China Raises Rare Earth Taxes, As Turmoil in the Arab World Continues

Asian equities performed well today, while European markets were lower in consequence of the ongoing problems in Portugal, and concern that they would spread other Eurozone members. EURUSD, EURJPY and EURCHF were all lower, but Asian pairs performed somewhat better where the worsening Japanese nuclear crisis seems to have had limited impact on sentiment.

In Japan, the government is reported to have ordered residents of the limited risk zone surrounding the nuclear plant to evacuate due to lack of supply deliveries into the region, while Japan`s nuclear safety agency has discovered highly elevated levels of radiation in soil samples from locations at about 2.5 times the distance from the areas found earlier to be contaminated with radioactive substances. TEPCO, the reactors` operator, has also confirmed that the third reactor`s containment vessel may have been breached, indicating that the crisis is now reaching a new level of hazard for the region. 

In Syria, where a number of demonstrators have been killed by security forces in recent clashes, the country`s President Basshar Assad  has promised widespread reforms, punishment for those responsible for the deaths, and multi-party elections. His more flexible approach to the demonstrations may bring some success if the intensity of the protests and revolutions in the rest of the Arab World diminishes in the coming weeks. But given his past record of failed promises, it is highly unlikely that the regime`s opponents will be willing to compromise for half-hearted promises in the longer term. In Yemen and Libya, clashes and chaos are ongoing with no sign of a cooldown.

These events have brought West Texas Intermediate (WTI) to its present levels around $105 per barrel, and there is little sign of a weakening momentum until perhaps the latter half of this year, when the impact of Chinese rate rises and a possible termination of the Fed`s bond purchase programs make their effect felt. The periodical flare-ups of the Eurozone sovereign debt issue does not help either.

Meanwhile, the Fed Chairman seems to be very well aware of the importance of his actions to the market, and is apparently worried about a rash reaction by traders to rumors about the end of the bond purchase program. To avert volatility in the markets that could be the result of uncertainties about his future actions, he is planning to hold four press briefings each year during which he`ll communicate the outlook and the Fed`s vision to the general public. This is definitely a welcome development.

Finally, the rare-earth materials issue between China and the rest of the world is quietly escalating further, as China announces plans to increase sales taxes ten times, curtailing global supply further at a time of globally rising commodity prices and supply shortages. The reactions from the U.S. and Japan are unclear so far, but we`ll be sure to keep an eye on this major issue.

Libya Fighting Calms Down as Stocks Around the World Rally

After yesterday`s important events were accounted for, markets looked to regain the bullish mood once again. The fall in U.S. home prices has not had a perceptible negative impact overseas, nor was the response in the U.S. strong enough to necessitate a reconsideration of long-term viewpoints. Perhaps traders are pleased that with the pressure on consumer net-worth exerted by falling house prices remaining in place, the Fed will be unwilling to adopt any radical measures to curtail speculative activity indirectly, or to fight inflation risk.

In the Middle East, a little bit of a stalemate is in place after the events of the past few days, and it is reported that while loyalist forces are too afraid to launch an open assault on rebels, due to Coalition airstrikes, the rebels remain too weak in terms of equipment and training to stage a major offensive against their enemies. Leaders of the Coalition against Colonel Gaddafi are worried about such a stalemate becoming entrenched, and there is increasing talk of arming the rebels coming from both sides of the Atlantic. In Syria, President Basshar Assad is expected to give a speech outlining his reform proposals, but it remains unclear how serious he is. His own supporters staged large demonstrations in support of the regime in many cities yesterday, and it looks like the rule of the Assad family is in no risk of a quick collapse anytime soon. Oil prices remain stable in response to these developments, with WTI a little lower, while Brent crude is slightly more expensive than yesterday.

In Asia, we are especially interested in reports of the new "copper as collateral" paradigm shaping the Chinese bubble, where it is reported that companies exploit latencies in supply and delivery of copper stocks in order to finance speculation. The article in the Financial Times blog is certainly worth a read for anyone curious about how the greatest bubble in the history of mankind is developing. While there is no sign yet that the game will be over soon, we believe that the PBOC and the Chinese Communist Party are committing a fatal mistake by refusing to restrain the creativity of China`s speculators more aggressively. It is especially worrying, and strange, that no precautions are being taken to prevent the diversified techniques of financial "innovators" in the country, in light of the fact that their deeds are counteracting the goverment`s tightening measures..

Stocks around the world are higher before U.S. open, while risk sentiment among currency traders is somewhat more mixed. News of an apocalyptic tone continue to come from Japan, and no end to the crisis appears to be in sight. Attention is focused on tomorrow`s NFP release, where anything less than a solidly bullish number indicating an employment gain in the 200k range will be regarded as a disappointment, although the short term price reaction remains as unpredictable as ever.

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 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.