The Mole says he mainly trades currencies but, as the markets are so closely related, he keeps a close eye on stocks and Oil too.
Hank Speaks, Stocks Sink
The Dow Jones gave back almost 70% of last week’s historic gains in just one session yesterday as soon as end month rebalancing was out of the way. Financials, retailers and real estate stocks lead the rout.
Maybe it’s just me but I can’t help thinking that the increasingly erratic and flip-flop performances by Treasury Secretary Hank Paulson are really spooking the stock market. The other half of the double act, Fed Chairman Ben Bernanke, confirmed ZIRP was beckoning and mused about monetizing the debt. This news that they were indeed considering buying their own bond market sent yields to record lows. Has it really come to this? Now either Bernanke fears we are on the cusp of a Nippon style deflationary death spiral (cue The Vapours “Turning Japanese”) or we will end up like madcap Mugabe’s Zimbabwe. I hope the Fed’s printing presses are more reliable than my photocopier.
Today’s Market Moving Stories
- The US NBER committee back-dated the start of the American recession to December 2007.
- Another central bank interest rate cut, this time the Reserve Bank of Australia chopping by a full 1%. Sweden’s Riksbank look likely to follow suit Thursday after they brought forward their scheduled meeting. Mmmmm, maybe a whiff of large coordinated rates cuts this Thursday with the BoE and ECB also due to decide on the magnitude of their own reductions???
- The downturn in the global economy is accelerating. Yesterday’s PMI/ISM surveys showed the manufacturing sector at record lows across Europe, the US and perhaps even more importantly China. Note that the prices paid component in the US survey was the lowest since 1947, confirming the stunning pace of the decline in inflation.
- Our favourite banking analyst Meredith Whitney was on CNBC last night. Just before the close Meredith warned that banks are on the verge of pulling consumer credit card lines. That would further smash fragile consumer spending in 2009. She went on to further to dismiss the current “never neverland” bank’s earnings estimates and had particularly harsh words for beleaguered Citibank (whom she predicted would see fresh lows) and Wells Fargo (who she thinks are the biggest sell in the financials space right now).
- The big winner on the foreign exchange markets was the Japanese Yen, benefiting from its safe haven status, with USD/JPY hovering around the 93.00 level. Whilst the BoJ kept rates on hold at 0.3%, the currency will gain in relative terms as other central banks continue to take a chainsaw to rates. The currency may also garner support from the BoJ’s announcement that it will accept a wider range of corporate debt in their money market operations.
- Credit agency TransUnion are saying that delinquent consumer mortgages will nearly double over the next year. They predict that by the end of 2009, 7.17% of standard mortgages will be more than 60 days overdue. They blame the rise mainly on teaser rate mortgages rolling off and the new higher resets being unaffordable. This is one of the reasons that Helicopter Ben wants to start buying bonds. He want to depress the absolute yields on government securities and keep them steady there. Then people may be able to refinance at lower levels if spreads (the margin) over which domestic borrowers can fix their mortgage narrow.
- Chat in the German press that Commerzbank may be banned from paying a dividend for two years in response to calls that the €8.2bn recapitalisation of the bank was too cheap. Staying with Teutonic financials, Bayern LB are laying off 5,600 staff and are set to become a shadow of their former selves after accepting a €10bn bailout from the less than happy Bavarian government. So much for Deutscheland Uber Alles.
- US automakers are due to report final November sales figures today. These are going to make for dismal reading.
Sisyphus Had It Easy
And Finally… It’s Time For My Nomination For Best Video Parody Of The Year
Disclosures = None
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December 2nd, 2008 at 11:34 am
I can understand why bond yields are where they are, but why did the yields sink deeper when the US said it was considering buying its own debt… Wouldnt you have thought foregin investers would have demanded a high premium with this stuff of stuff going on…
Do you have alink to the article for this ?
Thanks
December 2nd, 2008 at 1:02 pm
Hi,
We have a few articles (mostly Views and Opinions pieces) that are on Bonds.
Here are a few that might interest you:
Bond Spaghetti Part I
http://www.paddypowertrader.com/blog/index.php/2007/06/22/bond-spaghetti-part-i/
Introduction to Bonds
Bond Spaghetti Part II
http://www.paddypowertrader.com/blog/index.php/2007/06/28/bond-spaghetti-part-ii/
More indepth analysis of Bonds
More Cred Than The Fed
http://www.paddypowertrader.com/blog/index.php/2008/03/27/more-cred-than-the-fed/
Bonds and Inflation
For more of our best articles, check out our “About the Markets” page:
http://www.paddypowertrader.com/financial-spread-betting/trader-academy/about-markets.php
December 2nd, 2008 at 1:19 pm
@justsome1
Don’t forget that higher yields equals lower prices. The first article from the comment above should explain that.
Here’s one blog that suggests what’s going on is just more risk aversion. http://blogs.wsj.com/marketbeat/2008/12/01/crowding-into-treasurys/ and here’s a link to the factual Bloomberg article on Bernanke’s comments: http://www.bloomberg.com/apps/news?pid=20601103&sid=a3ZLh8eb3Szc&refer=us
December 2nd, 2008 at 1:28 pm
Re Government bond yields.
In theory, with the debt issuance planned for 2009, bond yields should be higher (prices lower).
In reality, they aren’t because of huge risk aversion, safe haven flows, a guarantee that you will get your money back, deflationary fears, deleveraging, capital flight from emerging markets and now the prospect that the Treasury / fed will buy their own bonds. Japan did this in the ’90’s and it caused bond yields to remain far lower than one would have otherwise expected (Rinban scheme). Foreign holders of the bonds are of course thrilled (particularly the Chinese, Brazilians and Japanese, as this move under rights the current massive holdings and encourages them to continue recycling their current account surpluses into more vendor financing).
December 2nd, 2008 at 1:39 pm
Thanks for providing this info. However 2 question
Foreign holders of the bonds are of course thrilled (particularly the Chinese, Brazilians and Japanese, as this move under rights the current massive holdings and encourages them to continue recycling their current account surpluses into more vendor financing).
Why would forgein holderes of debt be delighted. i can see how the US would be delighted as they can borrow cheaprer with low yields. Why for instrance would china be delighted with this. If they lend money to the US now, the get a very low yield ?? So why so happy.
Also why would the FED expect the the cost of mortage financing to be reduced if the FED buys its own bonds in the market place… I understand the mortage rate is calculated from the 30 year yield but to-date with the yield heading south on the bond, mortage rates have not fallen and are the same as last year, give or take…
thanks
December 2nd, 2008 at 1:51 pm
Because these countries already hold trillions of these bonds which are now “insulated” from falling in value as they may have done given the level of issuance we are about to see. These countries operate a very long term mercantilist approach to their economies i.e. vendor financing. They have a huge trade surplus which they recycle back into US bonds to keep rates lower than they would otherwise be. Traditionally the US consumer, via Wall Mart and the car forecourts, have thanked them by consuming more of their products, the surplus from which they then reinvest and start the whole symbiotic cycle again. Their support is born from self interest. Who else would buy all their goods
December 2nd, 2008 at 1:53 pm
Bringing down the SPREAD over T bond yields at which mortgage rates are set is more tricky and sticky and will take longer to achieve. Its baby steps stuff and this is but one part of the jigsaw of schemes that the Fed / treasury are trying. We’re in largely uncharted waters here with plenty of pirates around.