Financial market report for November 23, 2010
I … The Euro, FXE, tumbled on unsettled fears that more bailouts will be needed and that sovereign debt contagion will spread throughout European Financial Institutions, EUFN.
Pan Pylas, of the Associated Press relates: “The overarching problem, though, remains the worry that European officials have not done enough to prevent the continent's debt crisis from moving on to another highly indebted country, with Portugal and Spain considered the next dominoes most likely to fall after Greece and Ireland.” …. "There is a real and building risk that at some point the financial markets lose faith with the eurozone authorities' ability to manage the debt crisis," said Derek Halpenny, European head of global currency research at the Bank of Tokyo Mitsubishi UFJ.
Bryan Keogh of Bloomberg reports that the Markit iTraxx SovX Western Europe Index of credit default swaps, CDS, rose significantly. “Bailouts are nothing but a short-term string-and-sealing- wax fix,” Bill Blain, a strategist at Matrix Corporate Capital LLP in London, wrote in a client note. “We into the next stage of the euro sovereign crisis. It’s now a struggle between the political will of the Brussels elites to maintain the euro as is, versus the markets betting they can’t.”
Concern that banks will be hurt in the fallout of the government debt crisis drove the Markit iTraxx Financial index of swaps linked to subordinated debt up 23 basis points to 260.5, the biggest jump since June 1, according to JPMorgan Chase & Co. The senior index climbed 12.5 basis points to 152.
Finbarr Flynn and Joe Brennan of Bloomberg report Bank of Ireland Plunges on Concern Shareholders Will be Diluted in Bailout: Bank of Ireland Plc, Ireland’s largest bank, fell to a 20-month low on concern that shareholders will be diluted in any government bailout. Bank of Ireland slid 31 percent to 27 cents at 12:45 p.m. in Dublin trading after dropping 19 percent yesterday. Allied Irish Banks Plc, the country’s second-largest lender, fell 19 percent to 33 cents and Irish Life & Permanent Plc, which has avoided a bailout so far, fell 4.8 percent to 80 cents. “That the banks will be obliged to raise further capital now looks assured,” Emer Lang, an analyst with Dublin-based securities firm Davy, wrote in a note today
II … There was a massive currency sell off of currencies world wide, as investors flocked to the perceived safe haven of the dollar, $USD, following North Korea firing artillery on the South Korean island of Yeonpeong.
The fall in the Optimized Currency ETF, ICI, documents that currencies have passed through an inflection point, and have achieved their peak value. It also documents that global competitive currency devaluation is underway. And that all currencies will be falling lower, actually taken lower, by rising interest on sovereign debt world wide, which can be seen in World Government Bonds, BWX, falling lower.
The fact that all the major currencies, DBV, and the emerging currencies, CEW, fell, and the Yen, FXY, rose, documents that an unwinding of yen carry trade investing is underway, deleveraging stocks, VT, and bonds, BND, world wide.
Carry trade investment came out of Mexico, EWW, today, as can be seen in its 2.5% fall lower, as seen in the fall of the Mexico Peso - Yen carry trade chart, FXM:FXY.
Carry trade investment came out of Europe, VGK, stemming from a fall in the EUR/JPY, seen in the chart of FXE:FXY … The EURJPY Gives Way, says Forex Live trader Jamie Coleman. The EURJPY broke through support, says chartist James A Hyerczyk.
The 3.4% fall in the South Africa shares, EZA, is in large part due to the unwinding of the South African Rand - Yen carry trade, seen in the chart of SZR:FXY.
The currencies marked with the (*) have fallen the most since November 5, 2010. This was when the currency traders declared a global currency war on the world’s central banks, by selling the major world currencies, DBV, and emerging currencies, CEW, commencing competitive currency deflation, in response to the bond vigilantes sustaining the Interest Rate on The US Government Bond, $TYX, above 4%.
The US Dollar, $USD, rose a strong 1.27% today, to close at 79.68, as Pattern Radar comments Dollar Pushes To A Two Month High. I ask: how soon will it rise above 80 to hit 80.5% and 81?
III … Today’s commodity, stock, bond and gold report documents that debt deflation is running strong in fiat assets and stimulating an investment demand for gold.
Commodities, DBC, fell lower, on the falling currencies. Debt deflation is being manifested in commodities, in spite of global conflict developing.
Timber, CUT, -2.6%. It is likely to be the fastest faller of all commodities as the inflation trade is now over.
Base metals, DBB, -2.15. Base metals fell on China’s vow to stop material price inflation
Oil, USO, -0.3 and West Texas Intermediate Crude, $WTIC, -0.3%, It’s fall on a day of international conflict is testimony that debt deflation is underway.
Financial and value hares falling lower included:
Global Financials, IXG, -2.6%
Emerging Market Financials, EMFN, -2.15
European Financials, EUFN, -3.1%
Banco Santander, S.A. Madrid, STD, -6.2% … “It’s hasta la vista baby” to this European bank, as Tyler Durden relates Spanish Bond Spreads Hit Ten Year High. This bank is locked out of the bond markets forever. This is of great concern, because Spain accounts for 10% of European economic activity. Banco Santender, SA is a zombie bank.Yes a nightmare out of the living dead.
International Dividend Payers, DOO, -3.2%
Emerging Market Small Cap Dividend, DGS, -2.85
India Earnings, EPI, -2.7%
Brazil Financials, BRAF, -3.6%
Chinese Financials, CHIX, -3.0%
Europe Small Cap Dividend, DFE, -2.6%
Fortress Financial, FIG, -4.0%
NewStar Financial, NEWS, -6.0%
Leveraged Buyouts, PSP, -2.4%
MasterCard, MA, -3.2%
Istar Financial, SFI, -3.7%
Bank of America, BAC, -1.9%
Banks, KBE, -1.7%
Investment Bankers, KCE, -1.6%
Insurance companies, KIE, -1.6%
Lazard, LAZ, -2.6%
Preferred shares, PGX, -0.6%
Countries falling lower included:
South Korea, EWY, -5.4%
South Korea Small Caps, SKOR, -5.4%
Ireland, EIRL, -4.5
Australia, EWA, -3.6% The Australian Dollar has been one of the strongest growing currencies. This resource currency was used along with the Euro to drive up the price of gold. Australia has seen a tremendous amount of carry trade investing via the AUD/JPY. This investing was given short, but unfortunately invested long by the Australian banks and the Australian government in home lending. And now” the call is due”, the currency traders want their money back. The Australian ETF, EWA, is bank laden, and will see awesome deleveraging. Australia is also a mining mining country. Given that China has vowed by all means possible to reduce inflation, BHP Billion, BHP, like the Australian banks, will see a great deflation in value.
Australia Small Caps, KROO, -4.0% The small cap shares fell more than the country shares.
New Zealand, ENZL, -3.7% Shares have fallen heavily on a currency downgrade by Standard and Poors.
India Small Caps, SCIF, -3.3% The India small cap shares fell more than the country shares.
India, INP, -2.6%
Switzerland, EWL, -2.8%
China, FXI, -2.3%
China Small Caps, HAO, -2.2%
Indonesia, IDX, -2.7%
Turkey, TUR, -5.1% Turkey was one of the greatest liquidity trade investments; now it is experiencing great and fast debt deflation.
Spain, EWP, -4.5%. Spain is at the epicenter of European investment distress.
Singapore, EWS, -4.0% Singapore saw money flow in under anticipation of QE 2; now it is flowing out.
Hong Kong, EWH, -2.0%
Malaysia, EWM, -2.1%
Taiwan, EWT, -2.1%
Brazil Small Caps, BRF, -4.0% The Brazil small caps fell more than Brazil.
Brazil, EWZ, -2.95
Austria, EWO, -4.0% The value of Austria shares are large currency driven, given that it is a major lender to emerging Europe and has many carry trade home mortgage loans made to Poland and Hungary.
Europe, VGK, -3.4% European shares fell lower on the lower Euro.
Italy, EWI, -3.5% Italy is the poster nation for on balance sheet and off balance sheet debt.
Sweden, EWD, -2.9%
Asia High Yielding Equity, DNH, -3.3%
Asia Excluding Japan, EPP, -3.4%
Russia, RSX, -2.9%
Poland, PLND, -3.0%
United Kingdom, EWU, -3.0%
South Africa, EZA, -3.4% South Africa shares fell on heavy carry trade disinvestment -- currency selling.
Japan, EWJ, -1.9%
Hedged Japan, DXJ, -1.7% In the future hedged Japan should fall faster than Japan.
Russell 2000, IWM, -0.9%
Emerging Markets, EEM, -3.2%
World shares, ACWI, -2.3%
The S&P, SPY, -1.4%
Sectors falling included:
International Basic Materials, DBN, -3.4% Carry trade investment is flowing strongly out of basic material stocks.
China Basic Materials, CHIM, -3.3%
Copper Miners, COPX, -3.6%
BHP Billiton, BHP, -3.9%
Steel, SLX, -2.9%
Energy Services, OIH, -1.9%
International Utilities, IPU, -1.9%
International Discretionary, IPD, -3.0% The international discretionary stocks were the slow but consistent gainer of the prior liquidity trade. Now this sector is seeing rapid unwinding of prior investment.
Agriculture Industry, MOO, -2.5%
Software Holders, SWH, -2.2%
House Building, ITB, -2.1%
Gaming, BJK, -3.1%
Wind Energy, FAN, -2.8%
Solar Energy, TAN, -2.5%
Clean Energy, ICLN, -2.0%
Airlines, FAA, -2.2%
Some Real Estate shares fell lower
Chinese Real Estate, TAO, -1.8%
Blackstone Group, BX, -2.4%
Blackrock, BLK, -2.1%
Computer hard drives fell lower:
European oil company stocks fall lower; in a debt deflationary world, even oil companies fall lower.
Repsol, REP, -5.5%
ENI, E, -3.7%
Leveraged S&P, BXUB, fell 3.8% lower.
Total Bonds, BND, traded barely up.
Junk Bonds, JNK, fell sharply lower. The fall lower in junk bonds gives proof positive investing long in yen based carry trades is over; and that the liquidity trade coming from anticipation of the US Federal Reserve Quantitative Easing 2 is also over.
Tyler Durden in article The End Of The Dollar Carry Trade? presents the CFTC Commitment of Traders Report For The US Dollar showing that Net US Dollar Position, rose November 5, 2010, and that Gross US Dollar Positions fell as of that date; and remarks: “Granted, while some of the recent spike in short interest has been covered, there are still just over a whopping 7.5k contract shorts that need to be covered before a reversion to the recent trendline. This is why we are currently seeing a massive unwind in the dollar short carry trade, and why once again rumors that macro funds are slowly and quietly receiving billions in margin calls behind the scenes.
The chart of the small cap value, RZV, shares relative to the small cap growth shares, RZG, RZV:RZG, is a metric of currency driven investment liquidity. Its fall from 0.800 on November 5, 2010, establishes that, the liquidity trade ended on that date.
November 5, 2010 was an inflection point, that is a tipping point, in world economic and political history.
On November 5, 2010, the world passed from an age of investment liquidity provided by the world central banks lowering of interest rates and by quantitative easing and by Bank of Japan ZIRP yen carry trade lending and passed into the age of deleveraging and the age of debt deflation.
Beginning on November 5, 2010, the bond traders seized control of both long-term interest rates, such as the Interest Rate on The US 30 Year Government Bond, $TYX, and short term rates that were formerly under the control of the world central bankers.
Bond vigilantes will continually be taking interest rates higher as the US Federal Reserve’s Quantative Easing constitutes monetization of debt and European Sovereign debt and other sovereign debt issues remain substantially unaddressed.
World Corporate Bonds, PICB, fell 1.1% and World Government Bonds, BWX, fell 0.8%, and Emerging Market Bonds, EMB, fell 0.9%
Peak bond wealth, BND, was achieved on November 4, 2010 at 82.96. Bond deflation is definitely underway, despite US Government Treasuries rising on the stronger US Dollar and risk aversion to stocks.
TLT, 10 to 20 Year US Government Bonds
EDV, 30 Year US Government Bonds
The chart of the gold, GLD, shows a strong rise on concern over the European sovereign crisis. And to think that at one time the euro yen carry trade strongly drove gold. And for the longest time gold rode oil’s coat tale as speculators drove up the price of oil.
The chart of gold in terms of Australian dollars, GLD:FXA, shows a huge jump up, documenting that gold is now the world’s sovereign currency and storehouse of investment value.
The junior gold mining shares, GDXJ, fell lower; as did the HUI precious metal mining shares, ^HUI, traded by GDX, documenting that the liquidity trade and yen carry trade are investment tools of a by gone era.
IV … Might A Sovereign And A Seignior Arise Out Of Europe’s Sovereign Crisis To Secure The Euro As A Currency And Provide Stability To All Nations Involved?
Ireland and its banks received a seigniorage bailout from The EU, IMF, and the UK on November 22, 2010. This lending establish the UK as a fully integrated part of a European region of global governance.
Jean Claude Trichet, Dominique Strauss-Khan and David Cameron are now Ireland’s sovereigns and seigniors. Their supranational budget rules impose regional global governance, specifically economic governance, upon Ireland. The bailout clearly constitutes intensified fiscal federalism in the Eurozone, and unifies not only Ireland, but the UK into a European region of global government. The Leaders’ Agreement waived Ireland’s national sovereignty. It is no longer a sovereign nation state. This is simply part of the vision of the Club of Rome in 1974, when it called for the creation of ten regions of global governance. Ireland’s budget is now directed by others from outside and this means more internal devaluation, that is more austerity. Democracy died in Ireland as Brian Cower has announced that he will dissolve the government as soon as the bailout agreement and country budget is approved.
International Monetary Fund chief Strauss-Kahn, in a speech at the European Banking Congress in Frankfurt, Germany, spoke of sovereign crisis according to Phillip Aldrick of The Telegraph. The crisis is now held in abeyance, it has not been abated.
The issue has its roots in that when people participate in a currency union, there are different interest rates, cultures, trade account balances, and labor rates, as well as known and unrevealed debts. History shows that currency unions usually fail.
Add to those issues is the issue of credit default swaps. These derivatives, these modern-day inventions, shut down sovereign debt issuance. When a sovereign bond or even a corporate bond buyer, sees a mile high pile of these derivatives, he must turn away. CDS have literally destroyed both sovereign debt seigniorage and business lending. These should have been abolished from the get go; but were not; in fact their development and use were encouraged by both Alan Greenspan and Robert Rubin in Congressional testimony.
A currency union is very appealing at first to weak nations, in this case Portugal, Italy, Greece and Spain, because as investors get wind of its formation, they buy bonds in the weaker nations on the reasonable belief that sovereign interest rates will decline. As interest rates do decline, then their investment soars in value. But then as time wears on and the weaker nations enjoy the benefits of a common currency, their banks abandon lending discipline, and the country abandons fiscal discipline. Development of sports stadiums and other economically unproductive infrastructure occurs, and state employment rises with the hiring of teachers and other professionals. Then debt soars and interest rates rise; and the weaker economies find themselves unable to achieve competitiveness inside a currency union, without the option of currency devaluation at their disposal.
So the only remedy for the Euro sovereign crisis, is for a sovereign to arise at the center of the union, and demand, and enforce internal devaluation (internal depreciation), that is austerity measures in the weak countries.
Greece was extended seigniorage aid in May 2010. This was seigniorage triage, provided to a dying country in an currency union. There is no way it will ever be able to pay back its loans, since it lacks export sources of revenue, and any sale of state assets are unlikely, and as Greece wants to maintain majority interest in all the industries involved, and as it has little in the way of exports, and is unlikely to be able to crack down on tax cheaters.
Since the European Sovereign Debt Crisis started in November 2009, the European Central Bank, ECB, has been buying distressed bonds from banks all over Europe. It has become the central bank for Portugal, Italy, Ireland, Greece and Spain. It has effectively provided sovereign debt seigniorage for the economic weaker periphery countries; and in so doing it has become what is known in economic terms as a "bad bank". Open Europe in PDF document The Irish Bailout: What Are The Options And What Will They Solve? relates: The ECB, not least due to worries that it’s turning into a “bad bank”, now wants to cut down on its liquidity supply to banks in Ireland and elsewhere.
There is a trigger for all things economic. It was German Chancellor Angela Merkel's call for a Permanent Crisis Mechanism, a commonly accepted tool which would be used in the event of a sovereign default, as Econogirl reported on October 28, 2010, that lead to a blast higher in periphery European sovereign debt interest rates in November 2010, as well as a run on Ireland’s banks, that brought about the negotiation of seigniorage aid for Ireland.
I ask why would Mrs. Merkel suggest such a thing? I believe it is because the Germans, knowing that they have a strong and export productive economy, can do without a common currency. The announcement of Germany to push for the Permanent Crisis Mechanism, together with the Basel III requirements is the kiss of death for all of the all European Financial Institutions, EUFN, and accounts for the 4.5% fall in Banco Santander Madrid, STD on November 22, 2010 Lending via European banks died, November 22, 2010 with the announcement of a Ireland bailout agreement. European Financial Institutions now stand as white washed tombs of a prior age of investment liquidity.
In as much as Mr Strauss-Kahn says there is a sovereign crisis, I believe a sovereign will arise to address the crisis. Perhaps this person will be Herman van Rompuy.
And I believe the sovereign will be accompanied by a seignior, an old English word meaning top dog banker who takes a cut. He will provide credit seigniorage to all European Financial Institutions and corporations and persons residing in the currency union.
And in so doing he will command great authority. An example of such authority is EU’s Economic Affairs Commissioner Olli Rehn’s October 2, 2010 statement in FT article, Ireland May Have To Sacrifice Low Tax Status: “In the coming decade, it’s a fact of life that after what has happened, Ireland will not continue as a low-tax country, but it will rather become a normal tax country in the European context,” he said.
I believe the seignior (perhaps it will be Mr. Rehn), will pave the way for a global currency system, to replace all current currencies, as they expire in the current bout of global debt deflation that commenced that November 5, 2010, when the currency traders sold most of the world’s currencies, as the bond vigilantes sustained the Interest Rate on the US 30 Year Government Bond above 4%, causing the US Dollar, to rise to 76.59; it closed even higher today at 79.68.
Evidence abounds, and is clear, cogent and convincing that fiscal seigniorage has failed in Europe. As the end of credit approaches, then a Supra Government, of the Sovereign And Seignior, will be the Federal Government of Europe, and sole fiscal and credit seignior. This triune power will be the first, last and only provider of credit in the Eurozone.
There be many Austrian Economists, who being anarcho capitalists, would love to see Germany and its former currency revived, but that is a most unlikely future scenario.
Disclosure: I am invested in gold bullion