Radiation Levels Rise in Asia - Oil, Gold, Stocks and the USD Fall

The main focus of the markets remains being the Japanese nuclear issue in Asia, and the Portuguese debt problem and the Libya War in the West. Portugal`s yields are already at unsustainable levels, and there is talk of the President forming a caretaker government to pass a new budget, with the purpose of implementing austerity rules and reinforcing confidence to allow a refinancing of the June redemptions. We doubt that the President will choose this path, since the budget is a major point of contention in the political field, and an aggressive stance may well lead to a backlash from the new parliament, which could potentially complicate an already difficult situation.

Meanwhile, representatives of 40 nations from the E.U., the Arab League and NATO will be meeting in London today to discuss the future of the operations against the Libyan regime. Today news reports speak of the Colonel`s forces defeating and pushing back the rebel army from some of the coastal cities that they had gained on Sunday, but there is no sign of the initiative changing hands as the bombing campaign goes on. Statements from the U.S. side have detailed plans to use low-flying attack planes in ground attacks against the Libyan Army, and it is clear that pressure will be kept up. On the domestic front, a recent poll has shown that support for the Libyan campaign among U.S. Citizens does not exceed 48%, which is the lowest level of support for a military operation at its inception so far, and does not bode well for the president`s popularity if results are not obtained soon. If the campaign ends prematurely, oil prices could naturally see a significant correction.

In Asia, reports of higher-than-natural radiation levels have been emerging across a wide region. USA, Vietnam, Korea, and China have discovered radioactive particles in the air, but the authorities insist that the level of detection remains very low, posing no significant hazard to public health for now. The death toll in Japan has reached over 10,000 as 17,000 people remain missing, while cooling efforts at the reactors continue in spite of very high radiation readings. The latest reported leak of plutonium has compelled the government to publicly discuss plans to temporarily nationalize TEPCO, on the back of complaints that the company has not been responsible and effective enough in battling the crisis. The PM Naoto Kan has described the situation in Fukushima as "unpredictable", while Yukio Edano has characterized the same as being "very grave". 

Interestingly enough, the FX market is somewhat more optimistic today than the stock market, which is performing rather poorly on a global scale. The USD is lower against most peers, but up with respect to USD JPY, which is usually a sign of improved optimism. On the other hand, gold and oil are both lower, but the downtrend does not show a lot of signs of conviction, and could reverse rapidly and easily if the factors that dampen global sentiment once again dominate news reports.

Libyan FM Defects as Gold, Stocks and Oil Rise

Markets have been exceedingly resilient against the disappointing releases and difficult events of the past weeks, and as such releases become rarer, traders are displaying a great deal of enthusiasm about purchasing risk. Today is a bullish day although there is nothing particularly bright in the  political or financial news flow.

In Japan, "radioactive iodine-131 at a concentration of 4,385 times the maximum level permitted under law has been detected in seawater" near the Fukushima Daiichi nuclear plant today, according to the Kyodo news agency. The government is continuing to deny that the leaks constitute an immediate health hazard, but fears about the so-called recriticality are being voiced both in and outside Japan as the crisis drags on. 

Elevated radiation levels have been detected as far away as Britan and Switzerland, and some radioactivity has been detected in milk in the U.S. as well, although these levels are extremely low so far and do not pose any risk to people, according to official reports. Markets appear to have shrugged off the risk of wider contamination and seem to have settled for the viewpoint that the greatest economic and political impact of the leaks will be felt in Japan itself, with negligible results for global growth.

In Libya, Colonel Gaddafi`s foreign minister, and former intelligence chief, Moussa Koussa has defected to the U.K. after taking a flight through the neighboring Tunisia. There are signs that the Libyan leader`s regime is cracking from the inside, but the military situation remains inconclusive, so markets did not react strongly to the news. 

In the U.S., some focus is on the release of the list of banks that borrowed from the discount window during 2008-2009 - the most difficult days of the global financial crisis. The Fed will be releasing the identities of future borrowers after the passage of two years, in line with the Dodd-Franks Bill on banking regulation passed last year. If anything, this should make Fed officials a bit more cautious while bailing out financial firms, since from now on they may be accused of corruption and collusion of interest once the details of their past actions are made public. However, we are skeptical that the impact will be as strong as many would like.

Markets outside of the U.K. and the Eurozone were optimistic today, in anticipation of a favorable unemployment report. Most Asian markets were higher, as were gold and oil, and EUR USD appreciated while USD JPY fell. In Europe, focus remains on the uncertainties surrounding the Eurozone sovereign debt issues, the resolution of which is likely to stretch years into the future. Some concern is caused also by the ambigous position of the Irish government vis-a-vis their creditors. How much private lenders of the government will have to swallow in losses is an issue that is still haunting the Eurozone, suppressing the Euro currency even as the rest of the world retains a rather strong sentiment towards risk.

Markets Open the Year on a Note of Optimism, Stocks Rise Around the World

On the first trading day of 2011, markets were showing an optimistic performance, with stocks around the world ending the day higher, the dollar gaining against most of its peers, while gold rises once again above the 1410 level. Gold has been testing these levels for almost two months now, and a breakout to either direction should easily bring sustained momentum. We cannot disregard the possibility of a solid correction if the Chinese authorities signal too much pessimism about the performance of the economy, or if the Eurozone sovereign debt worries return without finding a decisive commitment from the Germans. But on the whole, the trends are being determined by the Federal Reserve and its anticipated bond purchases, which creates optimism about the global economy, boosts commodities, and of course gold too, which has its own additional reasons. For as long as the current mild atmosphere continues, we think that the present state of affairs in the markets will be maintained, and gold will continue to appreciate.

On Friday we will have the NFP release, so market focus will be on the numbers, but this piece of data is clearly not as dominant or powerful in the minds of traders as it used to be for much of the past decade. Instead, what everyone seems to be focusing on is clearly the Fed`s stance, partly because it is understood that the private sector is not in a position to create the necessary momentum in the jobs market, and partly because stock prices are nowadays driven almost entirely by inflation and risk expectations. That is not to say that growth will not pick up as well, but there is a difference between building a car factory for the middle class and building an empty city of skyscrapers in the middle of an empty desert (of which the greatest experts live in China). Both are recorded as growth, but whether they are the same kind of growth is a matter of debate. As such, NFP does not have the kind of relevance that it had when everyone believed that data and economic activity drive stock prices. The Fed is easing, and easing is good for U.S. stocks, so they appreciate.

In any case, the U.S. is performing better, having been smashed earlier in the crisis on the implosion of the real estate bubble, and the cleanup process is naturally less painful than the contraction that precedes it. Reflecting this, Bloomberg reports that investors are demanding a smaller premium to own U.S. corporate bonds than global company debt at 166 bps vs. 169 bps. for the latter. We think that this trend will continue for another reason apart from the better U.S. outlook. We believe that in the coming years home bias among speculators will increase, as the international political environment becomes difficult and cloudy, protectionism becomes the new fashion, and capital controls are introduced or tightened around the world. This is only a natural, corrective reaction to the liberalism of 1990-2008, and it probably does not signify a permanent reversal, but clearly, from a speculative point of view, it does imply that U.S. stocks will do better as the U.S. transforms itself, painfully, to a more balanced growth model with a heavier emphasis on exports.

Markets Focus on Today's Eurozone Debt Auctions, CDS Rates Rise, Stocks Fall

Market sentiment was dampened yesterday by today`s large debt auctions in the Eurozone, where the weaker members of the union will be borrowing at least $43 billion. Credit default swaps rose on Ireland, Belgium, Portugal, and while the CDS index that measures that default risk of Western European governments rose to match a record yield of 228 bps. There is a strong sense of tension all around the world as the results of these events approach.

Stocks were lower in response, and in Asia, Indonesia and India were the biggest losers. India`s not being treated very kindly nowadays after the scandals that shook the country a short while ago, while Indonesia is suffering from a worrisome inflation trend in line with the rest of the region.  In Europe, naturally, the falls were sharper, while U.S. markets performed reasonably well in spite of the tense atmosphere.

The dollar, naturally, gained against almost all of its peers, while oil rose on anticipation that Asian demand will remain strong. We are pessimistic on oil in the near term, and expect it to reverse course if the European problems intensify, or the Chinese aggressively continue with their rate rises. Commodities are likely to gain to some extent this year as the Fed continues its easy money policies, but perhaps the first half will not be as rosy as some seem to be expect. Gold, meanwhile, should stay on its upward track, notwithstanding the severity of its up and down swings as volatility remains high.

Today`s events are obviously of great significance. What we expect is that, while auctions will find sufficient buyers, in line with the trend of the months, rates will be higher, and money will be supplied at a high price. Regardless of the result, markets are unlikely to be convinced one way or the other, since lacklustre demand is unlikely to signify a withdrawal of borrowers, and a strong showing doesn`t imply much for the future. This makes sense, because the debt issues are long term and will not be settled by one or two auction`s results. If Ireland is shunned by creditors, however, we suspect that it will only trigger stronger European intervention, and not capitulation, as some commentators seem to expect. It is hard to see, as we like to emphasize, how they can reverse course after committing so much to the economic and political integration of the continent. And while perhaps dropping some aspect of the European Monetary Union doesn`t signify a lot from a pragmatic viewpoint, the same cannot be explained to voters in the region. All that convinces us that European politicans will only capitulate  when they are absolutely out of options, but with the Fed allied to them on the other side of the ocean it is hard to see how that even sort of situation would develop.

In summary we don`t expect much to happen as long the present governments remain in place. But we still believe that the Eurozone will disintegrate at some point in some way, only with the additional qualification that this development will be the consequence of powerful political events, and not some predictable surrender to speculators and the markets.

Markets Open the Year on a Note of Optimism, Stocks Rise Around the World

On the first trading day of 2011, markets were showing an optimistic performance, with stocks around the world ending the day higher, the dollar gaining against most of its peers, while gold rises once again above the 1410 level. Gold has been testing these levels for almost two months now, and a breakout to either direction should easily bring sustained momentum. We cannot disregard the possibility of a solid correction if the Chinese authorities signal too much pessimism about the performance of the economy, or if the Eurozone sovereign debt worries return without finding a decisive commitment from the Germans. But on the whole, the trends are being determined by the Federal Reserve and its anticipated bond purchases, which creates optimism about the global economy, boosts commodities, and of course gold too, which has its own additional reasons. For as long as the current mild atmosphere continues, we think that the present state of affairs in the markets will be maintained, and gold will continue to appreciate.

On Friday we will have the NFP release, so market focus will be on the numbers, but this piece of data is clearly not as dominant or powerful in the minds of traders as it used to be for much of the past decade. Instead, what everyone seems to be focusing on is clearly the Fed`s stance, partly because it is understood that the private sector is not in a position to create the necessary momentum in the jobs market, and partly because stock prices are nowadays driven almost entirely by inflation and risk expectations. That is not to say that growth will not pick up as well, but there is a difference between building a car factory for the middle class and building an empty city of skyscrapers in the middle of an empty desert (of which the greatest experts live in China). Both are recorded as growth, but whether they are the same kind of growth is a matter of debate. As such, NFP does not have the kind of relevance that it had when everyone believed that data and economic activity drive stock prices. The Fed is easing, and easing is good for U.S. stocks, so they appreciate.

In any case, the U.S. is performing better, having been smashed earlier in the crisis on the implosion of the real estate bubble, and the cleanup process is naturally less painful than the contraction that precedes it. Reflecting this, Bloomberg reports that investors are demanding a smaller premium to own U.S. corporate bonds than global company debt at 166 bps vs. 169 bps. for the latter. We think that this trend will continue for another reason apart from the better U.S. outlook. We believe that in the coming years home bias among speculators will increase, as the international political environment becomes difficult and cloudy, protectionism becomes the new fashion, and capital controls are introduced or tightened around the world. This is only a natural, corrective reaction to the liberalism of 1990-2008, and it probably does not signify a permanent reversal, but clearly, from a speculative point of view, it does imply that U.S. stocks will do better as the U.S. transforms itself, painfully, to a more balanced growth model with a heavier emphasis on exports.

Markets Focus on Today's Eurozone Debt Auctions, CDS Rates Rise, Stocks Fall

Market sentiment was dampened yesterday by today`s large debt auctions in the Eurozone, where the weaker members of the union will be borrowing at least $43 billion. Credit default swaps rose on Ireland, Belgium, Portugal, and while the CDS index that measures that default risk of Western European governments rose to match a record yield of 228 bps. There is a strong sense of tension all around the world as the results of these events approach.

Stocks were lower in response, and in Asia, Indonesia and India were the biggest losers. India`s not being treated very kindly nowadays after the scandals that shook the country a short while ago, while Indonesia is suffering from a worrisome inflation trend in line with the rest of the region.  In Europe, naturally, the falls were sharper, while U.S. markets performed reasonably well in spite of the tense atmosphere.

The dollar, naturally, gained against almost all of its peers, while oil rose on anticipation that Asian demand will remain strong. We are pessimistic on oil in the near term, and expect it to reverse course if the European problems intensify, or the Chinese aggressively continue with their rate rises. Commodities are likely to gain to some extent this year as the Fed continues its easy money policies, but perhaps the first half will not be as rosy as some seem to be expect. Gold, meanwhile, should stay on its upward track, notwithstanding the severity of its up and down swings as volatility remains high.

Today`s events are obviously of great significance. What we expect is that, while auctions will find sufficient buyers, in line with the trend of the months, rates will be higher, and money will be supplied at a high price. Regardless of the result, markets are unlikely to be convinced one way or the other, since lacklustre demand is unlikely to signify a withdrawal of borrowers, and a strong showing doesn`t imply much for the future. This makes sense, because the debt issues are long term and will not be settled by one or two auction`s results. If Ireland is shunned by creditors, however, we suspect that it will only trigger stronger European intervention, and not capitulation, as some commentators seem to expect. It is hard to see, as we like to emphasize, how they can reverse course after committing so much to the economic and political integration of the continent. And while perhaps dropping some aspect of the European Monetary Union doesn`t signify a lot from a pragmatic viewpoint, the same cannot be explained to voters in the region. All that convinces us that European politicans will only capitulate  when they are absolutely out of options, but with the Fed allied to them on the other side of the ocean it is hard to see how that even sort of situation would develop.

In summary we don`t expect much to happen as long the present governments remain in place. But we still believe that the Eurozone will disintegrate at some point in some way, only with the additional qualification that this development will be the consequence of powerful political events, and not some predictable surrender to speculators and the markets.

FOREX TREND MONITOR: Dollar to Rise on US Growth Outlook

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  EURUSD: Euro Follows Narrowing Yield Spreads Lower
  


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  GBPUSD: Pound Under Pressure as US Rates Advance
  


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  USDJPY: All Eyes on US Data as Yield Spreads Stay in Focus
  


• 
  AUD, CAD, NZD: Comm Bloc Uniformity Fractures
  

Will a Rise in Services and a Strong U.S. Labor Report Ignite a Dollar Rally?

The U.S. non-farm payroll and ISM non-manufacturing reports will look to continue the string of strong fundamentals results from the world’s largest economy. A brighter outlook for domestic growth has started to generate greenback support and signs that the service sector which accounts for 70% of GDP and the labor market are improving could be a catalyst for a bullish rally. Canadian manufacturing and German employment data will also be potential market moving events during the upcoming week, as traders look to see if their recoveries are sustaining.

Gold and Oil Rise, As Rating Rumors Abound

Gold, and oil are higher today, while the Euro is weakened against the dollar, and the yen holds its ground the against the American unit. Bourses are mixed, with European equities generally doing better than the rest, as American markets demonstrate a very indifferent performance.

Today is mostly a quiet day, but there is some talk about some major European nations, including France, losing their triple A ratings unless strong measures are taken to address the Eurozones problems. The nations on the watch list nowadays are Ireland, Greece, Spain, Portugal, Belgium, Italy. But oddly enough, even France is having a fair share of speculation and gossip depressing its CDS and bonds as bondholders look anxiously at the future, and the few remaining speculators sell to benefit from sentiment. Nonetheless, action is weak as we approach the end of the year, and it looks like this trend will stretch out until the cold days of December are over.

Moody`s, of course,  has been slashing ratings and issuing warning about downgrades for quite some time. It is just three days ago on Friday that the agency cut Ireland`s sovereign credit rating by five notches, after warning on Wednesday that it would move against Spain as it sees "substantial funding requirements" weakening the country`s prospects. By contrast, in August Moody`s had stated that France, in addition to U.K. And U.S. would maintain their ratings as they move aggressively to cut deficits, but it seems like the events between then and now have compelled them to change their outlook on anything that is West of Germany.  France`s CDS yields have been rising  on the back of these developments, reaching an all-time high of 105.5 bps which is almost triple the yield at the beginning of this year. It is now costlier to buy protection on France than on Czech Republic or Chile, which are both rated lower by ratings agencies.

So what is the interpretation of all this? We think that the European CDS market is even more illiquid these days as everyone moves to vacation, but beyond this trivial fact, there is also the somewhat scarier fact of rising correlation across the board in Europe, as markets begin to throw all these nations, as long as they are to the West of Germany, in to the same bag, partly due to worries about contagion, partly because of the recent rapid reversals in markets, and of course, because they want to bring down someone before the game is over in Europe. Some analysts and even academics  regard a default in the Eurozone an inevitable event nowadays, and there is a lot of doubt as to whether the Euro itself will survive such a severe test. And once markets begin to question the future of the Euro, there is very little that is immune to suspicion and doubt, which is why we are seeing convergence in the market`s assessment of the regions. It does indeed seem that the market`s general pooling of all these widely disparate economies into a single basket is a little irrational. But at the same time, isn`t it true that there is hardly a signle economy in the world that would be immune to adverse results and crises if creditors and speculators begin to doubt the will and credibility of authorities and governments? This, then, above anything related to markets, CDS, or bonds, is what is driving the rapid convergence that we have been observing in Western Europe these past months. Just like a few years ago it looked like nobody could default, it now looks like just about everyone is on the road to a default. Market sentiment and action is only in part based on rational arguments, but that is something most of us know very well already.

What, then, is in store for sovereign debt in Europe next year? And what about the rest of the world? The rest of the world will probably remain immune to these pressures because traders are focusing on Europe, and there are a lot of target candidates in the area. For at least the six months we`ll keep hearing about potential defaults, austerity, and ever stricter budget plans. At least for the first six months, it seems very unlikely that anyone will default, because most of the nations in dire straights have been funded amply for quite some time into the future. This also coincides with seasonal market patterns, since the first half of the year is generally more bullish than the latter, and as such, we suspect that much of the real action and sweating for the Eurozone will be kept in store for the second half.

Will there be a default in 2011? With Merkel and Sarkozy still in office, we find it hard to believe that any particular nation will be allowed to default. After all, if the E.U. has already spent close to $1 trillion in bailing out nations in order to protect the currency, what is the point of refusing a couple hundred billion more(!) and keeping the edifice intact at least until the next elections? The Euro will of course keep weakening on a year-on-year basis, with its descent being prevented from being a plunge only because of the Fed`s QE2-3-4  series.

In short, then, we don`t expect a default in 2010, and believe that one would only come in consequence of a big public relations disaster or a severe breakup among leaders of the union at a personal and international level. That, of course, is impossible predict accurately, at least as far as we are concerned.

The fireworks, so to speak, will only begin once the current frustration of voters transforms to real wrath at the ballot boxes, as oceans of cash evaporate into thin air even as the promised improvement in growth fails to revive the region`s economies. This is true for not only the periphery, but also for the core, because next year is likely to see weaker growth after this year`s fairly strong performance. In the meantime, all we need to do is to wait and see. It is difficult to purchase the USD with Bernanke standing on our path, and it is nearly impossible to purchase the Euro confidently with all the troubles standing in between. Some would go and gamble into emerging market currencies as a "safe haven" gamble, but we find it difficult to find confidence in anything other than gold as long as the cash channels remain open into world markets.