data that showed the recovery in the world’s largest economy is gathering pace. Futures on the Standard & Poor’s 500 Index expiring in March gained 0.2 percent. The MSCI Asia Pacific Index retreated 0.6 percent.

Italy sold the bills at an average yield of 3.251 percent compared with 6.504 percent at an auction of similar-maturity debt on Nov. 25. More details were awaited. The government was scheduled to sell 9 billion euros of 179-day bills and as much as 2.5 billion euros of zero-coupon 2013 bonds today. It will auction as much as 8.5 billion euros of debt due in 2014, 2018, 2021 and 2022 tomorrow.

The yen strengthened for a fourth day versus the euro and the dollar as concern Europe’s debt crisis will push up the region’s borrowing costs and damp economic growth boosted demand for safer assets. Japan’s currency appreciated versus 12 of its 16 major counterparts as Italy auctioned debt and before a report tomorrow forecast to show business confidence in the Mediterranean nation fell to the lowest level in almost two years. The yen also gained as Asian stocks declined. Demand for the dollar was tempered as data signalled a recovery in the U.S. economy is gaining momentum.

The euro has weakened against all but one of its 16 most- traded peers this month. The 17-nation currency has declined 2.8 percent versus the dollar, and lost 2.7 percent against the yen.

Oil traded close to the highest in six weeks after Iran threatened to block crude supplies through the Strait of Hormuz at a time when U.S. stockpiles are falling. Oil for February delivery was at $101.04 a barrel, down 30 cents, in electronic trading on the New York Mercantile Exchange at 9:21 a.m. London time. It added 1.7 percent to $101.34 a barrel yesterday, the highest settlement since Nov. 16. Futures climbed 11 percent this year, extending last year’s advance of 15 percent.

Brent oil for February settlement was down 83 cents, or 0.8 percent, at $108.44 a barrel on the London-based ICE Futures Europe exchange. The European contract’s premium to crude in New York was $7.40 a barrel, compared with $7.93 at yesterday’s close, the smallest differential based on settlement prices since Jan. 20. About 15.5 million barrels of oil a day, or a sixth of global consumption, passes through the Strait of Hormuz between Iran and Oman at the mouth of the Persian Gulf, according to the U.S. Energy Department. Iran’s navy started a 10-day exercise east of the passage that involved the use of submarines, ground- to-sea missile systems and torpedoes, Press TV said Dec. 24.

Market snapshot as of 11:00 am GMT (UK time)

The yen gained 0.2 percent to 101.61 per euro at 10:26 a.m. in London after rising 0.2 percent over the past three days. The currency climbed 0.2 percent to 77.71 per dollar, extending this year’s advance to 4.4 percent. The euro was little changed at $1.3076, having fallen 2.4 percent in 2011.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, was little changed at 79.760.

Asian/Pacific markets mostly fell during overnight/early morning trading the CSI being the exception closing up marginally at 0.13%. The Nikkei closed down 0.2% and the Hang Seng closed down 0.59%. the ASX 200 closed down 1.25% currently 14.4% down year on year. European indices have faired well in the morning session, the STOXX 50 is up 0.73%, the UK FTSE is up 0.66%, the CAC is up 0.86% and the DAX is up 0.15%. ICE Brent crude has fallen by $0.91 and Comex gold is $5.80 per ounce.

There are no economic calendar data releases that investors should be mindful of in the afternoon session.

Source: FX Central Clearing Ltd, (FXC BLOG)
http://blog.fxcc.com/the-usa-has-no-option-but-to-play-soft-ball-with-china-over-the-yuan/

“I’ll See That Debt Raise And I’ll Raise You” The USA Continues With Its High Stakes Poker Game

Amongst the ‘good news’ regarding consumer optimism that was reported on Tuesday came the very bad news (which appeared to be buried) that the USA was close to breaching the first level of it’s revised debt ceiling agreed by both houses in the USA Congress back in late July, early August 2011. We’ll comment on consumer confidence and house prices towards the end of this commentary, but for now let’s take a quick look at the debt ceiling issue.

The USA admin/govt borrows approx 40% of the money it needs to simply function on a day to day basis, a desperate state of affairs brought on by the steadfast and resolute obstinacy of either of the two parties to increase taxes over successive decades. The USA govt. has managed to burn through the revised debt ceiling inside five months, in short it has spent roughly an extra $220 billion per month since the revised debt ceiling was introduced. Now apologists for the USA admin will state that, “it’s under control, there’s nothing to see here, just move along Sir”, however, despite the calm and the argument that raising it was subject to certain criteria being met and it was all part of the programme, the situation is dire.



The Republican party pretended to play hard ball on the issue back in July/August, but the tub thumping was for the gallery, if they hadn’t raised it then the wealthiest amongst the Capitol Hill cabal would have been first in the firing line to witness a significant part of their paper wealth evaporate. When S&P downgraded the USA rating as a consequence of the debt raise on August 5th, (the first time in ‘rating agency history’ the USA had ever been downgraded), the Dow Jones index fell by 5.6% on the day, the fall in the equities markets, had the USA gone into lock down, would have been catastrophic.

Late on the night of July 31, President Obama and Congressional leaders of both parties announced an agreement that would raise the debt ceiling by up to $2.4 trillion in two stages, enough to keep borrowing into 2013. The pact called for at least $2.4 trillion in spending cuts over 10 years, with $900 billion in across the board cuts to be enacted immediately. And here’s the ‘rub’; the current ceiling has been breached very early, the next tranche of $1.2 trillion (on current projections) will only last until May at the latest, not August 2013 and once that extra cash is burned through the USA will have a debt versus GDP ratio of 110%. That’s a creeping ratio in the same ball park of the PIIGS nations in Europe – those who the USA admin. attempt to lecture with regards to fiscal prudence and monetary control. There really is no comparison given the sheer size of the USA debt, the USA is (and always was) the mammoth cryogenically suspended in the deep freeze if Europe was the elephant in the room..

Here’s a snapshot of the debt ceiling;

The United States debt-ceiling crisis was a financial crisis in 2011 that started as a debate in the United States Congress about increasing the debt ceiling. The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending. However, similar debates are anticipated for the 2012 and 2013 budget.

As of May 2011, approximately 40 percent of US government spending relied on borrowed money. Raising the debt ceiling allows the federal government to continue to borrow money to support current spending levels. If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)

According to the Treasury, “failing to increase the debt limit would “cause the government to default on its legal obligations an unprecedented event in American history”. These legal obligations include paying Social Security and Medicare benefits, military salaries, interest on the debt, and many other items. Making the promised payments of the principal and interest of US treasury securities on time ensures that the nation does not default on its sovereign debt. Prior to the debt ceiling crisis of 2011, the debt ceiling was last raised on February 12, 2010 to $14.294 trillion.

On April 15, 2011, Congress passed the last part of the 2011 United States federal budget, authorising federal government spending for the remainder of the 2011 fiscal year, which ends on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of circa $1.48 trillion. According to Treasury, the US government would run out of cash to pay all its bills on August 2, 2011, which became the deadline for Congress to vote to increase the debt ceiling.

Consumers Confident In The USA

Two reports published on Tuesday, highlighting the overall levels of sentiment in the USA, appeared to be on the face it rather contradictory, however, closer inspection revealed why…

The Case Schiller housing report in the USA is accepted as the most respected house price metric published. Despite record low mortgage rates the index dropped by 1.1% month on month. From the peak of house price mania in 2006 the fall is now at circa 37% from peak to trough and many analysts are pencilling in further falls in 2012. The irony that only now are banks, who repossessed with such pathological vigour since 2007, now looking to create mass tenancies in many of the circa six million properties they repossessed is truly an epic ‘face palm’ moment. Had they engineered a plan with original owners, perhaps with a little debt forgiveness, then the rescue of USA banks wouldn’t have been so gargantuan and the USA homeless figures wouldn’t have spiked to over 1.5 ml during 2011..

And finally if you’re going to conduct a survey on shoppers optimism you may get a slightly false reading if you stick a clip board or microphone under someone’s nose after they’re all giddy and light headed due to competing with the throngs in the sale which comes after Xmas, but before the New Year sale. Questions such as “how optimistic and confident do you feel about the future of the USA economy?” when the respondent is laden like a Buckaroo mule, with as much baggage as possible before snapping, is bound to be greeted with a ” hey man, life is wonderful, I just got this toaster for $3, don’t need it but hey, god bless American consumerism, it accounts for seventy percent of our economy right? ”

And that consumerist optimism isn’t shared by the huge retail firm Sears in the USA who have announced that they’re closing up to 120 stores after a disappointing season. That metric has far more credence than a survey given that Sears owns the K mart brand in the USA..

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/ill-see-that-debt-raise-and-ill-raise-you-the-usa-continues-with-its-high-stakes-poker-game/

Market Commentary by FXCC - 2012, The Year Of The Yen?

Japan sold at least 14.3 trillion yen ($183 billion) in 2011 in order to stem the gains that cut profits for exporters, Finance Minister Jun Azumi has pledged more intervention if required in 2012. Intervention in 2012 may fail again however, as the financial turmoil in the USA and Europe attracts investors to the world’s third-most traded currency due to its relatively low volatility.

The yen has advanced versus most major currencies in 2011, including a 4.1 percent rise versus the USA dollar. Despite bond yields in Japan being the second-lowest in the ‘developed’ world and government borrowings being double the size of the economy, foreign ownership of its debt is now at the highest point since 2008.

Besides its gains versus the dollar, (the world’s reserve currency), the yen is the best performer of 2011 after ‘filtering out’ price swings, strengthening 0.5 percent, according to the risk-adjusted return data compiled by Bloomberg. The Yen is the only Group of 10 currencies predicted to rise versus the greenback next quarter, strengthening to 77 per dollar by March 31, many analysts’ forecasts show. The U.K. pound and Swiss franc were the second and third best performers versus the dollar in 2011, finishing unchanged and down by 0.1 percent on a risk-adjusted basis. South Africa’s rand fared the worst, weakening 1 percent after taking into account price swings, followed by the Mexican peso’s 0.7 percent loss.



Gains in Japan’s currency underscore the retreat from risk and losses in carry trades, whereby investors borrow in low- interest regimes to invest in higher-risk, higher-return assets elsewhere. Carry trades involving borrowing yen to invest in the currencies of Australia, South Africa, Mexico and Brazil have lost 9.1 percent this year, reversing a 1 percent gain in 2010.

The Japanese currency traded at 77.90 per dollar and 101.82 versus the euro as of 9:02 a.m. London time. For the year, the yen advanced 4.1 percent versus the greenback and 6.6 percent versus the 17-nation currency.

The difference in the number of positions by hedge funds and other large speculators on a rise in the yen compared with those predicting a drop was 24,476 on Dec. 20, data from the Washington-based Commodity Futures Trading Commission revealed? In April there was a net 52,983 contracts betting on a fall.

Japan’s nominal gross domestic product is roughly the same as 1992, following the collapse of the nation’s asset and real estate bubble. The Bank of Japan on Oct. 27 lowered its forecast for the country’s economic growth in 2012 to 2.2 percent from the 2.9 percent projected in July, citing effects from the strong yen. A previous yen record of 79.75 reached in April 1995 stood until March of this year, when a magnitude-9.0 earthquake struck Japan’s northeast, stoking speculation companies would repatriate overseas assets to pay for rebuilding. The currency jumped to 76.25 on March 17, prompting coordinated action by Group-of-Seven nations the next day.

Total currency sales in the year through Nov. 28 were seven times bigger than the 2.1 trillion yen sold in one event in 2010, according to data from the Ministry of Finance. The currency erased most losses in as short as five days after each intervention and stood about 12 percent stronger on Dec. 23 than the three-year average against the dollar. Lack of alternative havens is causing investors to buy and hold. Three-month historical volatility in the dollar-yen rate was at 9 percent today, the least since July and compared with a three-year average of 12 percent. The 10.18-yen gap between the Japanese currency’s weakest and highest points of 2011 is the narrowest since at least 1973 when it started to trade freely.

Market Overview
The volume of shares changing hands across Europe is reduced today as U.K. and Irish markets remain closed for a second day following the Christmas holiday. European stocks advanced for a third day before reports from 2:00 pm GMT that may show house prices in U.S. cities fell at a slower pace and consumer confidence climbed. Asian shares retreated.

The benchmark Stoxx Europe 600 Index climbed 0.2 percent to 242.31 at 10:20 a.m. in London. The MSCI Asia Pacific Index declined 0.2 percent as the Bank of Japan warned of risks to the economy and South Korean consumer confidence slid. U.S. index futures will begin trading at 6 a.m. New York time today after the Christmas holiday, according to the IntercontinentalExchange Inc. website.

Stock swings that reached twice the five-decade average left the S&P 500 with the smallest price change in 41 years. The S&P 500 rose 3.7 percent last week, sending the measure to a gain of 0.6 percent for the year. The last time it moved less on an annual basis was in 1970, when it fell 0.1 percent.

Economic calendar releases that could affect sentiment in the afternoon session

Tuesday 27 December

14:00 US – S&P/Case-Shiller Home Price Indices Oct
15:00 US – Consumer Confidence December
15:00 US – Richmond Fed Manufacturing Index Dec

A Bloomberg survey gives a median consensus of -3.23% falls in house prices year-on-year for the Composite-20, from a previous reading of -3.59%. A Bloomberg survey of economists forecasts a figure of +58.3 for consumer confidence as compared with the previous reading of +56. A survey gives a median consensus of 5 for the Richmond Fed figure, compared to the previous reading of 0.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/2012-the-year-of-the-yen/

Market Commentary by FXCC - I’m All Lost In The Supermarket, I Can No Longer Shop Happily

“I’m all lost in the supermarket
I can no longer shop happily
I came in here for that special offer
A guaranteed personality” – The Clash 1979

The day preceding Xmas Eve caused chaos in certain stores across the USA as ‘sneaker heads’ turned riotous. It’s impossible to imagine how sane individuals could get so excited and competitive regarding the sale of a basketball training shoe, but nowhere other than America could the strange dichotomy between; rich and poor, the haves and the have nots, those on food stamps and those with plenty, be illustrated more crudely than the visceral emotions on display as USA citizens fought between themselves for the right to own the latest pair of ‘retro’ Nike Air Jordan’s.

Is it ironic or a strange juxtaposition that in the land where the Occupy Wall Street movement is being deliberately down played such an event should occur? The USA has a national debt of over $15 trillion dollars and rising by circa $50 bl per week, 1.5 million are homeless, circa ten million jobs have been lost since 2008, individual states and cities are declaring bankruptcy, over 400 banks have failed since 2008 and yet passion becomes more inflamed with regards to sneaker status anxiety than the overall deterioration of the country’s economy and social cohesion. When witnessing such events it’s understandable why political agnostics simply ‘give up’ on their fellow countrymen and women, at times there appears to be no answer and little point in fighting their cause…

The sale of the new Nike retro Air Jordans led to chaos in multiple locations across America. But it was in Seattle that the situation appeared to be most out of hand. Police had to use pepper spray on approx. twenty shoppers at a Seattle mall, while officers arrested at least four unruly shoppers in suburban Atlanta. The list of cities where mayhem ensued was alarming. Police were called to shopping centres in Indiana, Florida, Texas and Virginia to control crowds of hundreds lining up for the shoes.

People started gathering from midnight at four stores in in Seattle to buy the shoes retailing for $180 a pair. The crowd grew to over 1,000 by 4 am. Around 3 a.m. there was fighting and pushing amongst customers, by 4 am, officers used pepper spray to break them up.

But it was In Richmond, Calif. that the most bizarre incident occurred as a man was arrested after firing a gun while waiting in line.

“I don’t understand why they’re so important to people. They’re just shoes at the end of the day. It’s not worth risking your life over.” – Seattle shopper..

The Air Jordan XI Retro “Concord” sneakers, costing $180 retail, are based on a design that went on sale in 1995. The shoes are on eBay for $605. Adding to frenzied demand some stores were given as few as 12 pairs each.

In Lithona, Ga., up to 20 squad cars responded after a large crowd broke down a door to get inside before a store opened. Police officers took four into custody. Officers said they broke a car window to get two toddlers out after a woman went in after the shoes. They said she was taken into custody when she returned to the car.

In Arlington, Va., a crowd waited outside the Fashion Centre at Pentagon City mall which let in a few buyers at midnight and then a few at 6 am. Police arrived to control crowds, many customers left angry and empty handed.

At St. Charles Towne Center in Waldorf, Md., people pushed open the doors at several entrances to the mall. Initially they lined up outside the six stores but began pushing each other, trying to keep their places in line, the scene turned chaotic. No individual stores were broken into. Officers arrested four juveniles and one adult for disorderly conduct.

In Dayton, Ohio, fights broke out among shoppers outside a store, and some people sold their spots in line.

In Indianapolis, Ind., hundreds stampeded a store, a few losing shoes and jackets along the way. One girl was nearly trampled, WTHR TV reported. “I actually jumped over the girl that fell. There was a few people on the ground but I jumped over ‘em and kept running,” said one shopper. Another shopper said she “was able to be the first one in, but I kinda hit my hand on the door. I was bleeding but it’s all good. It was worth it.”

In Taylor, Mich., about 100 people forced their way into a shopping centre around 5:30 a.m., damaging decorations and overturning benches. One man was arrested.
It’s not the first time the Nikes have caused an uproar. Some people were mugged or even killed for early versions of the Air Jordan shoe, which Nike Inc. created in 1985.

Nike, based in Beaverton, Ore., issued a statement Friday afternoon saying:

We are extremely concerned to hear of the reported crowd incidents. Consumer safety and security is of paramount importance. We encourage anyone wishing to purchase our product to do so in a respectful and safe manner.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/im-all-lost-in-the-supermarket-i-can-no-longer-shop-happily/

Daily Market Roundup by FXCC - December 26 am

Yuan Hits All-Time High

As Japan and China officials made statements today declaring that they’ll promote direct trading of the yen and yuan without using dollars and will encourage the development of a market for companies involved in the exchanges, the Yuan reached record highs in thin trading.

The significance of this announcement should not be overlooked, particularly as Brazil moved past the UK over recent days to become the sixth largest economy relegating the UK to seventh position with India and Russia due to overtake the UK based on current (projections) inside this decade. The threatening noises that emanated from the USA in 2011, with regards to trading embargoes and tariffs due to China’s appreciation of the Yuan versus the US dollar, will no doubt resume in intensity over the next few months.

Ren Xianfang, a Beijing-based economist with IHS Global Insight Ltd.

Given the huge size of the trade volume between Asia’s two biggest economies, this agreement is much more significant than any other pacts China has signed with other nations.

Japan exported circa 10.8 trillion yen to China in 2011, and imported 12 trillion yen, according to Ministry of Finance data. The deficit with China widened to 1.2 trillion yen, from 418 billion yen in January-to-November 2010. About 60 percent of the trade transactions are settled in dollars, according to Japan’s Finance Ministry. China sold the second-biggest net amount of Japanese debt on record in October as the yen headed for a postwar high against the dollar and benchmark yields approached their lowest levels in a year. It cut Japanese debt by 853 billion yen, Japan’s Ministry of Finance said on Dec. 8.

The yuan closed up versus the dollar on Monday hitting an all-time high in intraday trading, fuelled by the stronger mid-point set by the People’s Bank of China. The yuan is expected to remain stable or rise slightly in the last week of the year to close 2011 near 6.30 versus the dollar, in line with market expectations. The currency is likely to appreciate in 2012 as China continues to post large trade surpluses despite a slowdown in exports. Spot yuan closed at 6.3198 against the dollar, up from Friday’s close of 6.3364, after hitting an all-time high of 6.3160. Its previous peak was 6.3294 hit on December 16.

The PBOC set the dollar/yuan mid-point at 6.3167 on Monday, stronger than Friday’s 6.3209 and near the record-high fixing of 6.3165 on November 4. The yuan has appreciated 4.27 percent this year most of the gain being recorded in the first 10 months of the year as China tries to rebalance trade and use the currency to help fight high inflation. The government halted yuan appreciation but is wary of a weaker yuan that could lead to capital outflows.

Japan will buy Chinese bonds next year, allowing the investment of renminbi that leaves China during the transactions, the Japanese government said in a statement after a meeting between Prime Minister Yoshihiko Noda and Chinese Premier Wen Jiabao in Beijing yesterday. Encouraging direct yen/yuan settlement will reduce currency risks and trading costs. China is Japan’s biggest trading partner with 26.5 trillion yen ($340 billion) in two-way transactions last year, from 9.2 trillion yen a decade earlier. The pact between the world’s second and third largest economies shadows attempts by fund managers to diversify as the European debt crisis ensures global financial markets remain volatile.
Market overview

MSCI’s global index advanced 0.1 percent at 1:34 p.m. in New York. Financial markets from Hong Kong to the U.K. and the U.S. were closed for holidays on Monday. The dollar weakened 0.2 percent to $1.3074 per euro. The yuan touched 6.3160 versus the greenback, the strongest level since 1993, on speculation China’s policy makers will tolerate appreciation to stem capital outflows.

Japan’s Nikkei 225 Stock Average closed up 1 percent in the Monday session. The Dollar Index, which tracks the U.S. currency against those of six trading partners, fell 0.1 percent after sliding last week. The Australian dollar rose 0.1 percent to $1.0166. Gold for immediate delivery retreated as much as 0.5 percent to $1,597.75 an ounce before trading at $1,606.90 an ounce. Copper declined 1.2 percent to 55,200 yuan ($8,735) a metric ton in Shanghai, the first retreat in five days. The London Metal Exchange and Comex were closed on Monday.

There are no economic calendar data releases that may affect sentiment in the morning session.

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

Climbing Out Of The COT Report And Beginning To Walk As A Forex Trader

In the first part of this two-part article, we discussed the entity that is the COT report. In this second part we’ll discuss how to put the report to best use when looking to trend and or position trade forex trades.

The COT (commitment of traders) report is a weekly publication, therefore logically it’s of more use and relevance to trend traders, it is regarded as the ultimate market sentiment indicator. Traditionally the main use for the report is to identify what’s termed as “market extremes”; simply find extreme net long or net short positions as identifying these positions may signal that a market reversal is just around the corner. Let’s simplify it a stage further, if everyone is long a currency, you need to ask yourself the question “who is left to buy?” Could the right answer be no one? And if everyone is short a currency, who is left to sell? Different question, same answer.

One of the major problems with the forex market is the lack of a volume indicator. Since there is no forex exchange such as in the Nikkei or the NYSE, volume statistics on the entire FX market are not available. The COT report, tracking the weekly currency and commodity futures allocations of the major speculators and commercial hedgers, is an excellent substitute for the volume indicator, and it should therefore be an inseparable item of any technical trading strategy.

There are three main categories to analyse when gauging the COT report.

Open Interest
The amount of open futures contracts that are being held, it is the total volume of open contracts in the market, but not the transactions.

Reportable Positions
The positions held by institutions that meet the reporting requirement of the CFTC. These are the major players in the CBOT, and their choices are usually backed by hordes of analysts and their studies.

Non-Reportable Positions
These cover everyone bog contained in the previous criteria, they are also termed small speculators. Of reportable positions, non-commercial includes all investors such as hedge funds, brokerage firms, investment banks and other related firms. Commercial open interest is created by firms that have the desire to receive or deliver the underlying.

The report provides data on the percentage of long or short contracts as a percentage of the total, on the number of traders in all three categories with positions on a currency, and changes in open interest vis a vis the previous reporting period.
Five main uses of the COT report for FX traders

1. Create a currency portfolio based on the COT report
If the non-commercial sector is overall long the USD what should be the criteria in deciding the currency pairs that will be included in our portfolio in such a situation? We could short AUD/USD and EUR/USD and be long USD/JPY. We are aiming to gain from the appreciation of the USD whilst limiting the volatility. This will reduce the volatility of our portfolio, consequently reducing the potential return from our investment, but it does create a longer-lasting, more resilient position.

2. Exploiting reversals to create a portfolio
It’s possible to arrange FX portfolios to profit from trend reversals as signalled by COT reports. However, traders should carefully hedge positions by trading uncorrelated pairs. The major changes in the strength of a trend, or its reversal on a permanent basis, are always noted by changes in open interest, and institutional positioning, traders need to avoid trying too hard to catch “bottoms and tops”.

3. The COT report as a longer term volume indicator
A prudent use of the COT report is as a volume indicator as this can’t be generated by conventional technical analysis. Traders can refuse to act when a technical signal fails to be confirmed by a similar movement (signalled in increasing open interest) in the COT report. For an uptrend, expect a corresponding rise in open interest, and for a down trend, a corresponding fall. It possible to use indicators for this purpose, the MACD, or Stochastics, PSAR, or DMI can all be utilised on the COT report data.

4. Using ‘flips’ to predict market reversals
One way of exploiting the COT report is by taking note when net positions switch from long to short and vice versa, and predicting forex market reversals on that data. When net positioning of the non-commercial sector switches to long, traders would use the development as a signal for buying euros, perhaps underpinned with some input from other sources of technical analysis. This method can produce results that are much more reliable than those generated by pure technical analysis. Percentage values are simple to recognise and easier for recognising position flips.

5. Using extremes to gauge market exhaustion
Comparing long or short positioning with historical extremes is beneficial in identifying market extremes. There are no absolute values that indicate a bought-out, or sold-out currency, but as the COT positioning hits these apparent values, there’s a significant chance of a reversal. However, there’s no hard and fast rule or reason to expect that positioning cannot exceed a previously registered high or low, before reversing. But if traders engage their overall intelligence then the extremes reported by the COT report have much greater value than that reported by price based technical analysis alone.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/climbing-out-of-the-cot-report-and-beginning-to-walk-as-a-forex-trader/

Market Commentary by FXCC - St. OMO, The ‘Beatification’ Of The FED May Take Some Time

Bloomberg have released a Christmas cracker for investors this morning, under the USA Freedom of Information Act they’ve obtained the detail on the loans made to the banks and various financial institutions from when the banking system began to implode in 2008-2009. I’ve provided a link to the main body of the information, but it’s worth concentrating on a few of the salient numbers in order to get a feel for the size and scope of the support.

Just how deep the rabbit hole went is truly breath-taking and terrifying in equal amounts. When you consider the ‘headline’ figure for USA unemployment is still at a stubborn 9%, GDP growth at 1.8%, the debt ceiling months away from busting through it’s revised circa $17 trillion level, there are 46 million USA citizens on the food stamps programme, 1.6 million homeless and States and cities are bankrupt you do begin to wonder what’s actually been achieved (since 2008) with this gargantuan support package?

Has a banking system stabilisation been worth this level of debt and support, when the citizens of the country are worse off? The counter argument is that we (apparently) have no idea how much worse the economy and as a consequence individual lives would have been had the USA govt. and the Fed not stepped in. However, the rebuttal to that counter argument is that the USA would now be over the worse and the rest of the global banking system, in Europe and the USA, might not lie in ruins. Three-four years on, cleansed of the financial virus after a healthy purge, collectively we, as global citizens, may have been experiencing a brighter dawn and a far brighter future had the ‘too big to fails” been allowed to fail..

Bloomberg has this morning released spreadsheets showing the daily borrowing totals for the 407 banks and companies that tapped Federal Reserve emergency programs during the 2007 to 2009 financial crisis.

Bloomberg News obtained the information on the ‘discount window’ and ST OMO (short for single-tranche open-market operations) through the Freedom of Information Act. The Fed rejected the request, Bloomberg LP then filed a federal lawsuit to force disclosure and won the case. In March 2011, the U.S. Supreme Court chose not to intervene and the Fed released more than 29,000 pages of transaction data.

The Numbers

$1.2 trillion – The Fed’s actual lending to banks and financial companies at its single-day peak, Dec. 5, 2008, through the seven programs Bloomberg News studied in depth.
$1.5 trillion – The Fed’s own number to represent its peak lending. This included foreign-currency liquidity swaps. Under the swap lines, the Fed lends dollars to foreign central banks, which in turn lend the money to local banks. Only the names of central banks involved in the transactions have been made public.
$7.77 trillion – The amount the Fed pledged to rescue the financial industry. This number represents potential commitments, not money out the door, was first published in March 2009, when it peaked.
$6.8 trillion – The potential amount the Fed might have lent if “all eligible program applicants request assistance at once to the maximum permitted under the program guidelines,” according to a July 21, 2009, report by the Treasury Department’s Special Inspector General for the Troubled Asset Relief Program, or TARP.
$16 trillion – The “total transaction amounts” for Fed lending included in a July 21, 2011, study by the Government Accountability Office. The Fed’s Dec. 6 memo said it was inaccurate to describe that amount as the total of its lending and guarantees.
$1.14 trillion – A different total for Fed lending that the GAO included in the same July 21, 2011, report. The GAO accounted for differences in loan terms by multiplying each loan amount by the number of days the loan was outstanding and then dividing by the number of days in a year. Bloomberg’s figure represents peak lending on a single day.

Are we any clearer on what the rescue total is/was, how much the USA tax payer is on the hook for, how much of the rescue fund has been ‘burnt’ through, how much ‘ammo’ the Fed has left? Well it’s no longer as clear as mud and doubtless the more iconoclastic publications within our forex community will dissect, analyse and opine on the info. but for now Bloomberg’s tenacity, which should be applauded, has provided some seriously chewy ‘meat on the bone’ that’ll take some time to digest..

http://www.bloomberg.com/news/2011-12-23/fed-s-once-secret-data-compiled-by-bloomberg-released-to-public.html

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/st-omo-the-beatification-of-the-fed-may-take-some-time/

Market Commentary by FXCC - All Your Cash, Are Belong To Us Mario Monti Takes On The Italian Cash Society

“All your base are belong to us” (often shortened to “All Your Base”, “AYBABTU”) is a broken English phrase that became an Internet phenomenon in 2000–2002. The text comes from the opening cutscene of the 1991 European Sega Mega Drive version of the video game Zero Wing which was poorly translated from Japanese…

It’s only taken the former (if there is ever such a thing) Goldman Sachs banker and now unelected technocratic Italian Prime Minister a month to threaten Italians with regards to their cash economy. Not even Silvio dared to adopt such an breath taking reforms, although he had his personal reasons for his preferences and cash paying history. Mario Monti quickly realised that the Italians love affair with their lire now extends to the euro. Despite their distrust of banks being amplified during the current crisis he’s beginning to issue autocratic diktat regarding the cash society that lives, breathes and is at the heart of the Italian economy. The government on Dec. 4 reduced the maximum allowed cash payment to 1,000 euros from 2,500 euros.

Italy apparently loses more than 120 billion euros in unpaid taxes every year, according to the Italian tax collection agency. The country spends circa 10 billion euros annually on security and labor in order to process cash transactions, according to the Italian banking association, the ABI.

Monti is now focusing on curtailing evasion as one way to reduce Italy’s 1.9 trillion-euro debt, which is bigger than Spain, Greece, Ireland and Portugal’s combined. Investor concern that Italy remains at risk of being overwhelmed by the region’s debt crisis pushed the country’s borrowing costs to euro-era records last month.

However, a money grab of the cash in society must be irresistible to a confirmed banker who no doubt sees billions of turnover in the cash society and wants it to be continually washed through the banking system, as part of the ‘healing’ process for a crippled economy and country.

Italians are the euro region’s least-indebted consumers and among its biggest savers, according to Eurostat. data from the European Union’s statistics office. Their frugal nature is linked to a distrust of paying with anything other than cash. Italian credit-card holders use their cards on average only 26 times per year, or five times less than in the U.K., according to the Bank of Italy. And who could blame Italians for not trusting the banking system during the current malaise? With interest rates at less than one percent putting cash to work is seen as a sensible basic street level hedge versus inflation. A culture of investing in the equities market doesn’t exist in Italy in comparison to for example the UK and USA, and if it did Italians would find their investments, if tracking the MIB index, down by 27% year on year.

But now Monti has made the public “an offer they can’t refuse”, by criminalising cash transactions of more than €1,000, he’s increased distrust and heightened suspicions as to his real motives as opposed to engendering the support he desperately needs. There’s no direct translation for “all your cash are belong to us” but the street-wise Italians won’t be easily fooled..

Market Overview
Stocks rose for a fourth day, U.S. equity-index futures rallied and the dollar fell on signs the world’s largest economy is recovering and as takeovers increased. Commodities climbed as oil headed for the biggest weekly gain in almost two months.

The MSCI All Country World Index advanced 0.4 percent at 8:45 a.m. in London, set for the longest winning streak since Dec. 5. Standard & Poor’s 500 Index futures increased 0.5 percent and Treasury 10-year yields climbed one basis point. The Dollar Index slid 0.2 percent, while South Korea’s won strengthened 0.5 percent. Oil was up a fifth day in New York and copper added 0.9 percent in London.

The Stoxx Europe 600 Index rose 0.7 percent, taking its weekly advance to 3.3 percent. The MSCI Asia Pacific excluding Japan index added 1.4 percent. Australia’s S&P/ASX 200 Index rose 1.2 percent as Gloucester Coal surged 22 percent after China’s Yanzhou Coal agreed to buy the Sydney-based company for A$2.1 billion ($2.13 billion) in cash and shares. Yanzhou Coal jumped 6.6 percent in Hong Kong.

The dollar headed for weekly declines against 14 of its 16 major peers. The currency fell to 78.04 yen and weakened 0.2 percent to $1.3078 against the euro.

Oil futures in New York rose as much as 0.7 percent to $100.23 a barrel. Futures have jumped 6.7 percent this week, set for the largest increase since the five days ended Oct. 28. Copper in London gained 0.9 percent to $7,611 a metric ton, climbing for a fourth day, the longest increase since October. The metal is poised for a 3.5 percent rise this week, the first increase in three weeks.

Market snapshot at 9:45 am GMT (UK time)

The Asian Pacific markets ‘enjoyed’ mixed fortunes in overnight/early morning trade; the Nikkei fell by 0.77%, the Hang Seng closed up 1.37% and the CSI closed up 0.76%. The ASX 200 closed up 1.21%. European markets have been steady in the morning session; the STOXX 50 is up 0.63%, the UK FTSE is up 0.42%, the CAC is up 0.74%, the DAX is up 0.28% the Portuguese index the PSI is up 1.52% but down 31.52% year on year.

Economic calendar releases that may affect sentiment in the afternoon session

13:30 US – Durable Goods Orders November
13:30 US – Personal Income November
13:30 US – Personal Spending November
15:00 US – New Home Sales November

Analysts surveyed by Bloomberg gave a median forecast of +2.20% for durable goods orders, compared with the last release which was revised to -0.50%. Excluding transportation, the expectation is for +0.40%, down from a revised +1.10%. Personal spending is predicted ar +0.30% compared with a previous figure of +0.10%. A poll of economists showed a median prediction of 315,000 new home sales, compared with 307,000 last month.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/all-your-cash-are-belong-to-us-mario-monti-takes-on-the-italian-cash-society/

Daily Market Roundup by FXCC - December 23 am

Is Wall Street On Santa’s Naughty List?

Is Wall Street On Santa’s Naughty List?

The traditional “Santa Claus rally” refers to the seasonal tendency for equities to gain in the final five trading days of the year and first two trading days of the new year. Rumour (and anecdotal evidence) suggests that the main reason for this secular rally is due to traders not wanting to liquidate any positions during this time of year for fear of showing a loss. Far better to simply let the losing positions ‘percolate’ quietly in the background noise and let them slide in the New Year.

Since 1969, the S&P 500 index has apparently gained at an average of circa 1.6 percent during those seven trading days. This year, the period runs from Friday, Dec 23. through Wednesday, January 4. However, given the constant drumbeat of downgrades from the ratings agencies in relation to the Eurozone debt crisis, many investors and traders are still betting that any support for the rally will fade due to debt-stricken Europe, which has been the source of so much instability this year.

Brown Brothers Harriman data, which goes back as far as 1928, shows that stocks have traded higher 78 percent of the time during the year-end period, with an average gain of 1.8 percent. That compares with an average gain of 0.2 percent during any seven-day period since 1928, and a 56 percent chance of being higher. In the 12 times the S&P 500 fell at least 1 percent during the Santa Claus rally, the index subsequently averaged a 1.9 percent loss during the first quarter of the new year.

However, an argument could be put forward that we’ve already had the Santa rally, that it came and went a bit early this year, with the one-day, 3 percent rally on the 20th accounting for all of what was to come…

In the economic calendar data releases on Thursday the markets reacted positively to the news that fewer Americans than forecast sought jobless benefits and consumer confidence climbed, giving the USA economy a final boost heading into 2012.

Market Overview
Unemployment claims fell by 4,000 to 364,000 in the week ended Dec. 17, this was in fact the lowest level since April 2008, Labor Department figures showed on Thursday in Washington. The Bloomberg Consumer Comfort Index improved to minus 45 in the period ended Dec. 18 from a reading of minus 49.9 the prior week, marking the biggest seven-day gain since January.

As a consequence of the jobs data equities rose sending the Standard & Poor’s 500 Index higher for a third day in series. The index increased 0.8 percent to 1,254 at the close in New York. Treasury securities also advanced, sending the yield on the benchmark 10-year note down to 1.96 percent from 1.97 late yesterday. The Dow Jones Industrial Average rallied 61.91 points, or 0.5 percent, to 12,169.65. The Stoxx Europe 600 Index advanced 1.1 percent.

The euro climbed less than 0.1 percent to $1.3049 after rising 0.6 percent. Yields on 10-year Treasuries dropped one basis point to 1.95 percent. Oil futures rose 0.9 percent, a fourth straight increase. The yen fell against most of its major peers as stock markets climbed amid reduced demand for haven assets and signs U.S. employment is strengthening.

Crude oil rose to $99.53, after climbing above $100 a barrel for the first time in a week. Gold fell 0.2 percent to $1,610.60 an ounce on the Comex in New York.

Economic calendar data releases that could affect sentiment in the morning session

Friday 23 December

09:30 UK – Index of Services October

A Bloomberg survey predicts a month-on-month rate of -0.10% compared with the previous change of +0.10%. The quarterly estimate is +0.30%, down from the previous reading of 0.60%.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/december-23-am/

The KLF Were Lightweights At Burning Money. The Swiss Know How, When And Why To Do It

The KLF (also known as The Justified Ancients of Mu Mu, The Time-lords and other names) were one of the seminal bands of the British acid house movement during the late 1980s and early 1990s.

From the outset, they adopted the philosophy espoused by the esoteric novel series The Illuminatus Trilogy. KLF gained notoriety for various anarchic actions, including the defacement of billboard adverts, the posting of prominent cryptic advertisements in NME magazine and the mainstream press, and highly distinctive and unusual performances on Top of the Pops.

Their most notorious performance was a collaboration with Extreme Noise Terror at the February 1992 BRIT Awards, where they fired machine gun blanks into the audience and dumped a dead sheep at the after-show party. This performance announced The KLF’s departure from the music business, and in May 1992 the duo deleted their entire back catalogue.

Their creation, the K Foundation, created a stir two years later. “Burning a Million Quid” was an action that took place on 23 August 1994, in which the K Foundation (the KLF duo consisting of Bill Drummond and Jimmy Cauty) burned cash in the amount of one million pounds sterling on the Scottish island of Jura. This money represented the bulk of the K Foundation’s funds, earned by Drummond and Cauty as The KLF, one of the United Kingdom’s most successful pop groups of the early 1990s.

The incineration was recorded on a Hi-8 video camera by K Foundation collaborator Gimpo. In August 1995, the film “Watch the K Foundation Burn a Million Quid”, was toured around the UK, with Drummond and Cauty engaging each audience in debate about the burning and its meaning. In November 1995, the duo pledged to dissolve the K Foundation and to refrain from public discussion of the burning for a period of 23 years. Despite this Drummond has spoken about the burning in 2000 and 2004. At first he was unrepentant but in 2004, he admitted to the BBC that he regretted burning the money…

Of all the financial headlines and actions that caught my attention in 2011 understandably currency events rank highest. Repatriation was a big issue in 2011 and there were many inexperienced investors caught out by the devastating tsunami and earthquake in Japan. The yen didn’t fall it rallied given that hundreds of billions of yen would have to ‘come home’ in order to re-build the infrastructure. At such times what we do, speculate on currency movements, is rendered ridiculous when you see footage of a country and it’s people being savaged and ravaged by nature. I closed all my trades, I’ll be honest it owed as much to self preservation as respect, but the juxtaposition that Japan’s devastating event had impacted on my business some 6,000 miles and a time zone away required quiet reflection, not interaction..

However, there was another currency issue that caught my eye over recent months and that was the Swiss National Bank’s deliberate intervention to lower the value of the franc. Whilst the SNB action of ‘burning money’ by purchase was considerably greater than the act KLF performed on the remote Scottish island of Jura in 1994 (even allowing for inflation) what the SNB performed caused the same feeling of initial bewilderment.

Yes we’re currency investors and speculators, trying to make a decent living or invest what we have for a brighter future for us and our loved ones. Most of us don’t have ambitions to be the next ‘Soros’, just to enjoy our good fortune of having found a brilliant industry in which to ply our trade, perhaps make forge a career for ourselves and thrive, both in our industry and out of it. But when you read that the Swiss Central Bank actually put into action a programme to deliberately lower the value of their currency by buying up weaker currencies, i.e. they “planned to fail”. Whilst they didn’t destroy liquidity and increased the ability for their manufacturers to export; machinery, chemicals, metals, watches, agricultural products being their chief exports, the action to ‘burn’ through circa 41 billion francs was quite a revelation.

But on closer inspection their action makes perfect sense, particularly given the Swiss recent history of utilising this method successfully. Devaluation on this scale is nothing new to The Swiss, they know what they’re doing, it ‘worked’ before therefore in theory and based on previous practice it should work again.

In the early 2000s recession, being so closely linked to the economies of Western Europe and the United States, Switzerland was not able to escape the slowdown felt in these countries. After the worldwide stock market crashes in the wake of 9/11 in 2001 the rate of growth dropped to 1.2%, to 0.4 % in 2002 and in 2003 the real GDP contracted by 0.2%.

On the 10.11.2002 the economics magazine Cash published 5 measures which political and economic actors were suggested to implement so that Switzerland would once again experience an economic revival:

1. Private consumption should be promoted with decent wage increases. In addition to that families with children should get discounts on their health insurances

2. Switzerland’s national bank should revive investments by lowering interest rates. Besides that monetary institutes should increasingly credit consumers and offer cheaper land zones which are to be built on.

3. Switzerland’s national bank is asked to devalue the Swiss Franc, especially compared to the Euro.

4. The government should implement the anti-cyclical measure of increasing budget deficits. Government spending should increase in the infrastructural and educational sectors. Lowering taxes would make sense in order to promote private household consumption.

5. Flexible work schedules should be instituted, thus avoiding low demand dismissals.

These measures were applied with successful results along with the government’s policy of the Magical Hexagon which consists of full employment, social equality, economic growth, environmental quality, positive trade balance and price stability.

The rebound which started in mid 2003 saw growth rate growth rate averaging 3% (2004 and 2005 saw a GDP growth of 2.5% and 2.6% respectively; for 2006 and 2007, the rate was 3.6%). In 2008, GDP growth was modest in the first half of the year while declining in the last two quarters. Because of the base effect, real growth came to 1.9%. While it contacted 1.9% in 2009, the economy started to pick up in Q3 and by the second quarter of 2010, it had surpassed its previous peak. Growth for 2010 stood at 2.6%.

The stock market collapse has deeply affected investment income earned abroad. This has translated to a substantial fall in the surplus of the current account balance. In 2006, Switzerland recorded a 15.1% per GDP surplus. It went down to 9.1% in 2007 and further dropped to 1.8% in 2008. It recovered in 2009 and 2010 with a surplus of 11.9% and 14.6% respectively.

Whilst KLF admitted to regretting the burning of their cash pile of £1,000,000 the Swiss won’t regret the destruction of value in the Swiss franc. Their Magical Hexagon model could be considered as the perfect equilibrium and attainment goal for a developed culture, society and economy. Full employment, social equality, economic growth, environmental quality, a positive trade balance and price stability would be the best end of year and New Year wish any of us could hope for. Both the future of our domestic economies and that of the global economy.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/the-klf-were-lightweights-at-burning-money-the-swiss-know-how-when-and-why-to-do-it/

Market Commentary by FXCC - Investors Pause For Breath And Take Stock

Whilst investors are winding down for the year-end and trading volumes are set to dwindle, the threat of mass credit ratings downgrades for the euro zone countries still stalks the market. However, the European Central Bank lending programme yesterday eased fears about an immediate ‘credit crunch’, although it’s not regarded as resolving the huge indebtedness of some euro zone countries.

The euro was higher at around $1.3110, above an 11-month low of $1.2860, with traders seeing major support around $1.3000, the December 14 low. The euro briefly touched a one-week high near $1.32 on Wednesday.

Greece’s creditors are resisting pressure from the International Monetary Fund to accept bigger losses on holdings of the indebted nation’s government bonds. The IMF is pushing for creditors to accept greater losses in order to reduce Greece’s debt-to-gross domestic product ratio to 120 percent by 2020, a key element of the Oct. 27th agreement by European Union leaders.

Greece’s debt will balloon to almost twice the size of its economy next year without a write-off accord with investors. The IMF and EU leaders want to bring the country’s debt down to a sustainable level. As part of Greece’s 130 billion-euro second bailout, investors would take a 50 percent hit on the nominal value of 206 billion euros of privately owned debt. Exchanging bonds for securities with a 5 percent coupon would leave investors with a 65 percent total loss in the net present value of their holdings of Greek government debt.

Market Overview
The Stoxx Europe 600 Index rose 0.9 percent as of 8:00 a.m. in London. Standard & Poor’s 500 Index futures added 0.3 percent, reversing an earlier drop of 0.3 percent. The MSCI Asia Pacific Index lost 0.5 percent, retreating from a one-week high. Oil climbed 0.6 percent in New York, while copper advanced a third day. The Dollar Index declined 0.3 percent.

The dollar weakened 0.4 percent to $1.3095 versus the euro, after rising yesterday when European banks took larger than forecast loans from the central bank. The borrowings equal about 63 percent of the European bank debt maturing in 2012, according to Goldman Sachs Group Inc.

The euro gained 0.4 percent against the dollar to $1.3102 as of 8:28 a.m. London time. It fell to $1.2946 on Dec. 14, the weakest level since Jan. 11. The 17-nation euro bought 102.23 yen from 101.86 yesterday. The dollar was little changed at 78.05 yen. Sweden’s krona gained 0.6 percent to 6.8545 per dollar, after gaining as much as 1.2 percent yesterday to 6.7846, the strongest level since Dec. 12.

Crude for February delivery climbed as much as 0.6 percent to $99.28 a barrel on the New York Mercantile Exchange, extending a three day advance. Figures from the Energy Department yesterday showed U.S. stockpiles declined 10.6 million barrels last week to 323.6 million, the largest drop since Feb. 16, 2001. They were forecast to decrease 2.13 million barrels, according to a Bloomberg News survey. Imports slipped to a three-year low.

Market snapshot at 9:15 am GMT (UK time)
Asia Pacific markets enjoyed mixed fortunes in overnight/early morning trading, the Nikkei closed down 0.77%, the Hang Seng closed down 0.21% and the CSI closed up 0.10%. the ASX 200 closed down 1.1% currently down 14.39% year on year. European markets have so far railed in this morning’s session; the STOXX 50 is up 0.98%, the UK FTSE is up 0.87%, the CAC is up 0.96% and the DAX is up 0.93%. The ASX (Athens exchange) is down 0.49% and down 54.5% year on year. The main Italian index, the MIB is currently up 1.12% but down 27.63% year on year. The SPX equity index future is up 0.36% whilst ICE Brent crude is up 0.08% at $107.8 a barrel. Comex gold is up $1.80 an ounce.

The pound rose for a third day versus the dollar before a report economists said will confirm that the U.K. economy expanded at a faster pace in the third quarter. The pound appreciated 0.3 percent to $1.5719 at 8:40 a.m. London time. It also climbed 0.3 percent versus the yen, to 122.72, and weakened 0.2 percent to 83.36 pence per euro, after strengthening yesterday to 83.03 pence, the strongest level since Jan. 13.

Sterling has advanced 1 percent in 2011 against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The dollar is 0.7 percent stronger and the euro has lost 1.2 percent, the indexes show.

Economic calendar releases that may shift sentiment in the afternoon session

13:30 US – GDP Annualised Q3
13:30 US – Core PCE (YoY) Q3
13:30 US – Initial & Continuing Jobless Claims Weekly
14:55 US – Michigan Consumer Sentiment Dec
15.00 US – Leading Indicators November
15:00 US – House Price Index October

There is a raft of information due from the USA this afternoon. The ‘pick’ is arguably; jobs data, the Michigan survey and the house price index.

A Bloomberg survey forecasts initial jobless claims of 380,000, compared with the previous figure released which was 366,000. A similar survey predicts 3,600,000 for continuing claims, compared with the previous figure of 3,603,000.

Economists surveyed by Bloomberg yielded a median forecast of 68.0 for the Michigan sentiment compared with the previous release of 67.7. A survey predicts a change of +0.20% for annual house price inflation, compared with last figure of +0.90%.


Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/investors-pause-for-breath-and-take-stock/

Daily Market Roundup by FXCC - December 22 am

Party Poopers Kill The Joy Of The ECB Give Away

The giddy market atmosphere created by the ECB’s LTRO could not be sustained through the afternoon session. In fact, approaching the USA afternoon opening bell, the optimism had completely evaporated. Investors realised that, although the operation by the ECB has provided liquidity, in terms of a solution to the debt crisis there is no silver bullet. Apparently 523 banks snapped up the €489 billion. As to “who got what” that information isn’t available yet, but would make for fascinating reading once published. According to Reuters more than a dozen Italian banks, including top lenders UniCredit and Intesa Sanpaolo tapped 116 billion euros ($143.52 billion) of new three-year loans offered by the European Central Bank, nearly a quarter of the total, three sources with direct knowledge of the matter told Reuters.

Perhaps the fact that so many banks had their hands out in this record breaking tender actually spooked investors. 523 hungry banking mouths is lot to feed on a regular basis and with an average of less than a billion euros per bank investors could be forgiven for supposing that today’s exercise was simply a drill for further tenders of similar if not greater magnitude. Another interesting aspect is that as a game of ‘show and tell’ the weakest banks their played their hands.

European Consumer Confidence Falls Despite Germany’s Increase Yesterday
European consumer confidence has now collapsed to its lowest level since August 2009. New data released by the EC showed that consumer morale in euro countries fell to -21.9 in December, from -20.7 in November. This drop in European consumer confidence is fuelling fears that the eurozone is heading into recession. An interesting note was published by Citigroup in which they stated;

The S&P downgrade of euro zone sovereigns is hanging over the market but there is no definite timing, every day brings one rumour or another of an imminent moves. At this point a French downgrade is no surprise. A one-step downgrade would be a positive surprise, but downgrading core Europe, Germany, the Netherlands, Finland would still be a negative.

SNB May Go Negative
Switzerland may bring in negative interest rates in an attempt to drive down the value of the Swiss franc. Swiss finance minister Eveline Widmer-Schlumpf said on Wednesday that a ‘task force’ was looking into ways to protect Switzerland if the European debt crisis worsened. The Swiss franc is currently capped at 1.20 to the euro, having almost hit parity this autumn as investors looked for a safe place for their money.

The F.T. Lex column believes that the “stampede” to borrow from the European Central Bank should calm fears that a major European financial institution will collapse. Lex warns, however, that the wider economy may see little other benefit:

This is quantitative easing ECB-style. Ideally, the liquidity will flow into the real economy but the pattern of the past three years suggests that banks will hoard the cash as they look ahead to a stormy 2012 and see no sign that access to market funding is going to get any easier. So the ECB’s river of cash may not ease the credit crunch but it should ease the pressure on banks to sell assets at fire-sale prices.

Inquisition To March On Italy As Hungary Is Junked
The International Monetary Fund has announced that it will send a “monitoring mission” to Italy early next year to assess the state of the Italian economy. The news came after a two-person IMF team completed discussions with the Italian treasury about its budget plans. According to the IMF these talks were ‘productive’.

Hungary’s credit rating has been slashed to Junk status, by Standard & Poor’s. It’s a one-notch downgrade, taking Hungary from BBB- to BB+.

USA AAA Downgrade On The Horizon
Fitch threatens to cut America’s AAA rating. The agency cited the escalating welfare bills which the US faces in the years ahead. Fitch currently has the US credit rating on a ‘negative outlook’. That means that there is a “slightly greater than 50% chance of a downgrade over a two-year horizon”.

The agency also flags up another challenge facing America – deciding whether to raise its debt ceiling again The deal that was painfully put together last summer is likely to only last until the first half of 2013.

America’s AAA rating will be cut within two years unless a credible plan to cut the budget deficit is devised. Fitch fired its broadside after updating its fiscal projections for America, and concluding that:

“Federal debt will rise in the absence of expenditure and tax reforms that would address the challenges of rising health and social security spending as the population ages. The high and rising federal and general government debt burden is not consistent with the U.S. retaining its ‘AAA’ status despite its other fundamental sovereign credit strengths. A key task of an incoming Congress and Administration in 2013 is to formulate a credible plan to reduce the budget deficit and stabilise the federal debt burden. By postponing the difficult decisions on tax and spending until after the forthcoming Congressional and Presidential elections, the scale and pace of required deficit reduction will consequently be greater. Even under optimistic economic and fiscal policy assumptions. Fitch believes that at least $3.5trn of additional deficit reduction measures will be required to stabilise federal debt (held by the public) at around 90% of GDP in the latter half of the current decade.”

Market Overview For Wednesday 21st December

Standard & Poor’s 500 Index rose 0.2 percent to 1,243.72 at 4 p.m. in New York and the Dow Jones Industrial Average climbed 4.16 points to 12,107.74. Ten-year Treasury yields added five basis points to 1.97 percent. Oil surged as U.S. supplies dropped the most in a decade. The euro lost 0.3 percent to $1.3044 and Italian and Spanish 10-year bond yields climbed at least 18 basis points as stronger-than-forecast demand for European Central Bank loans fuelled concern the region’s lenders were struggling to meet funding needs.

The S&P 500 is down about 1.1 percent in 2011, having rallied as much as 8.4 percent and lost as much as 13 percent on a year-to-date basis during the year. Financial shares have lost 20 percent this year to lead declines.

Economic calendar releases that could affect sentiment in the morning session

Thursday 22 December

09:30 UK – GDP Q3, final
09:30 UK – Current Account Q3
09:30 UK – Total Business Investment Q3, final

Analysts surveyed by Bloomberg gave a median quarterly prediction of +0.50% for UK GDP, the same as the previous quarter. Year-on-year, the survey also predicted +0.50%, again the same as previously released. The analysts surveyed by Bloomberg gave a median forecast of -£6.1 billion for the UK deficit, compared with the last release which was -£2.0 billion.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/december-22-am/

Market Commentary by FXCC - Brothers In Arms Get Money For Nothing

The head of the world’s biggest bond fund said he sees a more than one-in-three chance that the euro zone will break apart in 2012-2013 and trigger a financial crisis akin to the one that devastated the global economy in 2008.

“It would be the equivalent of a sudden stop” in which financial markets seized up, Mohamed El-Erian, chief executive officer of Pacific Investment Management Co. in Newport Beach, California, said. “It would be really, really messy.”

The ECB will announce results of its first tranche of unlimited three-year loans today, a day after Spain sold more than its maximum target of bills, driving borrowing costs lower. A statement is due at 11:15 a.m. Frankfurt time. The European Central Bank will lend euro-area banks more than economists forecast for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.

The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans, more than economists’ median estimate of 293 billion euros in a Bloomberg News survey. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark rate, currently 1 percent, over the period of the loans. They start tomorrow.

“This is basically free money,” said Jens-Oliver Niklasch, a strategist at Landesbank Baden-Wuerttemberg in Stuttgart. “The conditions are unbeatable. Everybody who can will try to get a piece of this cake.”

Oracle Corp’s earnings fell short of Wall Street’s forecasts for the first time in a decade as software and hardware sales sputtered, sending its shares down more than 10 percent and stoking fears a global recession will hurt tech spending. The rare slip-up by the world’s No. 3 software maker raised questions about the health of the technology sector as many companies in the industry gear up to close deals before the end of 2011.

Japan’s central bank offered a bleaker view of the economy and the government warned of worsening business sentiment as exports slumped, adding to evidence of the pain Europe’s debt crisis is inflicting on global growth and Japan’s recovery prospects. But in a sign Japan’s tattered finances leave it with little room for more fiscal stimulus, Rating and Investment Information Inc (R&I) stripped the country of its AAA status, the first downgrade by a domestic credit ratings agency.

That puts the onus on the Bank of Japan, which kept monetary settings unchanged at a rate review on Wednesday but cut its economic assessment and acknowledged that growth will stagnate at least until spring next year. BOJ Governor Masaaki Shirakawa said that while Japan’s economy was still headed towards a moderate recovery, Europe’s sovereign debt crisis and economic stagnation were hurting global growth including Japan.

“A delay in dealing with Europe’s crisis may have a severe impact on the global economy. We must prevent this from happening at all cost,” he told a news conference.

Market Overview
European stocks rose for a third day amid speculation that companies and the economy can weather the fallout from the sovereign-debt crisis as the European Central Bank provides funding for lenders. Asian shares and U.S. index futures gained.

The Stoxx Europe 600 Index advanced 0.5 percent to 239.72 as of 9:16 a.m. in London. The index gained 2 percent yesterday, the biggest advance since Nov. 30, as German business confidence unexpectedly rose for a second month. The gauge has still lost 13 percent this year amid mounting concern that policy makers will fail to stop at least one member of the euro area from defaulting.

The euro rose for a second day amid speculation the ECB’s loans will spur demand for sovereign bonds. The 17-nation currency gained 0.3 percent to $1.3123 at 9 a.m. in Frankfurt.

Market snapshot at 10:30 am GMT (UK time)

Asia Pacific markets experienced mixed fortunes in overnight/early morning trade; the Nikkei closed up 1.48%, the Hang Seng closed up 1.86% and the CSI closed down 1.6%. The ASX 200 closed up 2.13%. The KOSPI closed up 3.03% as jitters regarding N. Korea recede.

European indices have risen due to market optimism regarding the 3 year ECB lending programme. The STOXX 50 is up 1.44%, the UK FTSE up 0.71%, the CAC up 1.38%, the DAX up 1.37% and the ASE (Athens exchange) is currently the leader up 1.4%.

The SPX equity index future is currently up 0.7%, ICE Brent crude is up 0.31% at $107.06 a barrel. Comex gold is up $18.9 an ounce at 1635.9.

Economic calendar data releases to keep a weather eye on in the afternoon session

12:00 US – MBA Mortgage Applications W/e 16 Dec
15:00 US – Existing Home Sales November

The number of mortgage applications acts as a leading indicator for home sales. Consequently the report can be used as a guide of housing demand and thereby economic momentum. A high reading is seen as positive for the economy as a whole, as it implies increased household income and spending.

Source: FX Central Clearing Ltd, (FXCC BLOG)
http://blog.fxcc.com/brothers-in-arms-get-money-for-nothing/