A Quick Glance at News (22/06/2012)

Asian stocks fell, nearly erasing this week’s gain, and the Indian rupee slid to a record low as data added to signs of a U.S. economic slowdown. Bond risk rose after Moody’s Investors Service cut ratings for global banks.

Wall Street suffers worst loss in three weeks, Stocks posted the worst day in three weeks on Thursday on mounting evidence that slowing manufacturing growth worldwide threatened corporate profits.

Ratings agency Moody's downgraded many of the world's biggest banks on Thursday, lowering credit ratings of 15 companies by one to three notches.

The Indian rupee weakened beyond the psychologically important 57 per dollar mark on Friday, hitting a record low for a second consecutive session, with traders seeing no signs of any central bank intervention yet.

Morgan Stanley, one of the most closely watched firms, had its long-term debt rating lowered by just two notches, one level less than had been expected, and its stock rose in after-hours trading. The downgrade left Morgan Stanley more highly rated than Bank of America Corp (BAC.N) and Citigroup (C.N) but a step below Goldman Sachs Group (GS.)

Crude-oil prices bounced off October lows but stayed below $80 a barrel in electronic trading Friday, as the dollar weakened and U.S. equity futures edged higher.

Gold gave up early gains on Friday and was heading for its biggest weekly loss since December after growing fears of a global economic slowdown hit commodities, prompting investors to seek safety in the U.S. dollar.

Lower gold prices prompted buying by jewelers in Hong Kong, although the low volume suggested consumers were waiting for further declines

Money managers raised their net length in gold by 1,258 lots, or about 1 percent, to 99,684 lots in the week to June 12, as signs of slowing U.S. economic recovery and the euro zone debt crisis fuelled speculation of monetary stimulus from central banks around the world.

Euro's big four seek way out of crisis in Rome. The leaders of Germany, France, Italy and Spain will try to find common ground in Rome on Friday to restore confidence in the euro zone ahead of a full EU summit next week, with German Chancellor Angela Merkel likely to be outnumbered.

Prices of U.S-Treasuries edged down in Asia on Friday as investors took profits after an overnight rise, but concerns about slowing U.S. growth kept bonds in recent ranges.

China and Brazil have agreed a currency swap arrangement that enables each country to access up to $30 billion as part of efforts to build a financial buffer to help guard against a freeze up in global markets.

Microsoft Corp is looking at making its own Smartphone to kick start sales of its Windows mobile software, according to a Wall Street analyst who has followed the company for many years.

Samsung Electronics Co. said it will investigate a complaint that a new Galaxy S III Smartphone overheated, the same day the world’s top mobile-phone maker began U.S. sales of the latest model in its best-selling series.

 Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae

A Quick Glance at News (22/06/2012)

Asian stocksfell, nearly erasing this week’s gain, and the Indian rupee slid to a record low as data added to signs of a U.S. economic slowdown. Bond risk rose after Moody’s Investors Service cut ratings for global banks.

Wall Street suffers worst loss in three weeks, Stocks posted the worst day in three weeks on Thursday on mounting evidence that slowing manufacturing growth worldwide threatened corporate profits.

Ratings agency Moody's downgraded many of the world's biggest banks on Thursday, lowering credit ratings of 15 companies by one to three notches.

The Indian rupee weakened beyond the psychologically important 57 per dollar mark on Friday, hitting a record low for a second consecutive session, with traders seeing no signs of any central bank intervention yet.

Morgan Stanley, one of the most closely watched firms, had its long-term debt rating lowered by just two notches, one level less than had been expected, and its stock rose in after-hours trading. The downgrade left Morgan Stanley more highly rated than Bank of America Corp (BAC.N) and Citigroup (C.N) but a step below Goldman Sachs Group (GS.)

Crude-oil prices bounced off October lows but stayed below $80 a barrel in electronic trading Friday, as the dollar weakened and U.S. equity futures edged higher.

Gold gave up early gains on Friday and was heading for its biggest weekly loss since December after growing fears of a global economic slowdown hit commodities, prompting investors to seek safety in the U.S. dollar.

Lower gold prices prompted buying by jewelers in Hong Kong, although the low volume suggested consumers were waiting for further declines

Money managers raised their net length in gold by 1,258 lots, or about 1 percent, to 99,684 lots in the week to June 12, as signs of slowing U.S. economic recovery and the euro zone debt crisis fuelled speculation of monetary stimulus from central banks around the world.

Euro's big four seek way out of crisis in Rome. The leaders of Germany, France, Italy and Spain will try to find common ground in Rome on Friday to restore confidence in the euro zone ahead of a full EU summit next week, with German Chancellor Angela Merkel likely to be outnumbered.

Prices of U.S-Treasuries edged down in Asia on Friday as investors took profits after an overnight rise, but concerns about slowing U.S. growth kept bonds in recent ranges.

China and Brazil have agreed a currency swap arrangement that enables each country to access up to $30 billion as part of efforts to build a financial buffer to help guard against a freeze up in global markets.

Microsoft Corp is looking at making its own Smartphone to kick start sales of its Windows mobile software, according to a Wall Street analyst who has followed the company for many years.

Samsung Electronics Co. said it will investigate a complaint that a new Galaxy S III Smartphone overheated, the same day the world’s top mobile-phone maker began U.S. sales of the latest model in its best-selling series.

 Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae

GOLD FUTURE

Demand for physical gold in key markets remained lackluster, meanwhile. Gold imports to India, historically the world's largest buyer, fell by $6.2 billion in the first two months of the fiscal year that began in April, compared with a year before, finance secretary R.S. Gujral said on Friday.
Gold buying in India has been hurt by weakness in the rupee, which pushed local prices to record highs, and the federal government's decision to double import duty on gold to 4 percent. Gold imports have been widely blamed as one of the reasons for the country's widening current account deficit.
The market remained underpinned by demand from central banks, meanwhile. Russian newswire Interfax reported a 15.6 tone rise in Russia's gold reserves in May.

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae

GOLD FUTURE

Demand for physical gold in key markets remained lackluster, meanwhile. Gold imports to India, historically the world's largest buyer, fell by $6.2 billion in the first two months of the fiscal year that began in April, compared with a year before, finance secretary R.S. Gujral said on Friday.
Gold buying in India has been hurt by weakness in the rupee, which pushed local prices to record highs, and the federal government's decision to double import duty on gold to 4 percent. Gold imports have been widely blamed as one of the reasons for the country's widening current account deficit.
The market remained underpinned by demand from central banks, meanwhile. Russian newswire Interfax reported a 15.6 tone rise in Russia's gold reserves in May.

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae

Who Will Take First Swing at Euro Crisis—Fed or ECB?

Traders are handicapping which central bank will come out swinging first — and the odds right now are not on the European Central Bank.

 So it would be a surprise if the European Central Bank takes action at its rates meeting Wednesday morning. The meeting is followed by an 8:30 a.m. ET press briefing by ECB President Mario Draghi.

Later in the day, the release of the Fed’s beige book, a roundup of economic activity region by region, at 2 p.m. ET could provide clues on the strength of the U.S. economy, and therefore on whether the Fed sees enough weakness to consider a new round of easing, either at its June meeting or later. 

But more importantly, Fed watchers await the words of Fed Vice Chair Janet Yellen, who speaks in Boston at 7 p.m. Wednesday evening, and also Fed Chairman Ben Bernanke, who testifies Thursday morning before the Joint Economic Committee. 

“I actually think Yellen says more than Bernanke. I think Bernanke just gives an update on the economy,” said J.P. Morgan economist Michael Feroli. Yellen is one of the more dovish voices on the Fed, so the market listened several weeks ago when she said there was a high threshold for quantitative easing .

Since then, a weaker stream of economic data and in particular, the poor May jobs report, has brought back the idea of more Fed easing. Economists have been shaving GDP expectations in the last several days, and J.P. Morgan now sees 2012 GDP at 2.1 percent, from 2.3 percent. 

The Fed’s quantitative easing programs have involved purchases of Treasury securities, but another round could also include mortgages. The Fed also may just extend its “Operation Twist,” which expires at the end of the month. That program involves the sale of shorter-dated Treasurys and the purchase of a similar amount of longer-dated notes and bonds. Unlike QE, Twist does not expand the Fed's balance sheet.

“I’m not so convinced we see a large QE announced. If we do see anything, I think it’s an extension of Operation Twist and perhaps pushing back the rates guidance,” said Feroli. 

RBS senior Treasury strategist John Briggs says the bond market is already pricing in an extension of Operation Twist, and he believes the Fed would extend it until the end of the year.

The Treasury market Tuesday saw some selling and rates moved higher. The 10-year yield, which sunk below 1.5 percent last week for the first time, rose to 1.56 percent. 

“Yields are rising. For once, we didn’t have the steady drip of bad news that is required to keep 10-year yields below 1.5 percent,” said Briggs. “I don’t’ think anyone thinks Europe is resolved but for once we didn’t have data in the U.S. disappoint.” 

The ISM nonmanufacturing survey, reported Tuesday, was slightly better than expected at 53.7, up from 53.5 in April. It is the first in a recent string of economic reports that didn’t come in below expectations, a pattern that has raised concerns the effects of the European sovereign crisis are hurting U.S. growth.

“It feels like we’ve taken the first part of the storm, and we’re sitting in the eye waiting for the winds to pick up,” said Briggs. 

The Dow Tuesday snapped a four-day losing streak, ending up 26 points at 12,127, and the S&P 500 rose 7 to 1285. The euro lost ground against the dollar, ending the day at 1.2453. 

Year of the Draghi

The ECB is widely expected to hold back on rate cuts or other actions until after the Greek election June 17 and the European leaders summit at the end of the month.

“There’s no reason or them to wait, but we do think they hold out until July,” said Feroli.

Alan Ruskin, G-10 currency strategist at Deutsche Bank, also expects the ECB to hold off on any move. “I wouldn’t be too carried away with expectations, given that it all revolves around events,” he said. “They’re going to be inclined to keep their power dry, and just wait on events in Greece and to some extent, events in Spain.” 

Euro-zone politicians are now the ones who should act, he said. “There’s a feeling the ball is more being hoisted into the politicians’ court," Ruskin said. "They’ve got to make some decisions on things like a banking union, deposit insurance and bank recapitalizations. Those issues are best addressed at the political level.”

Ruskin said Draghi may sound more dovish when he speaks Wednesday. “He can certainly make clear they have a number of tools at their disposal, without expanding too much on it. Clearly, they have a mixture of a different things they could do. They could still cut official rates. They could still come up with another LTRO (liquidity program). They could use their strategic market program to buy bonds. They could ease collateral rules.” 

But Marc Chandler, chief currency strategist at Brown Brothers Harriman says there’s a case to be made for an ECB move as early as Wednesday. “I suspect there’s a greater chance they do something tomorrow,” he said. Chandler said Draghi may prove to be more proactive than the market is expecting.

“He cut interest rates in his first two meetings, and in his second meeting, he told us about the LTRO. The market confuses Draghi and (former ECB President) Trichet,” Chandler said.

In addition to the ECB, the Bank of England holds its rate meeting Thursday and it could take further easing actions. Chandler said there is also speculation China may move on rates. 

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae

Who Will Take First Swing at Euro Crisis—Fed or ECB?

Traders are handicapping which central bank will come out swinging first — and the odds right now are not on the European Central Bank.

 So it would be a surprise if the European Central Bank takes action at its rates meeting Wednesday morning. The meeting is followed by an 8:30 a.m. ET press briefing by ECB President Mario Draghi.

Later in the day, the release of the Fed’s beige book, a roundup of economic activity region by region, at 2 p.m. ET could provide clues on the strength of the U.S. economy, and therefore on whether the Fed sees enough weakness to consider a new round of easing, either at its June meeting or later. 

But more importantly, Fed watchers await the words of Fed Vice Chair Janet Yellen, who speaks in Boston at 7 p.m. Wednesday evening, and also Fed Chairman Ben Bernanke, who testifies Thursday morning before the Joint Economic Committee. 

“I actually think Yellen says more than Bernanke. I think Bernanke just gives an update on the economy,” said J.P. Morgan economist Michael Feroli. Yellen is one of the more dovish voices on the Fed, so the market listened several weeks ago when she said there was a high threshold for quantitative easing .

Since then, a weaker stream of economic data and in particular, the poor May jobs report, has brought back the idea of more Fed easing. Economists have been shaving GDP expectations in the last several days, and J.P. Morgan now sees 2012 GDP at 2.1 percent, from 2.3 percent. 

The Fed’s quantitative easing programs have involved purchases of Treasury securities, but another round could also include mortgages. The Fed also may just extend its “Operation Twist,” which expires at the end of the month. That program involves the sale of shorter-dated Treasurys and the purchase of a similar amount of longer-dated notes and bonds. Unlike QE, Twist does not expand the Fed's balance sheet.

“I’m not so convinced we see a large QE announced. If we do see anything, I think it’s an extension of Operation Twist and perhaps pushing back the rates guidance,” said Feroli. 

RBS senior Treasury strategist John Briggs says the bond market is already pricing in an extension of Operation Twist, and he believes the Fed would extend it until the end of the year.

The Treasury market Tuesday saw some selling and rates moved higher. The 10-year yield, which sunk below 1.5 percent last week for the first time, rose to 1.56 percent. 

“Yields are rising. For once, we didn’t have the steady drip of bad news that is required to keep 10-year yields below 1.5 percent,” said Briggs. “I don’t’ think anyone thinks Europe is resolved but for once we didn’t have data in the U.S. disappoint.” 

The ISM nonmanufacturing survey, reported Tuesday, was slightly better than expected at 53.7, up from 53.5 in April. It is the first in a recent string of economic reports that didn’t come in below expectations, a pattern that has raised concerns the effects of the European sovereign crisis are hurting U.S. growth.

“It feels like we’ve taken the first part of the storm, and we’re sitting in the eye waiting for the winds to pick up,” said Briggs. 

The Dow Tuesday snapped a four-day losing streak, ending up 26 points at 12,127, and the S&P 500 rose 7 to 1285. The euro lost ground against the dollar, ending the day at 1.2453. 

Year of the Draghi

The ECB is widely expected to hold back on rate cuts or other actions until after the Greek election June 17 and the European leaders summit at the end of the month.

“There’s no reason or them to wait, but we do think they hold out until July,” said Feroli.

Alan Ruskin, G-10 currency strategist at Deutsche Bank, also expects the ECB to hold off on any move. “I wouldn’t be too carried away with expectations, given that it all revolves around events,” he said. “They’re going to be inclined to keep their power dry, and just wait on events in Greece and to some extent, events in Spain.” 

Euro-zone politicians are now the ones who should act, he said. “There’s a feeling the ball is more being hoisted into the politicians’ court," Ruskin said. "They’ve got to make some decisions on things like a banking union, deposit insurance and bank recapitalizations. Those issues are best addressed at the political level.”

Ruskin said Draghi may sound more dovish when he speaks Wednesday. “He can certainly make clear they have a number of tools at their disposal, without expanding too much on it. Clearly, they have a mixture of a different things they could do. They could still cut official rates. They could still come up with another LTRO (liquidity program). They could use their strategic market program to buy bonds. They could ease collateral rules.” 

But Marc Chandler, chief currency strategist at Brown Brothers Harriman says there’s a case to be made for an ECB move as early as Wednesday. “I suspect there’s a greater chance they do something tomorrow,” he said. Chandler said Draghi may prove to be more proactive than the market is expecting.

“He cut interest rates in his first two meetings, and in his second meeting, he told us about the LTRO. The market confuses Draghi and (former ECB President) Trichet,” Chandler said.

In addition to the ECB, the Bank of England holds its rate meeting Thursday and it could take further easing actions. Chandler said there is also speculation China may move on rates. 

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae
 

Fed Will Ease Monetary Policy This Week: Goldman’s Hatzius

The U.S. central bank will most likely ease monetary policy when it meets this week as recent data point to a worsening labor market and the crisis in Europe intensifies, Goldman Sachs said.

 The Federal Open Market Committee will likely say it would buy assets such as mortgage-backed securities and U.S. Treasurys when it meets for a two-day meeting starting Tuesday, Jan Hatzius, the investment bank’s Chief U.S. Economist said in a report on Monday.

“We would be quite surprised if we saw no easing this week,” Hatzius wrote in the report.

The Federal Reserve may also extend Operation Twist, he added, although he does not find the “strategy very attractive.” The program – which involves the Fed selling medium-term bonds and using the proceeds to buy longer-term ones, such as 10-year Treasurys, effectively driving down longer-term interest rates – runs out at the end of June.

“We believe that an extension of Operation Twist could well be insufficient on its own and could thus be followed by additional easing action before long,” Hatzius said.

Instead, a “sufficiently large program” that involves mortgage-backed securities would help, he said, adding that while “it is unlikely to be very powerful, that doesn't mean Fed officials shouldn't do it.” 

“The risk of inflation is remote, and even when it becomes less remote Fed officials should be easily able to tighten policy sufficiently,” Hatzius wrote.

In addition, the Fed could opt for unconventional means such as promising not to raise rates until the unemployment rate has fallen to a specific level and a nominal GDP level target, according to the report.

While analysts agree that the U.S. economy faces deep problems, not everyone is expecting measures beyond extending Operation Twist.

“I think it probably wants to save some bullets for later on in the year, once we get some clearer sense of where Europe is going and the impact that it has,” Rob Rennie, Global Head of FX Strategy with Westpac Bank in Sydney, told on Tuesday. “So our expectations are only for an extension of Operation Twist, no more.” 

Gerald Hanweck, Professor of Finance at George Mason University, said what’s more likely to happen is that the Fed would hold off on easing until the next meeting. 

“I think the Fed has pretty much spent its bullets. It’s run out of steam; its QEs are having less and less impact on the real economy,” Hanweck told CNBC. “There are members who are really not in favor of having any more expansion, any more quantitative easing, including Operation Twist. So it is very likely that what might happen is they’ll put it off until the next meeting because they’re supposed to be done with the current operation Twist by the end of June.”

Tax cuts to help individuals and the corporate sector, as well as incentives to get businesses to invest are what will help the U.S. economy, Hanweck said. The Fed could also adopt “extreme” measures such as boosting demand for corporate bonds. 

“It can buy, if it wants to go to an extreme, it can start buying short-term commercial paper. And that’s certainly one of the areas where it has an option. It’s an extreme option but they could do it,” he added.

Asad Khan
Financial Analyst  (CFB)
050-8774861
asad@cfb.ae