Market Commentary by FXCC - Does a dead cat still bounce when it’s nine lives are over?

When the main markets began to ‘correct’ in late July – early August many sages and sock puppets were immediately let loose to ‘astroturf’ the airwaves, forums and usual suspect news broadcasts in order to soothe the masses with regards to the impact. One of the most prominent messages was; “well we’re still in positive territory for the year, and hey, this could be a good time to pick up some bargains” Er…OK..whatever..

The UK FTSE 100 is now 12.3% down year on year, as to what bargains and in what sectors the experts would have us gamble is anyone’s guess. As to who the commentators are referring to as having magic money trees, with spare cash dangling off ready to ‘invest’, is also a mystery. Unless of course the majority are supposed to do a Hugh Hendry of Eclectica Asset Management and have a massive short on the Hang Seng using funky algorithms, or do a John Paulson and spot the crash of the subprime mortgage market.

The impact this correction will have on the pensions of the hard working masses, who our politicians constantly refer to as “doing the right thing”, is huge. The fact that the FTSE 100 is now circa 30% down on its recent decade high in 2007 has rendered most pension contributions (for the masses) worthless over the past decade. However, the biggest Ponzi schemes created, pensions, will never come in for criticism by the mainstream media, that is one Pandora’s box that will remain firmly shut given it strikes at the very core of our work ethic.

By now most accept that the jobless recovery was no recovery, unless success, in for example the USA, is to be measured by spending circa $1.3 trillion and managing to keep unemployment hovering at 9%. The incalculable levels of bailout and support in the USA, together with zirp, created the secular bear market rally we’ve experienced from 2010. How this can possibly be repeated in 2012, now central banks appear to be out of ideas and ammunition, is the massive question moving forward, assuming, and it’s a big assumption, that these crises don’t enter a newer more dangerous phase. If the markets do recover to the 2007 highs, or the recent Jan 2011 levels, then by now most accept that any ‘recovery’ may be bought on borrowed time equal to the size of the ‘fresh’ bailouts with more creative money.

Despite the positive news that the troika and the EU specifically appear to be finally dissolving their options down to a credible solution, the late market rally experienced in the USA, resulting in the SPX closing up 2.2% (having been down by a similar amount at one stage through the session), did not overlap to Asian markets, the Nikkei closed down 0.86% and the Hang Seng closed down 3.4%. The Hong Kong index is now down a massive 28.22% year on year. Let’s hope the Hong Kong residents and pensioners didn’t take the advice of their sages and try to pick the bottom of their main market, or perhaps they’re following Eclectica..

Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades yesterday evening on concerns that Italy’s chronically weak growth will make it difficult to reduce the region’s second-largest debt. Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993. However, what is more onerous is Moody’s suggestion they haven’t quite finished with their slash and burn.

All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings. Consequently, Moody’s expects fewer countries below AAA to retain high ratings, there are no immediate pressures that could cause downgrades for AAA-rated countries.

European indices have recovered this morning, the STOXX is currently up 2.1%, the UK FTSE is up 1.73%, the CAC is up 2.41% and the DAX up 1.94%. Brent crude is up $166 a barrel and gold is down $22 an ounce. The SPX daily equity future is currently down circa 0.5%. The euro has shed most of its small gains versus the dollar after the major sell off experienced over the past few days. It has continued to appreciate versus the Swissy as has sterling which is flat versus the dollar and yen. The Aussie dollar has risen versus the US dollar in overnight-early morning trade.

The major data releases that may affect sentiment on or around the New York session opening include the following;

12:00 US – MBA Mortgage Applications Sep
13:15 US – ADP Employment Change September
15:00 US – ISM Non-Manufacturing Index September

Of particular interest is the ADP employment figure which has been inaccurate and unreliable of late. A Bloomberg survey of analysts forecasts an increase of 70,000, compared with last month’s 91,000 rise. There may be a revised adjustment for August contained within the data release. The ISM index could affect sentiment, as with several readings a figure above 50 is considered positive. Analysts surveyed by Bloomberg indicated a median expectation of 52.8, compared with last month’s level of 53.3.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/does-a-dead-cat-still-bounce-when-its-nine-lives-are-over/

Daily Market Roundup by FXCC - October 4 pm

Dexia’s Midnight Runners

The market soared late in the New York session as a consequence of Dexia executives apparently agreeing to put circa €180 billion of assets into a ‘bad bank’. The SPX soared circa 4.1% to end the day up 2.25%. This development was twinned with news from Luxembourg that during the latest EU ministers meeting they’d finally concluded what the rest of the financial world had been screaming for weeks; they hadn’t done enough to convince financial markets that Europe’s banks could withstand the current debt crisis.

“There is an increasingly shared view that we need a concerted, co-ordinated approach in Europe while many of the elements are done in the member states,” Olli Rehn, European commissioner for economic affairs, told the Financial Times. “There is a sense of urgency among ministers and we need to move on.” Mr Rehn cautioned that while there was “no formal decision” to begin a Europe-wide effort, co-ordination among EU’s institutions, including the European Central Bank, European Banking Authority and the European Commission, on necessary measures had intensified.

European Central Bank President Jean-Claude Trichet said on Tuesday he opposed the ECB financing bailout funds for the euro zone, thereby dismissing one policy idea government officials and EU ministers were contemplating. To convince markets they have the firepower to tackle the crisis, policymakers have been considering an option to turn the existing €440 billion European Financial Stability Fund into a bank so that it could access ECB funds, potentially giving it far more liquidity.

These events over shadowed the negative news that Italy has been further downgraded by Moody’s by three notches on their bedpost to A2. It’s unlikely to be the last country to be dragged into the headmaster’s office for a thorough caning, France is surely back on the radar? We’ll avoid jokes regarding Berlusconi probably enjoying the caning and notches on bedposts given the seriousness of the situation.

Anyone with a memory not pickled into oblivion by the constant market news coming from all angles will recall the fuss the USA politicians made with regards to the debt ceiling being raised last month. Yesterday, having closed the books on the fiscal year, the new books started being cooked straight off. There was a circa $95 billion surge on the last day and today the level increased by another $47 billion. The USA admin. has added close on $140 billion of debt inside twenty four hours. On current projections the USA debt limit will not stretch to the year end, perhaps Times Square in New York can have a twist to their New Year countdown clock..

Federal Reserve Chairman Ben Bernanke said the bank can take further steps to sustain a recovery that’s close to faltering whilst cautioning lawmakers against making changes in fiscal policy that harm growth. The Fed will give more information about its pledge to keep interest rates low at least through mid-2013, reduce the rate paid on banks’ reserve deposits, or buy more securities, Bernanke said today in testimony to Congress’s Joint Economic Committee in Washington, reiterating options he mentioned in July.

Hundreds of thousands of Greeks are walking off their jobs at airports, schools, hospitals to protest versus Prime Minister George Papandreou’s €6.6 billion austerity plan, challenging a government seeking European bailout funds to stave off default. Today’s 24-hour strike, that will shut the Athens International Airport for a full day, takes place after European Union ministers signalled they may renegotiate terms of Greece’s latest rescue.

Euro markets closed down sharply on Tuesday, the ‘saving’ of Dexia and the Luxembourg news coming too late to effect sentiment. the STOXX closed down 2.21%, the FTSE closed down 2.58%, the CAC down 2.61% and the DAX closed down 2.98%. The SPX closed up 2.25%. Having dropped circa 300 pips in 24hours the Euro has recovered to be in positive territory during the Asia open. This pattern is repeated versus sterling yen and the Swissy. The FTSE equity index future is currently circa 2% up.

Data publications to be wary of for the London and Euro morning session include the following;

09:00 Eurozone – PMI Services September
09:30 UK – GDP Q2
09:30 UK – Current Account Q2
09:30 UK – Total Business Investment Q2
10:00 Eurozone – Retail Sales August.

The UK GDP figures need careful monitoring. Analysts surveyed by Bloomberg gave a median quarterly prediction of +0.20%, the same as the previous quarter. Year-on-year, the survey predicted 0.70%, the same as previously released. Eurozone retail sales, based on a Bloomberg survey of economists, are expected to decline -0.30% (MoM). This is in comparison to last month’s change, which was +0.20%.



Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/october-4-pm/

When Will the Troika’s Headless Chicken Fall on the Bailout Spot?

When Will the Troika’s Headless Chicken Fall on the Bailout Spot?

Whilst numerous cerebral films, bios and documentaries have been made musing on the reasons for the 2008-2009 crash, (such as the superb Inside Job), none managed to capture the malaise with the clarity, brevity and humour as the episode of South Park called Margaritaville. The basic premise behind the episode was to explain why the system broke down. The makers also managed to take a side swipe at Americans’ religious views. Part of the episode’s brilliance is owed to the producers explaining the cause and effect of the crisis so quickly. In comparing Americans lack of understanding and faith in money to blind acceptance of religion they pulled off a master stroke.

In the sub plot one of the characters reaches the very top of the Treasury department for an explanation were he quickly discovers that decisions are made by ‘consulting the charts’ and a headless chicken running around a gameshow style board. If the chicken lands on the ‘bailout spot’ the financial institution gets bailed out.

The episode is overall a satire and commentary on the global recession affecting the industrialised world at the time the episode was broadcast. One of the characters Kyle is portrayed as a Jesus-like saviour working to save the economy, and Stan spends much of the episode trying to return a personal Jimmy Buffett Margaritaville machine.

The storyline begins as Stan tries to save money by depositing it into a bank but it “disappears” moments after. A recession hits the nation and South Park. Randy explains to Stan that the economy is failing due to people spending their money on luxuries. Ironically, he continues his lecture while making himself a margarita in a Margaritaville-brand mixer.

Randy convinces everyone in the town to reduce spending to bare essentials in order to initiate the economy’s anger though defending his own frivolous purchase by saying the essentials include margaritas. His recommended changes make the town resemble first-century Galilee. Kyle, getting annoyed, responds that the economy is not actually angry with them, and that they should be out spending money. Kyle preaches that the economy exists as a mental construct, if they want the economy to be strong, they must have faith in it. Randy and the council, upon hearing this, decide that they need to kill Kyle. Cartman, in his desire to obtain a copy of Grand Theft Auto: Chinatown Wars, says that he will deliver Kyle to Randy and his friends in exchange for the game.

In a Last Supper, Kyle and his friends go out for pizza where he laments that he feels they will not be able to get together like this anymore because he thinks one of his friends will betray him. The next day, Kyle sets up a table with a credit card machine in the town and begins “paying everybody’s debts” with his American Express Platinum Card. Kyle’s mother begs him to stop because he will be in debt for life, but Kyle feels he must to help everybody in the town.

As a subplot, Stan spends most of the episode trying to return the aforementioned Margaritaville mixer. The retailer Sur La Table won’t accept the return because it was bought on a payment plan. He tries to find out to whom he can return it, each person saying the debt has been packaged and sold to someone else (much like real-life mortgage-backed securities). Eventually he goes all the way to the United States Treasury, where a group of associates “consult the charts” and tell him the mixer is worth $90 trillion. One of the three treasury workers says that another insurance company is failing and asks what they should do. They say they have to “consult the charts” again. Stan follows the men inside. He sees a round lit-up gameshow style board. The men cut off a chicken’s head and let the decapitated chicken run on the board while one of them plays Yakety Sax on a kazoo. The chicken falls on the “bailout!” spot, so that is what the men do. In anger at the ridiculousness of the system, Stan breaks the mixer on the platform by the chicken and walks off. The episode ends with a news report giving credit to Barack Obama for the recovery of South Park’s economy, rather than Kyle.

Just what it takes for the troika to finally make a decision on bailing out Greece (or not) is a mystery. Unless the troika all have long orders placed on the Dow Jones index to be executed at sub 9,000 there can be no rational explanation for the continued delay. As each day passes the collateral damage intensifies. Mention of orderly or disorderly defaults are currently rendered redundant as we’ve now entered a new situation were market makers, ‘shakers and movers’ will begin to question the competence and moreover the credibility of the troika. The original support package of circa €110 billion was agreed in 2010, the next tranche of €8 billion is now overdue. Greek officials are insisting that they’ve met the new criteria and quite simply need the bank notes to pay civil service wages and fill up the ATMs.

One aspect rarely discussed is the silent bank runs that have taken place since 2009 which have intensified since 2010. As to whether or not this is a major concern to the troika is doubtful, but the reserves Greek banks hold must be at a minimum, and if and when they’re re capitalised the suspicion might exist that the next rounds of bailouts will come thicker and faster. As each day passes avoiding the bailout the healthy impact will be less as Greece will only experience a very short term reprieve until the question of default raises its head once again. Someone from the troika needs to find a local farm, buy a chicken and start making some decisions if the chicken hits the “bailout spot”.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/when-will-the-troikas-headless-chicken-fall-on-the-bailout-spot/

Market Commentary by FXCC - The Great Wall of China is a Match for the Wails of the USA

The Great Wall of China is a Match for the Wails of the USA

As the USA gets prepared to bite the hand that feeds you have to wonder if they’ve really thought this through, or is this latest invented enemy simply a xenophobic ill timed swipe at anything ‘anti American’? When your country’s economy is 70% reliant on consumerism and only twelve percent manufacturing perhaps you should tread carefully when condemning your biggest trading partner. Whilst the USA could (in theory) go all out ‘protectionist’ the result would surely be a net loss to the USA. U.S. lawmakers, with one eye on the 2012 elections, have stated that the undervaluing of China’s currency has cost American jobs and that a fairer exchange rate would help cut an annual trade gap of $250 billion. By how much it would cut the gap and how many jobs would be created remains unclear.

If the Chinese paid similar wages to their USA counterparts the price of an iPad 5 would double or triple and given that Apple is more solvent than the USA as a country…”sorry, what were you saying Senator?” Without wishing to be too facetious you have to wonder if the politicians ‘up on the hill’ have really done the math? How many input jobs are as a direct result of cheaper Chinese imports? Would inflation increase and unemployment rise if the Yuan was valued higher? Would the USA suddenly become an exporting powerhouse once again? Would the Chinese, Koreans, Australians and Japanese buy Jeeps and Cadillacs ahead of BMWs and Mercedes?

Foreign ministry spokesman Ma Zhaoxu said in a statement posted on China’s official government website (www.gov.cn) on Tuesday;

By using the excuse of a so-called ‘currency imbalance’, this will escalate the exchange rate issue, adopting a protectionist measure that gravely violates WTO rules and seriously upsets Sino-U.S. trade and economic relations. China expresses its adamant opposition to this.

China’ Central Bank issue a statement;

The yuan bill passed by the U.S. senate will not solve its problems, such as insufficient savings, high trade deficit and high unemployment rate, but it may seriously affect the whole progress of China’s reform of its yuan exchange rate regime and may also lead to a trade war which we would not like to see.

Ministry of Commerce spokesman Shen Danyang went one stage further by stating that the United States was trying to “pass on the blame for its own failings”. Ouch..

Trying to turn domestic disputes onto another country is both unfair and in violation of standard international rules, and China expresses its concern. It will weaken China-U.S. efforts to join hands and together promote global economic recovery. The global economic is in a complex, sensitive and changeable period, and so even more needs a stable international monetary environment.

Wang Jun, a researcher at the China Centre for International Economic Exchanges.

Maybe the United States will not be the only and last country to do so. With the worsening of the European sovereign debt crisis, we must also be on high alert that euro zone countries could also press China on the exchange rate issue. We need to launch some pre-emptive measures to hit back against any more attacks.

Perhaps we should be thankful that this story, which will be intensely magnified by the USA media over the next few months, has managed to displace the Eurozone crisis from the top of the finance news agenda. Perhaps history will be re-written to blame the current crises on the Chinese currency and HFT trading.

In Eurozone news Greek public sector workers have blocked the entrance to several ministries on Tuesday in order to protest against austerity measures disrupting talks with EU and IMF inspectors on the vital aid tranche. Athens has admitted that it will miss its 2011 deficit target despite a series of tax hikes, pension and wage cuts and a “labor reserve” plan to put tens of thousands of public sector workers in ‘hibernation’ redundancy. European governments are quietly suggesting that bondholders have to take bigger losses on Greek debt in the second aid package. European ministers have delayed a decision on the release of Greece’s next 8 billion-euro loan instalment until after Oct 13th. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year. Goldman Sachs Group has cut its global growth forecasts whilst predicting recessions in Germany and France.

Asian markets fell sharply in overnight early morning trade. The CSI fell 0.26%, the Hang Send closed down 3.4% and the Nikkei closed down 1.05%. the SPX future index is currently down circa 0.8% and the UK FTSE is currently down 2.14%. The FTSE is now down 11.06% year on year. The STOXX is down 3.02%, the CAC is down 3.04%, and the DAX is down 3.36%. The indecision by the troika will continue to impact as suspicions of a disorderly Greek default begin to gather pace. The euro reached a recent new low in overnight trade as it touched a ten year low versus the yen. Brent crude is down $87 a barrel and close to breaching $100 a barrel. Gold is up by $8 an ounce.

The main data realise this afternoon from the USA is the USA factory orders for August. This measures the value of new orders, shipments, unfilled orders and inventories reported by US manufacturers. Figures are reported in billions of dollars and also in percent change from the previous month. According to a Bloomberg survey of economists, a change of 0% is expected, compared with last month’s figure of +2.40.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/the-great-wall-of-china-is-a-match-for-the-wails-of-the-usa/

Daily Market Roundup by FXCC - October 3 pm

The same headline is constantly being regurgitated by the usual financial media outlets day after day, it repeats something like this; “US Stocks and the Euro fall as Greece concerns outweigh positive U.S. economic data..” Or we read something similar to the following most days of the week; “Large U.S. bank stocks fell sharply on concerns that lenders like Citigroup Inc and Morgan Stanley may face more earnings setbacks from the debt crisis in Europe.”

The constant inference appears to be that the SPX and the Dow Jones stock indices are falling due to the Eurozone debt crisis and not due to the mess the USA is in and has been since 2007-2008. “Oh look, our economic indicators are healthy, if only those pesky Europeans could get their act together.” Sure and..”If only that trinity and axis of unholy financial evil that was Northern Rock, Halifax Bank of Scotland and Cheltenham and Gloucester hadn’t invented the subprime mortgage securitisation business, causing Lehman to collapse, we’d all be living in €1 million houses with $300K mortgages.”

Perhaps it’s time for the headline writers in the USA mainstream media to join up the following words; houses, glass, in, people, living, bricks, throw, shouldn’t..

As America officially closes its books on the 2010-2011 fiscal year the final trading day of the year saw the settlement of all the outstanding and recently auctioned off debt. Like families splurging their last pay cheque of the year on an Xmas blow-out there was a final intoxicated surge of $95 billion in total government debt overnight, the result being a closing ‘balance’ of the USA being circa $14.8 trillion in debt. During the past fiscal year, the US has issued a total of $1.228 trillion in new debt. At a rate of $125 billion per month US debt to GDP will pass 100% inside a month. The US economy added over 3$ trillion in debt during the past two years and the stock market is almost back to 2009 levels. All that effort, all that money, all that fresh debt and dollar debasement (to be covertly dumped on the masses) and the end result? Zero growth, nada. Yep, it’s all the fault of those Europeans..or could it be the Chinese..?

The US Senate voted on Monday evening to push forward legislation designed to press China to let its yuan currency rise in value, creating a debate between lawmakers who say the bill will create jobs and critics who warn it could initiate a trade war. Over sixty senators voted to allow debate on the bipartisan Currency Exchange Rate Oversight Reform Act of 2011, which would allow the U.S. government to place countervailing duties on products from countries found to be (in the opinion of the USA) subsidising their exports by undervaluing their currencies. In short countries and economies who don’t do what the USA admin demands are wrong, period.

Manufacturing in the USA grew in September as production and hiring increased. Other data news for the struggling U.S. recovery indicated strong demand for new motor vehicles, construction spending unexpectedly rebounded in August. September marked a 26th straight month of expansion. The Institute for Supply Management said its index of national factory activity rose to 51.6 last month from 50.6 in August, boosted by a rebound in production and increased factory hiring. However, new orders fell for a third straight month suggesting that the underlying conditions are flat.

Despite the USA optimism the Global Manufacturing PMI, compiled by JPMorgan with research and supply organisations, fell in September to 49.9 from 50.2 in August. This is the first time since June 2009 that the index has fallen below the 50 mark that divides growth from contraction. Markit’s Eurozone Manufacturing Purchasing Managers Index (PMI) which gauges changes in the activity of thousands of factories in the countries that share the euro, fell to a final reading of 48.5 in September from 49.0 in August. It is the second consecutive month the manufacturing PMI has been below the 50 mark that divides contraction from growth.

As it closed 2.36% down for the day the SPX turned a significant corner by finally moving into negative territory year on year now 1.61% down YoY. It has fallen circa twenty percent since early May, a crash in anybody’s language. European indices fared just as badly, the STOXX closed down 1.9%, the FTSE closed down 1.03%, the CAC closed down 1.85% and the DAX down 2.28%. Brent crude lost circa 1% and gold advanced by circa $4 an ounce. The UK FTSE future equity index is suggesting a sharp fall at London open, the daily future is currently down circa 90 points or 1.76%. Similarly the SPX future is down forty points. The Hang Seng and Nikkei are currently down by circa 1.6% and 1.75% respectively. Having stabilised earlier in the day the euro contented its slide and is currently flat.

Daily economic indicators for the London and European open to be aware of include the following;

09:30 UK – PMI Construction September
10:00 Eurozone – Producer Price Index August

Notwithstanding the macro events the UK construction figures for September could prove to be relevant. Economists polled by Bloomberg gave a median forecast of 51.6, compared with August’s figure of 52.6. The Euro producer price index may affect sentiment, A survey of analysts compiled by Bloomberg shows a predicted month-on-month change of -0.20%, compared with the 0.50% that was reported in last month’s release. The same survey gave a median forecast of 5.80% year-on-year (the previous month’s annualised rate was 6.10%).

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/october-3-pm/

FXCC Blog Updated: Hungry Hippos and Quantitative Easing

It’s a race, it’s a chase, hurry up and feed their face! Who will win? No one knows! Feed the hungry hip-ip-pos! Hungry hungry hippos! (open up and there it goes!)

With the advent of web sites such as the original friends re-united website and lately Facebook it’s become relatively straightforward to track down many of your old friends and contacts. However, once you’ve reached a certain age you question where you’d stop on your retrieval mission given you must have met thousands of people and made hundreds of contacts and friends over the years.

I watch my eldest children on Facebook communicating with their friends and realise this new phenomena is for them. Not just due to the fact it’s their ‘space’ and “adding your Dad on Facebook would be really lame” (I’ve coped with the rejection) but because having grown up with the technology and phenomena as it’s evolved they’ll simply add, delete and lose touch with contacts perhaps in a similar way to how most of us have over the decades, it’ll become natural.

However, it’s inevitable that from time to time you wonder how old friends are doing, particularly those who had a real impact on you. I had a friend who had the most brilliant insight into, what on the face of it, were the most complicated of issues. She had a ‘Marilyn Monroe’ charm, her innocence, matched by her blonde hair, razor sharp wit and refusal to believe how stunning she was, (both intellectually and physically), made her brilliant company. She gathered her insights into news events from a children’s news programme called News-round. Typically a five minute news bite programme that diffused the news down to child-like levels; “it’s all I need, I haven’t got time to listen to all the complicated opinions, I just want the latest news explained to me in words in understand.” I often think of this when surfing the news channels.

In the UK I have access to the BBC, ITV, SKY, Al Jazeera, CNN, Bloomberg and the Russian tv station RT news. RT news acts as my (slightly more sophisticated) version of my friend’s news round up programme, it also offers a superb ‘buffer’ versus the incessant propaganda other state owned, or highly corporatised broadcasts offer up for consummation. You know RT is as pro Russia as the BBC is pro the UK government and it’s that ‘balance’ of opinion that offers you an opportunity to diffuse all the information, messages and opinions you’re bombarded with into some form of immediate coherent truth.

When explaining economic theory I use techniques and examples many of us will understand, I find this particularly useful when having discussions with my children. My eldest son is now studying economics at sixth form and some of the discussions and lessons we had when he was younger have undoubtedly sparked his imagination on the subject. One such discussion we had (and I’ve recently related it with his younger brother) was using their Hungry Hippos game in relation to the liquidity and solvency issues we’ve experienced since 2007.

The game is played by two to four players and is recommended by the manufacturer for children ages 3 and up. The object of the game is to cause the player’s hippo to “consume” as many of the twenty white plastic marbles on the playing field as possible. The player presses a lever on the back of their hippo which causes the hippo’s mouth to open, extend towards the centre of the board, close and retract. Marbles are drawn back into a depression within the hippo, so they do not drift back into play once properly consumed. Play ends when all of the marbles have been consumed by the hippos. The shaking of the lightweight playing field during play, particularly when children are pounding on the levers to make their hippos capture marbles, introduces a strong random element to the game. The game also is very loud, with the constant slamming of the hippo levers, and bouncing of marbles on the plastic board.

After you pour all the balls into the concave shaped arena, as the hippos aggressively fight over the balls as they swirl around the arena, some players get cute by developing what they believe to be techniques, perhaps waiting patiently to ‘scalp off’ the errant balls. Undoubtedly, having experimented with different techniques over the years, there’s only one method that works; be first. Aggressively capture as many of the wayward balls as you can, in as short a period of time as you can, in order to be declared the winner. But what happens next? Well, you count up all the balls, make a note of who won and then repeat the pouring in of the balls until the hippos run out of balls, once again ‘demanding’ to be fed once more.

In a 1990 short story published in The New Yorker (and sarcastically named after the game), Edward Allen wrote, “The object of the game is to press your handle down again and again as fast as you can, with no rhythm, no timing, just slam-slam-slam as your hippo surges out to grab marble after marble from the game surface….”

If asked to explain what’s gone wrong with the system since 2007/2008 you could do a lot worse than using the Hungry Hippos analogy…

You could nominate the four main players as the ECB, the IMF, the FED and the BoE as the Hungry Hippos. The IMF acts as the delivery mechanism of the balls and also as a player who less aggressively hunts the balls. It contends itself with contributions from the other players’ wayward techniques, it plans to come last in the same way a Dad would if playing with children. The ECB, FED and BoE, having previously decided on the amount of balls to be in play, then hunt for the remainder of the balls in a fight to the end. Once all the balls are gone the game is over. In order for a new game to start they need the balls gathering up and then put back into the arena for the competitors to play again.

But what if the rules of the game were changed slightly, the hippos now took the balls from the original game and just sat there, refusing to give them back, or abjectly refused to play the game again until a new series of balls were placed into the arena? What if they did this time and time again until there were no new balls left anywhere? Actually, come to think of it, does this description fit perfectly as a metaphor for the behaviour of the main investment and retail banks (as opposed to the central banks) since 2008/2009?

What if instead of there being four players there were forty players in a giant arena? The central banks and IMF deliver the balls but take no part in the game, they simply pour all the balls into the arena and let the forty players invent their own complicated techniques within the game to see who gets to take the balls first?

Then the banks get clever, instead of using the ‘basic’ hippo the banks invent smart hippos that are quicker and smarter than the oppositions’ hippos. When the game is over, which takes a lot longer than the original game, the forty players sit there in silence, emotionless. Having harvested the first series of balls they simply refuse to play the game until more balls are placed into the arena. What if the first time the game was played you started with platinum balls, then gold, then palladium, then silver, copper, lead..?

Each time the game is played the value of the balls gets less and less until there is nothing of worth you can put into the arena for all the forty competitors to fight over. The game reaches a natural end because there is nothing of worth you can place in the arena anymore. But here’s were the description and discussion often ends..”But Dad, in your different version of Hungry Hippos if we start of with valuable balls such as gold, silver and end up with lead until there’s nothing else left to give the Hippos to play fight over, they must still have all the balls, they can’t have gone anywhere can they, when will they give them back?”

Please provide your answers on our comments section, a ten year old, a sixteen year old and a few thousand economists need to know the answer…

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/hungry-hippos-and-quantitative-easing/

Daily Market Roundup by FXCC - October 3 am

China Whispers..then SHOUTS

China’s official news agency, Xinhua, has ridiculed U.S. lawmakers’ efforts to pressure Beijing over its currency policy insisting that the USA admin. is resorting to deflecting blame onto China for its own domestic economic malaise. “This has become a common practice, whenever the (U.S.) economy is slow, whenever an election is nearing, voices in the United States pressing for the rise of the renminbi are all over.” – Xinhua.

This statement comes the day before the U.S. Senate decides to take up legislation that could allow USA companies to seek import duties against countries that the USA admin. considers have undervalued currencies, ergo unfair subsidies. U.S. lawmakers contend that China undervalues the Yuan by circa 25 to 40 percent, giving Chinese products an unfair competitive advantage in global markets.

“The race for the U.S. presidential election has heightened, and the yuan exchange rate is now a target again,” the Xinhua commentary asserted, concluding that “the opinions of advocates of the yuan bill are expedient and shallow.” Beijing repeatedly urges U.S. lawmakers not to “politicise” the differences over China’s exchange rate practices by passing the bill.

China’s central bank has set record high yuan/dollar mid-points this year to guide the yuan’s rise to help fight inflation and reduce the economy’s reliance on exports. In September the yuan weakened slightly. The yuan has risen 3.19 percent against the dollar since the beginning of this year and 6.89 percent since it was unpegged from the dollar in June 2010.

European countries must act decisively to resolve the euro zone debt crisis, or risk member states forced out of the single currency, China’s top newspaper said in a front page commentary. The call came in the overseas edition of the People’s Daily, the official paper of the ruling Communist Party underscoring Beijing’s worries regarding the safety of its investments in the euro zone.

Europe is standing at a crucial juncture in its history. It must show great wisdom, great boldness and great resolve, and genuinely go into action. If it is able to set up a fiscal union, Europe can still turn its luck around. If the decision comes too late, some (euro) members may be forced to pull out. But if Europe keeps dilly-dallying, the situation can only worsen and gather speed. Outsiders who want to help will not dare, and then the euro zone may really disintegrate. Without doubt, this would be a huge disaster for Europe and the world. Leaving aside how enlightened that plan may be, Europe’s efforts to put it in place have been too sluggish. A failure to act when they should will certainly cause more trouble, and the euro zone’s problems are now getting greater and greater.

China’s pile of $3.2 trillion in foreign exchange reserves, the biggest in the world, continues growing due to trade surpluses and capital inflows. Analysts estimate that China holds approx. a quarter of its foreign exchange in euro assets, there are limited places for it to park investments of such a scale.

China’s factory activity increased in September for the second consecutive month as export orders strengthened. The official purchasing managers’ index showed inflation pressures eased slightly. China’s PMI rose to 51.2 from August’s 50.9. The export orders index rebounded to 50.9 from 48.3 in August, which was the 28-month low. The 50-point mark is the dividing line between expansion and contraction. The People’s Bank of China reaffirmed on Friday that it would keep monetary conditions tight in its effort to rein in stubborn inflation, adding that containing domestic price pressure remains its top priority.

Zhang Liqun, a researcher with the Development Research Center, a think-tank under China’s cabinet – “The small rise in September PMI indicates a rising likelihood that the downward trend in economic growth is stabilising. However, considering all factors, there is still high possibility the economy could continue to slow. Small firms are facing many difficulties right now”.

The Greeks have no more gifts to bear..

The Greek economy is forecast to shrink 5.5 percent this year, more than the 3.8 percent forecast by the EU and IMF. The Greek cabinet has finally approved a plan Sunday evening to lay off state workers, and sign off a draft of next year’s budget, in a race to slash stave off bankruptcy. Without the release of the next €8 billion tranche of the EU bailout Greece will run out of money to pay state wage bills within seven days. European officials are desperate to avert a Greek default, which would wreck the balance sheets of European banks, damage the prospects of the euro single currency and plunge the world into a new global financial crisis.

Negotiators from the International Monetary Fund, the European Union and European Central Bank, known as the troika, have been combing through Greece’s budget and reform plans since Thursday. The inspectors are expected to agree to the release of the aid. EU officials have suggested that banks that agreed to write-off 21 percent of the value of Greek debt in July may be forced to take even more pain.

The government plans to begin layoffs by putting 30,000 workers in a “labor reserve” by the end of this year. They would be paid 60 percent of their salaries for a year, after which they would be dismissed. But the government has yet to announce how the plan would work. If most workers placed in the reserve are near pension age and planning to retire soon anyway, the savings would be negligible and the inspectors are likely to be unimpressed. The inspection visit, expected to continue into the middle of this week, also focuses on budget plans for 2012-2014, a commitment to raise 50 billion euros from privatisation by 2015 and requirements to open up the country’s overly regulated economy.

ECB to quantitative ease?

The ECB does not have a history of creating money through asset purchases and has never been open to policy given its mandate is to keep inflation in check. At the height of 2008′s turmoil the closest the bank went to quantitative easing was the purchase of covered bonds. The euro zone debt crisis has reached such a critical point markets are speculating with regards to ECB QE. The ECB’s rules do allow it to buy any asset except for sovereign debt directly from governments. The solutions available to governments, such as common euro zone bonds, could face potentially lengthy constitutional challenges and may simply be politically undoable.

The ECB has put the onus on governments insisting that the solution to the crisis is responsible fiscal policy and monetary frameworks. It has gone on record that it will never embark on outright QE and given no sign of changing that view. To create large quantities of new cash at a time when inflation is already well above the bank’s two percent target (three percent currently) would be the antithesis of a decade of careful control over prices. But some analysts are discussing how it could be done.

The ECB did spend 60 billion euros in mortgage-related covered bonds in a one-year program started in June 2009. Media reports have recently suggested they could do that again, but to be able to release a larger chunk of money they would have to consider buying more liquid assets. While buying corporate bonds or equities can trigger a dramatic shift in market sentiment and spur growth, it may not go to the heart of the problem, which is governments facing increasing funding pressure as the crisis spreads.

Early trading indications

The U.S. dollar has advanced against the euro, extending gains from last week amid concerns about a global slowdown. The dollar climbed to in early Asia- Pacific trading from $1.338 at the end of last week in New York, and rose to 77.16 yen from 77.06 yen. The USA dollar was little changed against the New Zealand dollar to 76.10 cents from 76.14 cents and bought 96.62 cents per Australian dollar from 96.62 cents. The dollar and the yen strengthened last week as growing evidence that the global economy is slowing boosted investor demand for the currencies perceived as being the safest. Brent crude is down by circa $122 a barrel approaching the psychological 100 barrier were no doubt many stops and shorts are gravitating.

Economic indications

09:00 Eurozone – PMI Manufacturing September
09:30 UK – PMI Manufacturing September

Morning data publications that may affect market sentiment include the PMIs for Europe and the UK. These surveys give an idea of the overall health of the economic outlook as figures tend to match the overall state of the economy. A high PMI indicates an increase in materials purchased and a figure above 50 indicates positive business conditions. Bloomberg’s expectations for the Eurozone are 48.4 and for the UK the expectations are 48.5 a reduction of 0.5%.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/china-whispers-then-shouts/

Market Commentary by FXCC - USA FED Plays Show and Tell

The Federal Reserve Bank of New York will begin to question foreign banks for more thorough reports on their liquidity (and indirectly their solvency) as the U.S. steps up its risk monitoring of Europe’s sovereign debt crisis. Regulators have apparently held informal talks with the largest European lenders. The reports may cover potential liabilities such as foreign-exchange swaps and credit-default swaps.

U.S. prime money-market funds cut their exposure to eurozone bank deposits and commercial paper to $214 billion in August from $391 billion at the end of last year, according to JPMorgan Chase & Co. The funds are rationing their credit to European banks due to concerns that financial institutions will take huge losses if a eurozone nation (or nations) default. Credit-default swaps allow bondholders to buy protection against losses if an issuer defaults. The contracts entitle the holder to face value if the borrower defaults. Lawmakers and regulators have blamed misuse of the same swaps and lack of disclosure for helping to trigger the 2008 financial crisis.

A currency swap is a contract in which one party borrows one currency from another, and simultaneously lends another to the second party. Foreign-exchange swaps are used to raise foreign currencies for financial institutions and their customers, such as exporters and importers as well as investors. Currencies and their related derivatives are the most actively traded markets in the world, average daily turnover reached $4 trillion as of September 2010, the Bank for International Settlements estimated.

European finance ministers meeting in Luxembourg today are considering how to protect banks from the Euroland debt crisis and how to boost the region’s rescue fund. The Greek government approved €6.6 billion euros of austerity measures. The steps outlined by Prime Minister George Papandreou’s administration still leaves a 2012 budget deficit of 6.8 percent of GDP, missing the 6.5 percent goal previously set with the EU, International Monetary Fund and European Central Bank, known as the troika.

Dollar shows renewed strength

The US dollar beat stocks, bonds and commodities for the first time since May as investors sought refuge from slowing growth and Europe’s sovereign-debt crisis. The U.S. currency rose 6 percent in September, according to the Dollar Index. Raw materials measured by the Standard & Poor’s GSCI Total Return Index of 24 commodities slid 12 percent.

Dollar strength may indicate investor confidence in the nation’s creditworthiness after Standard & Poor’s stripped the U.S. of its AAA rating. The currency appreciated versus the sixteen of its most-traded counterparts in September for the first month in more than three years. However, it could be the liquidity of the dollar that investors are chasing as opposed to any real over riding confidence in the USA economy, if huge investors need to be nimble and divested the dollar represents the most obvious choice. The prevailing uncertainty over the extent of damage to the fragile European banking sector from a possible Greek default has been driving investors to take refuge in safer assets.

“In a time of crisis you want to be holding the most liquid currency out there,” Aroop Chatterjee, a currency strategist at Barclays Capital Inc. in New York, said in a telephone interview with Bloomberg on Sept. 27. Traders expect the dollar to strengthen against the euro, yen, pound, Swiss franc and Mexican peso, as well as the Australian, Canadian and New Zealand dollars, according to Commodity Futures Trading Commission data as compiled by Bloomberg. The dollar strengthened 0.8 percent versus the euro last week, extending its September advance versus the 17-nation currency to 6.8 percent, bringing its gain for the third quarter to 7.7 percent. The US dollar appreciated 0.6 percent versus yen in the five days ended Sept. 30, reducing its loss since June to 4.5 percent.

Market snapshot

Whilst Asian markets absorbed the positive news regarding the Greek government’s ratification the news that Greece would miss (by some distance) milestones weighed heavily. The market ‘group think’ could be that it’s inevitable that this next tranche of help, in the from of circa €8.8 billion, could be eaten up and Greece come back to the table for more echoing many commentators’ views that default is inevitable. The Nikkei closed down 1.78%, the Hang Seng closed down 4.38% and the CSI closed down 0.26%. The ASX closed down 2.78%, now 14.9% down year on year and the main Thai index closed down 4.88% to be down circa 10.56% year on year.

European markets have fallen sharply since opening, the STOXX is currently down 2.66%, the FTSE is down 2.41%, the CAC 2.71%, the DAX is down 2.91%. The SPX equity future is currently down 0.36%. Brent crude is down $92 a barrel and gold is up $33 an ounce. The euro has pared most of its losses since early morning to be flat versus the US dollar and has followed a similar pattern versus the Swissy, yen and sterling.

Data publications to be mindful of for NY opening and the session

With the London opening and session now in full swing it’s time to consider the data releases that may affect sentiment on or shortly after NY opens. There are only two major releases of importance from the USA today.

15:00 US – Construction Spending August
15:00 US – ISM Manufacturing September

Economists polled by Bloomberg predicted a change of -0.20% in construction spending compared to a previous figure of -1.30%. The ISM index can be a sentiment changer given it is considered to be the most important of all manufacturing indices. The ISM Manufacturing Index is liable to move markets, especially when periods of rapid economic growth are approaching the end of their cycle. As per the norm with many indices the ‘rubicon’ figure is considered to be 50, a survey of analysts compiled by Bloomberg showed a predicted figure of 50.5. This is slightly lower than last month’s figure of 50.6.

Source: FX Central Clearing Ltd. (FXCC BLOG)
http://blog.fxcc.com/usa-fed-plays-show-and-tell/