Financial Market Report For August 2, 2011
There was a massive unwinding of carry trade investing today as seen in the iPath Optimized Currency Carry ETN ICI Weekly, ICI, falling lower, causing world stocks, ACWI, the emerging markets, EEM, and the BRics, EEB, to fall sharply lower.
Banks at the forefront of carry trade investing fell lower; these included South Korea Bank, KB Financial, KB, and Sumitomo Mitsui Financial Group, SMFG, Banco de Chile, BCH, as the Swiss Franc, FXF, rose, the Japanese Yen, FXY, traded unchanged, and the worlds major currencies, DBV, commodity currencies, CCX, and emerging market currencies, CEW, fell lower. The world passed through peak currency in late July 2011, marking the fall of the Milton Friedman Free To Choose Floating Currency regime that served as a basis of neoliberalism, as the US Dollar, $USD, is rising and the world currencies are sinking. The Chinese Yuan, CYB, rose, as did the Russian Ruble, XRU; but all the other ETF traded world currencies tanked; this includes FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, BZF, and BNZ.
Neoauthoritarianism is market by deleveraging. Unwinding of currency carry trade investments drove Austria, EWO, Sweden, EWD, Norway, NORW, South Korea, EWY, Australia, EWA, South Africa, EZA, India, INDY, Mexico, EWW, and Brazil, EWZ, lower. New Zealand, BNZ, Thailand, THD, and Indonesia, IDX, finally turned lower.
India Small Caps, SCIN, and Australia Small Caps, KROO, were a major international small stock loss leaders of the day. World Emerging Small Cap Shares, EWX, and World Small Cap Shares, VSS, turned lower.
European Shares, VGK, Germany, EWG, Italy, EWI, Spain, EWP, and the European Financials EUFN, lost significantly, as the contagion of the European Sovereign Debt Crisis spread as Mike Mish Shedlock reports Spain, Italy, Belgium bond spreads hit euro record. And Ambrose Evans Pritchard of The Telegraph reports America is merely wounded, Europe risks death. And he relates The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008. “The three-month Euribor OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. "Europe's money markets are undoubtedly starting to freeze up," said Marc Ostwald from Monument Securites."It's not as dramatic as pre-Lehamn but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis."
And Reuters reports Italy under fire in widening euro debt crisis.
Transportation, IYT, and Industrial, IYJ, shares led the way down today. Dow Theory communicates that a major bear market is now underway. Midcap Growth, JKH, fell hard as did Real Estate, IYR.
Retail shares, XRT, and Internet Retail, HHH, lost significnatly. Biotechnology, IBB, and XBI, Consumer Service, VCR, Airlines, FAA, Leveraged Buyouts, PSP, Shipping, SEA, Design and Build, FLM, Homebuilders, ITB, Small Cap Energy, PSCE, Steel Manufacturers, SLX, Small Cap Consumer Discretionary, PSCD, Small Cap Industrial, PSCI, Pharmaceuticals, XPH, Leisure and Entertainment, PEJ, Gaming, BJK, Biotechnology, XBI, and IBB, Cloud Computing, SKYY, Networking, IGN, Semiconductors, XSD, Alternative Energy, GEX, Copper Mining, COPX, Aluminum Producers, ALUM, Timber and Paper Producers, WOOD, Coal, KOL, Banking, KBE, Water Utilities, FIW, Agriculture, MOO, Investment Bankers, KCE, Metal Manufacturing, XME, Energy Services, IEZ, and OIH, Energy, XLE, Small Cap Health Care, PSCH, and the Russell 2000, IWM, fell sharply.
The death cross seen in the chart of banking, KRE, gave investors a clarion call to exit stocks in mid July.
Timber, CUT, was a major commodity loss leader.
Small cap pure value shares, RZV, fell more than small cap pure growth shares, RZG, communicating that competitive currency devaluation, that is competivive currency deflation is underway. this is seen in the currency leverage curve weekly, RZV:RZG, manifesting a dark cloud covering candlestick today.
There are many indicators of the failure of the seigniorage of Neoliberalism. One is world major currencies, relative to emerging market currencies, DBV:CEW Monthly, turning lower in May 2011, as concern over the major country’s sovereign debt arose. Another is the world stocks relative to world government bonds, VT:BWX, turning lower in April 2011. And another is the rise seen in FactorShares 2X Gold/ Short S&P, FSG, which exploded higher.today.
Gold, GLD, arose as the world’s sovereign currency and storehouse of investment value.
Bonds, BND, rose on a short squeeze in US Treasuries as TMF, ZROZ, EDV, and Mortgage Backed Bonds, MBB, and GNMA mutual funds such as PDMIX, rose, taking BLV, and LQD, higher. Junk bonds, JNK, turned lower with stocks. World government bonds, BWX, experienced debt deflation, that is currency deflation, and traded lower.
In today’s news:
Open Europe reports Contagion fears continue to hit Italian economy; Cyprus could be the next country to seek a bailout. Fears over the eurozone crisis continued to hit Italy with its cost of borrowing topping 6% and its leading banks seeing huge falls in their stock prices. Shares in Unicredit, Intesa Sanpaolo and Monte dei Paschi, three of the country’s largest banks, were suspended temporarily in an attempt to halt their massive single day declines. Spain fared only slightly better, seeing its stock market fall and borrowing costs increase to 6.21%.
Meanwhile, the Bank of Cyprus, the largest Cypriot bank, warned yesterday that “there is an imminent threat of Cyprus joining the European Union’s support mechanism”, meaning another bailout could be just around the corner. The bank called “for immediate and effective action" to shore up the country’s finances.
In an interview with Le Figaro, Luxembourg’s Prime Minister Jean-Claude Juncker has said that he is in favour of having a ‘Eurozone Council’ of heads of state and government, chaired by European Council President Herman Van Rompuy. Separately, French MPs will vote on France’s contribution to the second Greek bailout in September, when an extraordinary session will be convened. France’s public debt will increase by up to €15bn by 2014, although the pace will depend on Greece’s financing needs, reports Les Echos.
Writing in the FT, Willem Buiter – Chief Economist at Citigroup – argues that the latest instalment of the eurozone crisis “demonstrates that fiscal federalism is not going to happen.” This leaves the option of disbanding or “a ‘you break it you own it’ Europe where insolvency of a sovereign is settled between the taxpayers of that sovereign and its creditors, without any permanent financial support from any other nation’s taxpayers.” In Le Monde, France’s former Foreign Minister Hubert Védrine argues that federalism is “no miracle solution” to the eurozone crisis. FT CityAM WSJ Corriere della Sera Repubblica EUobserver Les Echos FT 2 WSJ 2 Le Figaro: Juncker Le Figaro Les Echos 2 Presse Welt Telegraph Irish Times Guardian Guardian 2 Guardian 3 Guardian 4 Guardian 5 FT: Buiter FT: Editorial WSJ: Heard on the Street Le Monde: Védrine El País El País 2
Associated Press reports Americans cut spending for first time in 20 months.
Neoliberalism saw Great Britain and America rule the world; it as Putin relates The U.S. is a parasite" on global economy. But in contrast, Neoauthoritarianism, when fully mature will see powerful leaders ruling in all of mankind’s seven institutions, and in state corporatism over ten regions, as called for by the Club of Rome in 1974. The New York Times reports Asia seeks to cut its ties to western borrowers.
Neoliberalism was characterized by Prosperity; while Neoauthoritarianism is characterized by Austerity. Bloomberg reports Debt Deal puts U.S. on austerity path as economy falters
Between The Hedges relates the following.
Bloomberg reports Italy, Spain 10-Year Bond Spreads Reach Euro-Era Record on Growth Concern. Italian and Spanish 10-year bonds dropped, pushing yields up to euro-era records versus benchmark German bunds, on concern that slowing growth will hamper efforts to tame the nations’ debt loads. “This has all the features of a self-fulfilling crisis,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Plc in London. “The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve.” The yield on 10-year Italian bonds rose six basis points to 6.06 percent at 3:20 p.m. in London. It earlier surged to 6.25 percent, the most since November 1997. The 4.75 percent security maturity in September 2021 fell 0.39, or 3.9 euros per 1,000- euro ($1,427) face amount, to 90.845. That pushed the difference in yield, or spread, over bunds, to as much as 384 basis points, the most since before the euro was introduced in 1999.
“Suddenly, Italy joined the other peripherals,” said Justin Knight, a European rate strategist at UBS AG in London. “Investors are, in general, overweight Italy versus other peripheral markets, and it’s going to be a difficult position to unwind.” Spanish 10-year yields rose four basis points to 6.24 percent, after climbing to 6.46 percent, the most since 1997. That pushed the spread over similar-maturity German debt as high as 404 basis points.
The crisis risks worsening should the Spanish yield touch 6.5 percent, RBS’s Sian said. “Anything materially above that risks an acceleration like we saw for Greece, Ireland and Portugal,” he said. “The political willingness to backstop the European Union is now what the market needs.” The cost of insuring against default on European sovereign and corporate debt rose, according to traders of credit-default swaps. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments jumped 11 basis points to 288, approaching the all-time high closing price of 306.5 set July 18. The 10-year euro swap spread, which shows the difference between the swap rate and the yield on benchmark German bunds and is used as a measure of perceived risk, rose for a seventh day, climbing as high as 73 basis points, the most since January 2009. The yield premium investors demand to hold Belgian 10-year bonds instead of benchmark bunds widened to a euro-era record of 207 basis points, even as demand improved at a debt sale.
Bloomberg reports Auto Sales Stall as Unemployment Curbs Chance of Return to U.S. Peak: Cars. U.S. auto sales have stalled, casting doubt on a rebound this year as persistent unemployment and tighter lending deter buyers. Light-vehicle deliveries in July, to be released tomorrow, may have run at an 11.8 million seasonally adjusted annual rate, the average estimate of 12 analysts surveyed by Bloomberg. That would trail the 12.5 million rate in the first half. The auto industry may lose 1.5 million in projected sales in 2011, according to consultant AlixPartners LLP. The economy isn’t picking up as fast as anticipated, and the drag may continue beyond this year, AlixPartners said. That may put a return to average annual sales of 16.8 million vehicles from 2000 to 2007 out of reach. Unemployment reached the highest level this year in June. “This curve of unemployment looks like it’s got a lot of legs,” Mark Wakefield, an AlixPartners director in Southfield, Michigan, said in a telephone interview. “This is one of the first recent cycles where demand is not going to go back above its prior peak, because there are just so many structural things that are different this time around.”
Reuters reports Italian Banks Caught in Sovereign Debt Crossfire. Big holdings of Italian bonds by the country's banks are making them a proxy for funds responding to debt concerns by cutting their exposure to Italy. Italian banks had hitherto weathered the financial crisis better than their European peers, thanks to a tradition of conservative lending and relatively limited exposure to riskier assets, such as Greek bonds. But that inward culture, once seen as a strength at times of market turbulence, is now being perceived as a weakness -- making the banks inextricably linked to the fate of Italy's borrowing costs. Shares in Italy's two biggest banks, UniCredit and Intesa Sanpaolo have dropped about 20 percent since investors began dumping Italian assets at the start of July.
Egypt, EGPT, fell 3.9% as Wall Street Journal reports Egyptians Turn Against Liberal Protesters. Mobs of ordinary Egyptians joined with soldiers to drive pro-democracy protesters from their encampment in Tahrir Square here Monday, showing how far the uprising's early heroes have fallen in the eyes of the public.
Six months after young, liberal activists helped lead the popular movement that ousted President Hosni Mubarak, the hard core of these protesters was forcibly dispersed by the troops. Some Egyptians lined the street to applaud the army. Others ganged up on the activists as they retreated from the square that has come to symbolize the Arab Spring. Squeezed between an assertive military and the country's resurgent Islamist movement, many Internet savvy, prodemocracy activists are finding it increasingly hard to remain relevant in a post revolutionary Egypt that is struggling to overcome an economic crisis and restore law and order.