Guest Commentary: Oil Prices Fell Very Sharply Yesterday, What's Next?

Oil prices fell very sharply yesterday. These falls were related, in part to the 2% bump in USD compared to EURO. What is headed for oil prices today?

Switzerland: Index SVME – PMI fell to 58.4 points in April

FOREX NEWS: As it became known today, index SVME – PMI in Switzerland fell to 58.4 points in April against the previous level of 59.3 points.
 

Eurozone: Final PMI in service sector fell to 56.7 points in April

FOREX NEWS: As it became known today, final PMI in the service sector of Eurozone fell to 56.7 points in April against preliminary level of 56.9 points and the level of 57.2 points in March.
 

China: PMI HSBC in service sector fell to 51.6 points in April

FOREX NEWS: According to the data released on Thursday, index PMI HSBC in the service sector of China fell to 51.6 points against the previous level of 51.7 points.
 

Gold Fell Sharply, Dollar Rallied on FOMC, But Trade Volume Is Weak

Trade volumes in FX was reported to be weak on the second trading day of the year, and while gold and commodities have seen sharp movements, it is not clear that this is the beginning of a multi-week correction trend. Gold, in particular, has lost more than $45 per ounce in another of its typical sharp swings, in anticipation of a stronger dollar, and some concern about the Chinese interest rates. FOMC minutes released Tuesday further boosted the USD-positive sentiment, since the committee appears to note some economic improvement, and refrains from making any kind of commitment to another round of QE. Core inflation, according to the minutes, has bottomed out, and while 2011 may see some upside momentum in prices, 2012 will bring price stability back. In short, we`re told, this is as far as the FOMC is prepared to go for now on QE, with no clarity provided on when on how the program will be ended.

We have seen such statements before. Even in October 2007, the FMOC member Randall Krozner was speaking about the importance of keeping rates at a reasonable level, about his concern about inflation expectations, and issuing forth stock statements in an air of seriousness, yet the same FOMC later brought rates to zero, as we all know, and there they have stayed till now. We don`t suggest that the Fed doesn`t know what it is doing, because that is the subject for a different debate, but we do mean that their statements on the outlook are no more important than any analyst report that would be issued with respect to their future actions. In other words, we don`t think that the Fed knows what it will do any better than the typical analyst, and the minutes are more valuable then analyst reports only because people short-term trade the markets with them.

The release emphasizes that the risks to the growth outlook are significant, focusing on the house price, and Eurozone debt crises. If these progress in a manner that weakens sentiment in the markets considerably, driving interest rates on mortgage, and consumer loans higher than where the Federal Reserve wants them to be, Ben Bernanke`s statements up to date ensure that the Fed will act.

On Eurozone issues, we note the impact of an article at PIMCO`s website. They seem to be getting out of Eurozone peripheral debt, which has had a rather strong impact on bunds and Treasury bonds according to reports.  German unemployment was released unchanged at 7.5%, while Eurozone CPI rose above the ECB`s two percent target at 2.2%, and is not giving any sign of easing unless the Euro finds some respite from the constant talk about its demise. While the ECB`s actions are often hard to predict, we don`t expect any rate increases unless the Euro goes into a stall.

Korea, Chile Intervene, Brazil  "Ready to Take Strong Measures"

The focus has been on other issues recently, but the wave of competitive devaluations is still with us, with two central banks intervening today in local markets in order to rein in speculative inflows yet again, and Brazil threatening to alter commerce and FX regulations, as well as reduce government spending in order to control the real`s strength, and facilitate lower interest rates. Of these announcements, we think that the Brazilian one is the most interesting, because it goes beyond the usually futile intervention threats in order to discuss the implementation of controls on capital movements which echoes of times before the 2000-2010 period.

Just to the west of Brazil, we have Chile intervening by purchasing an enormous $12 billion dollars in the market, building up its reserves, and pulling the rug from under the feet of peso buyers, at least in the short term. Short-term traders were naturally gutted in the course of this heavy-handed intervention, but others note that, unless copper prices recede from their high levels, the Chilean central bank will have to keep pumping pesos into the market, as the country is producing about 35% of the global copper output. Anything less than that, and the peso will find solid demand.

Bank of Korea was also seen actively selling the won against the dollar in Asian trading, but that kind of action is fairly regular nowadays.

USDCNY Still dormant, But Appreciation Will Resume as Hu Jintao Meets Barack Obama on January 19th

Hu Jintao and President Obama will have a face-to-face meeting in two weeks or so, and many people expect the Chinese to time the next leg of yuan appreciation to coincide with the visit. Yang Jiechi, the ill-tempered Chinese foreign minister, and Treasury Secretary Geithner, the main engineer of the Bush era bailouts, will meet on Tuesday to prepare the groundwork for the visit, in a process that will keep building up momentum. Just before President Hu Jintao visits the U.S., Robert Gates, the Defense Secretary will be in China to discuss some Taiwan-related arms sales issues that are understood to have angered the Chinese. So the hectic pace of U.S. - China dialogue will be maintained into 2011.

USDCNY was fixed at 6.6215 vs.  6.6227 of Friday.

We conclude by mentioning the troubles faced by DPJ`s veteran backroom dealer, career politician Ichiro Ozawa, who is facing pressure to resign after corruption and bribery investigations have been initiated against him.  He has told the PM, who has been calling for his resignation, that he alone and the Japanese people will determine whether he will quit his seat at the Diet. If Mr. Ozawa quits, it will at least give the PM some calm as he makes his final attempts to salvage his disgraced government in the eyes of the voters.

 

Stocks, currencies fell, as markets anticipated Chinese rate rises

Events Friday appeared to be dominated by the release of Q3 Chinese GDP data, which came at 9.8, above the expectation of 9.4-9.6 current in the market. Inflation is reported to have eased to 4.6% in December, but that will provide no change to the government`s assessment of the current situation, and the need for rate increases, since price pressures in the commodity market, and the domestic sector leave very little room for any delay of the necessary action. We should recall that the government`s inflation target is just 3%, way below the 4.6% just mentioned.

The expectation of Chinese tightening has battered gold prices, which were lower to as much as $1345 per ounce during the last day of the week, as oil was similarly sold, losing around 2.65% off its value in Friday`s trading. We expect the difficulties in the commodity market to continue for the first half as the Chinese need to tighten is very real. In any case, prices of some commodities like silver and oil are probably already out-of-synch with their fundamental and technical trends, so a reversal of course will not be surprising. Still, we don`t expect the Chinese to be too aggressive with their tightening, and since the Fed will keep undermining the dollar, commodity trends will survive in the longer term, barring a major catastrophe such as a disorderly breakup of the Eurozone.

In separate developments, in a speech today Hu Jintao, the Chinese President, emphasized the necessity of "U.S. respecting Chinese sovereignty over Tibet and Taiwan", warning that acting in the opposite direction would create tensions in the Asia-Pacific region. He was rather frank in his words, saying that the history of bilateral relations shows the potential for steady growth if the countries respect each other`s points of sensitivity, concluding that "otherwise our relations will suffer constant trouble or even tension".

China`s concerns about about Tibet and Taiwan are well-known, of course. The Tibet issue  is probably the easier one, since, apart from the well-publicized protests of the Dalai Lama, and the occasional censure of various international bodies and U.S. Congress, there is not the remotest possibility that the Tibetans will be able to throw away the yoke imposed on them, or that the Chinese will face any significant security risks. India, which is the only  relevant  Asian backer of the Dalai Lama, has been trying to improve relations with the Chinese recently, and another conflict over the Aksai Chin or any Tibet-related issue seems extremely unlikely.

The Taiwan problem is an altogether different matter. We believe that the Chinese are make a mistake by playing their cards so openly, and leaving no room for doubt in their relations with the Americans. Arguably, this is born of their desire to maintain stability through an effective diplomatic deterrent, in that, if their partners and rivals are aware of what they will not be tolerating, the risk of a conflagration should be expected to be lessened. This approach makes sense from a Chinese point of view, since they see themselves as the righteous aggressors over the Taiwan issue, defending Chinese honor and power against the  humiliation of the past centuries. It also means that the Chinese do not expect the Americans to make a first move, such as inciting the Taiwanese to some declaration of independence, or an equivalent action that would force them to take action in terms defined by the U.S. It is unclear how much of a risk this poses for China over the longer term.

Apart from the propaganda value of such a stance, it is hard to see what strategic benefit the PRC gains from its current stance on the Taiwan issue. The U.S. can at any moment trigger a highly predictable Chinese response by encouraging the Taiwanese leadership to be more aggressive about the independence issue, potentially creating a crisis situation in which the Chinese have little opportunity to adapt to the emerging situation. The PRC leadership is, undoubtedly very well aware of this risk, and its very buildup of forces in the region, strong concentration of naval and air forces is probably directed at giving a clear sign of how powerful its response will be in case that a Taiwan crisis emerges. President Hu`s recent comments in the U.S. emphasizing this point, are to be understood in this context, and not a sign of belligerence or hostility, in our opinion.

On  the CNY issue in Washington, Democratic Representative Sander Levin of Michigan is reported to be planning to introduce a legislation as early as Monday next week, which will be reproducing the language of a similar bill passed by the House in September 2010. Hu`s response, while being questioned on it by senators, was that the problem is that "we, the China are more productive", and "have lower labor costs", according to Senator John McCain. Not very constructive, but one cannot expect Hu to say much else either. We are surprised that he was so candid with his answer.

In short, Friday was not a good day for stocks, commodities, or risky currencies, with the dollar, yen, and bonds generally being the better performers. We don`t expect this to change much in the near term, with the trigger point being signalled by Chinese rate rises, and their end marking the reinception of the previous bull trend. On U.S.-China relations, the main concern remains the currency issue, since, as both political parties are deeply out of touch with voters, it is but a matter of time that the politically lucrative, and low-cost USDCNY issue becomes too enticing a target for exploitation.  In the meantime, smiles will be maintained, since big business has as big a stake in seeing the status quo continue just as the Chinese leadership does, and with so much cash to spread around, it seems that the resolution can be delayed for quite a while.

Gold Fell Sharply, Dollar Rallied on FOMC, But Trade Volume Is Weak

Trade volumes in FX was reported to be weak on the second trading day of the year, and while gold and commodities have seen sharp movements, it is not clear that this is the beginning of a multi-week correction trend. Gold, in particular, has lost more than $45 per ounce in another of its typical sharp swings, in anticipation of a stronger dollar, and some concern about the Chinese interest rates. FOMC minutes released Tuesday further boosted the USD-positive sentiment, since the committee appears to note some economic improvement, and refrains from making any kind of commitment to another round of QE. Core inflation, according to the minutes, has bottomed out, and while 2011 may see some upside momentum in prices, 2012 will bring price stability back. In short, we`re told, this is as far as the FOMC is prepared to go for now on QE, with no clarity provided on when on how the program will be ended.

We have seen such statements before. Even in October 2007, the FMOC member Randall Krozner was speaking about the importance of keeping rates at a reasonable level, about his concern about inflation expectations, and issuing forth stock statements in an air of seriousness, yet the same FOMC later brought rates to zero, as we all know, and there they have stayed till now. We don`t suggest that the Fed doesn`t know what it is doing, because that is the subject for a different debate, but we do mean that their statements on the outlook are no more important than any analyst report that would be issued with respect to their future actions. In other words, we don`t think that the Fed knows what it will do any better than the typical analyst, and the minutes are more valuable then analyst reports only because people short-term trade the markets with them.

The release emphasizes that the risks to the growth outlook are significant, focusing on the house price, and Eurozone debt crises. If these progress in a manner that weakens sentiment in the markets considerably, driving interest rates on mortgage, and consumer loans higher than where the Federal Reserve wants them to be, Ben Bernanke`s statements up to date ensure that the Fed will act.

On Eurozone issues, we note the impact of an article at PIMCO`s website. They seem to be getting out of Eurozone peripheral debt, which has had a rather strong impact on bunds and Treasury bonds according to reports.  German unemployment was released unchanged at 7.5%, while Eurozone CPI rose above the ECB`s two percent target at 2.2%, and is not giving any sign of easing unless the Euro finds some respite from the constant talk about its demise. While the ECB`s actions are often hard to predict, we don`t expect any rate increases unless the Euro goes into a stall.

Korea, Chile Intervene, Brazil  "Ready to Take Strong Measures"

The focus has been on other issues recently, but the wave of competitive devaluations is still with us, with two central banks intervening today in local markets in order to rein in speculative inflows yet again, and Brazil threatening to alter commerce and FX regulations, as well as reduce government spending in order to control the real`s strength, and facilitate lower interest rates. Of these announcements, we think that the Brazilian one is the most interesting, because it goes beyond the usually futile intervention threats in order to discuss the implementation of controls on capital movements which echoes of times before the 2000-2010 period.

Just to the west of Brazil, we have Chile intervening by purchasing an enormous $12 billion dollars in the market, building up its reserves, and pulling the rug from under the feet of peso buyers, at least in the short term. Short-term traders were naturally gutted in the course of this heavy-handed intervention, but others note that, unless copper prices recede from their high levels, the Chilean central bank will have to keep pumping pesos into the market, as the country is producing about 35% of the global copper output. Anything less than that, and the peso will find solid demand.

Bank of Korea was also seen actively selling the won against the dollar in Asian trading, but that kind of action is fairly regular nowadays.

USDCNY Still dormant, But Appreciation Will Resume as Hu Jintao Meets Barack Obama on January 19th

Hu Jintao and President Obama will have a face-to-face meeting in two weeks or so, and many people expect the Chinese to time the next leg of yuan appreciation to coincide with the visit. Yang Jiechi, the ill-tempered Chinese foreign minister, and Treasury Secretary Geithner, the main engineer of the Bush era bailouts, will meet on Tuesday to prepare the groundwork for the visit, in a process that will keep building up momentum. Just before President Hu Jintao visits the U.S., Robert Gates, the Defense Secretary will be in China to discuss some Taiwan-related arms sales issues that are understood to have angered the Chinese. So the hectic pace of U.S. - China dialogue will be maintained into 2011.

USDCNY was fixed at 6.6215 vs.  6.6227 of Friday.

We conclude by mentioning the troubles faced by DPJ`s veteran backroom dealer, career politician Ichiro Ozawa, who is facing pressure to resign after corruption and bribery investigations have been initiated against him.  He has told the PM, who has been calling for his resignation, that he alone and the Japanese people will determine whether he will quit his seat at the Diet. If Mr. Ozawa quits, it will at least give the PM some calm as he makes his final attempts to salvage his disgraced government in the eyes of the voters.