There are times when the mechanics of high finance can leave even the most economically literate amongst us speechless. Whilst there’s an argument that burning through $500 billion is simply emotive and extreme language to describe the ‘spend’ the Bank of Japan has engaged in to support the yen, the fact remains that estimates put the dollar loss to date in that ‘ball park’ according to JP Morgan, this from a country with debt to GDP of circa 220%. On Monday Japan sold nearly $100 billion worth of yen, a record amount for single-day intervention, in attempts to tame its high-flying currency.
The obvious analogies of rouge traders being imprisoned for losing a fraction of that overall sum and it being the GDP of combined impoverished African States may eventually be voiced in the mainstream media. However, it’s at times such as these, when many economists and commentators are searching for (or anticipating) the next Lehman event horizon, you begin to wonder if it isn’t an unforeseen outlier event that won’t hit the system, or more worryingly that event could already be alive and in the system..
Japan’s government faces almost $512 billion in losses from intervening in the foreign-exchange markets to stem the yen’s advance, according to estimates by JPMorgan Chase & Co. Valuation losses on Japan’s foreign-exchange reserves minus yen liabilities totalled 35.3 trillion yen at the end of 2010, according to Finance Ministry data. The losses may swell further as the yen is projected to climb to 72 versus the dollar by September 2012.
Tohru Sasaki, head of Japan rates and foreign-exchange research at JPMorgan Chase in Tokyo;
It’s difficult to change the trend of the currency market with intervention. Even if the action can stem the currency’s gains temporarily, the yen will eventually appreciate.
Having won over his cabinet Greek Prime Minister George Papandreou believes that a referendum on Europe’s overall rescue package will confirm the nation’s membership of the euro as he stuck to plans to hold the vote amid signs his government may collapse.
The referendum will be a clear mandate and strong message within and outside Greece on our European course and our participation in the euro, it will ensure this course in the most decisive way. The dilemma isn’t this or another government. The dilemma is; yes or no to the loan accord, yes or no to Europe, yes or no to the euro.
Papandreou will travel to Cannes, France today to brief German Chancellor Angela Merkel, French President Nicolas Sarkozy and European Central Bank President Mario Draghi and other officials on developments in the country ahead of the scheduled G20 meeting. They will be joined by Luxembourg Prime Minister Jean-Claude Juncker, European Commission President Jose Manuel Barroso, International Monetary Fund Managing Director Christine Lagarde and EU Monetary Affairs Commissioner Olli Rehn. These key European leaders and policy makers are racing to prevent their week-old debt crisis management strategy from unravelling. At the hastily convened emergency talks today they’re likely to instruct Greece that there is no alternative to the budget cuts imposed in the bailout plan.
Whilst domestic matters may be taking a back seat Chancellor Merkel may be concerned that Europe’s economic catalysing powerhouse may be stalling. With recent GDP figures illustrating a stagnating economy German unemployment unexpectedly rose for the first time in more than two years in October and manufacturing contracted as pessimism mounts among businesses in Europe’s largest economy.
German companies are reluctant to hire workers as Europe’s fiscal crisis hurts prospects. German investor sentiment fell to its lowest level almost three years in September whilst business confidence dropped to a 16-month low. In the 17-member euro region, manufacturing output declined more than previously forecast in October, suggesting the region is moving towards the feared double dip recession. A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 47.1 from 48.5 in September, London-based Markit Economics said today. That’s below an initial estimate of 47.3 published on Oct. 24. A reading below 50 indicates contraction.
Over in the USA moves appear to be taking shape to allow the Federal Reserve to begin QE3 at least according to a Bloomberg news poll survey which on matters such as these are unerringly accurate. Sixty-nine percent of those surveyed believe the Fed Chairman Ben Bernanke will embark on the third round of quantitative easing, or QE3, 36 percent predict the event will take place in the first quarter of next year, according to the poll of 42 economists from Oct. 26th. The FOMC plans to release a policy statement at 12:30 p.m. in Washington after a two-day meeting. The FOMC forecasts will be released at 2 p.m., Bernanke is scheduled to hold a press conference beginning at 2:15 p.m.
Market snapshot at 10:15 – 10:30 am UK time
In Asia Pacific markets the Nikkei fell sharply closing down 2.21%, the Hang Seng closed up 1.88% and the CSI closed up 1.66%. The ASX 200 closed down 1.14% a 10.99% fall year on year. European bourses are relatively calm after yesterday’s stormy session induced by news of the potential Greek referendum. At 10:15 GMT (London time) the STOXX is down 0.14%, the UK FTSE is down 0.18%, the CAC is down 0.35%, the DAX is down 0.32%. the main Italian bourse, the MIB is down 0.03% and down 30% year on year. The Athens main equity market is down 0.58%, 50.44% year on year. Brent crude is currently up $67 a barrel and gold is up $12 an ounce. The SPX equity index future is up circa 1%.
Economic calendar releases that may affect the afternoon sessions’ sentiment
11:00 US – MBA Mortgage Applications
12:15 US – ADP Employment Change October
16:30 US – FOMC Policy Announcement
Employment data is released today by a private data firm. A Bloomberg survey of analysts forecasts a figure of 100,000, compared with last month’s 91,000. Focus on FOMC policy change will look for news on QE and interest rate policy. Of the economists surveyed by Bloomberg, the median consensus was 0.25% which remains unchanged from the previous figure.