Assumption, can make an ASS out of U and ME…
It would appear that the solution for the Eurozone crisis, released to the markets which the mainstream media lapped up like a child whose Christmas list had been ticked to the letter, has been juiced. Underpinning the detail and process was an assumption and expectation that China and Japan would jump at the opportunity of buying up some form of Eurobonds in order to protect one of their major trading partners. Japan is the latest to issue a snub. Presumably with a bow, not a full bow just a dismissive “get the hell out of here, are you on western drugs?” type bow.
It’s coming to something when you ask China to bail you out on the basis that you’ll have to help otherwise we won’t be able to import your goods in the volumes we have anymore. China may raise one eyebrow, look at the latest iPhone sales and think; “you will, no one else can deliver the ‘stuff’ we manufacture at the cost and if there’s a global recession us buying up debt that you’ll never pay back isn’t going to help, particularly if (as part of the plan) you all appear wedded to your ideals of austerity..” But to then ask Japan, a country that has been through (arguably is still knee deep in) its third decade of stagnation/stagflation, whose debt to GDP ratio is circa 220% and who is battling to suppress the value of its domestic currency (yen) given speculators have deemed it as safe a haven as the Swiss franc, which in turn is killing its ability to engineer an export lead recovery is stretching credibility and believability too far. However, that’s where we’re at.
Japan has told the head of Europe’s bailout fund and ‘motel travelling salesman’ Klaus Regling on Monday that it would continue to buy its bonds, however, like fellow potential sales prospect China, won’t commit to putting cash into any special purpose vehicle to boost the rescue fund’s firepower. European Financial Stability Facility (EFSF) Chief Executive Klaus Regling was in Tokyo after failing to court China over the weekend. His trip comes ahead of the G20 leaders’ summit in Cannes on Thursday and Friday that policymakers hope will secure pledges of more money to help resolve the debt crisis. European leaders are looking to countries with engorged foreign exchange reserves, such as China, Japan and the BRICS economies, to provide the extra financial firepower to strengthen the fund to circa 1 trillion euros from it’s base of circa 200 billion euros. The fear is that Europe’s largest banks may only raise a tenth of the total capital shortfall estimated by regulators, fuelling concerns that policy makers’ plans to bolster the region’s lenders could fail. European Union leaders have insisted that European banks increase the ratio of “highest quality” capital they hold by the end of June, creating a shortfall of 106 billion euros ($150 billion).
“The Japanese government will continue to buy the EFSF bonds that we have been issuing over the last 10 months and we will continue to be in contact about future operations,” Regling told reporters after a meeting with Takehiko Nakao, Japan’s vice finance minister for international affairs. Presumably this tour by the Eurozone envoy didn’t get in the way of the decision by Japanese officials to smash the value of their currency.
The US dollar exploded versus the yen by the most in three years on Monday, hitting a three-month high after Japan stepped into the FX market to curb the yen’s rise, although traders doubted the move would have a long-lasting impact. The dollar, recently hit by the continuous speculation of inevitable further quantitative easing by the Federal Reserve, spiked by more than 4 percent at one point to 79.55 yen, after hitting another all-time low of 75.31 yen on early in Asian trade. Finance Minister Jun Azumi said Tokyo stepped into the market at 10:25 a.m. local time and would keep intervening until it was satisfied with the results. Tokyo’s second foray into the currency markets since its record selling of 4.5 trillion yen ($59.4 billion) when it intervened on August 4, follows weeks of warnings by government and central bank officials.
Azumi told a news conference.
[quote]I have repeatedly said that we would take decisive steps against speculative moves in the market. Unfortunately it (the market) has not reflected our economic fundamentals at all. I have been frequently in contact (with other countries), I have always conveyed Japan’s stance and interests at senior official levels.[/quote]
Azumi said that while Monday’s intervention was a solo act he was in a continuous contact with his international counterparts.
In USA news the biggest bond gains in almost a decade has increased returns on Treasuries above equities over the past 30 years, the first time that’s happened since before the Civil War. Long-term government bonds have gained 11.5 percent a year on average over the past three decades, beating the 10.8 percent increase in the S&P 500. The U.S. savings rate has tripled to 3.6 percent since 2005 and has averaged 5.1 percent since the depth of the financial crisis in December 2008, compared with 3.1 percent for the previous 10 years, according to government data.
U.S. government debt is up 7.23 percent this year, according to Bank of America Merrill Lynch’s U.S Master Treasury index. Municipal securities have returned 8.17 percent, corporate notes have gained 6.24 percent and mortgage bonds have risen 5.11 percent. The S&P GSCI index of 24 commodities has returned 0.25 percent. While 10-year Treasury yields rose 10 basis points, or 0.10 percentage point, last week to 2.32 percent, they are down from this year’s high of 3.77 percent on Feb. 9. The price of the benchmark 2.125 percent note due August 2021 fell 27/32, or $8.44 per $1,000 face value, in the five days ended Oct. 28 to 98 10/32, according to Bloomberg Bond Trader data.
Speculators boosted their bets on higher commodity prices by the most since August as improving prospects for growth in the U.S. and Europe sent prices toward their biggest rally in more than two years. Money managers boosted their combined net-long positions across 18 U.S. futures and options by 13 percent to 831,421 contracts in the week ended Oct. 25, Commodity Futures Trading Commission data show. The Standard & Poor’s GSCI Index of 24 raw materials has jumped 10 percent in October, on track for the biggest gain since May 2009.
Markets
Asian markets suffered in overnight, early morning trade. The Nikkei closed down 0.69%, the Hang Seng closed down 0.77% and the CSI closed down 0.51%. the ASX 200 closed down 1.27%. In European markets at 9.50am GMT the STOXX is down 1.9% the FTSE 1.22% the CAC down 2.13% and the DAX down 1.67% the SPX equity index future is down circa 1%. Brent crude is down $36 a barrel and gold is down $27 an ounce.
Data releases that may affect market sentiment in the afternoon sessions
The National Association of Purchasing Management, Chicago Affiliate (monthly) is the only release of note this afternoon. A survey of Purchasing Managers across the states of Illinois, Indiana and Michigan, that aims to measure the business conditions. The survey covers such areas as new orders, inventory levels, production, supplies and employment. The answers are used to compile a ‘diffusion index’. 50 is used is a benchmark figure; a figure greater than that indicates expansion, whereas contraction is reflected by a figure below 50. A Bloomberg survey of analysts yielded a median estimate of 59.0. Last month’s index showed a figure of 60.4.
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