Tough week ahead

March 30, 2009 — Mitul Kotecha

It looked as though it all went wrong today as the bad news just kept on coming. Following reports on Friday that JP Morgan and BoA had a more difficult month in March following a stronger start to the year, reports that UBS would be shedding thousands of staff and would announce billions more in writedowns as well as news of the takeover of a Spanish regional bank by the Bank of Spain hit market sentiment hard. Topping all of this were comments by the US administration that some banks would need more capital in addition to that already provided. The administration also said that bankruptcy may be the best option GM and Chrysler.

This sets up a difficult week ahead, with risk aversion set to rise further and the news unlikely to get any better. Economic news is likely to add to the market’s gloom as US releases such as the ISM manufacturing survey for March and the jobs report will likely reveal further deterioration. Expectations for another hefty drop in payrolls in March could see a total of over 5 million jobs lost so far in the current cycle with many more to go.

The news in Europe will not be much better and as today’s Eurozone sentiment indicators have shown the outlook for the economy remains gloomy. The ECB is likely to cut interest rates but will refrain from embarking on the quantitative easing policies followed by other central banks such as the Fed or BoE. As risk aversion rises the USD is set to continue to strengthen against most currencies this week.

Posted in bank rescue, central banks, Currencies, Economics, equity markets, Europe, Financial crisis, UK, US, US administration. Tags: , , . 6 Comments »

Even Geithner would like a global currency

March 26, 2009 — Mitul Kotecha

Around the same time as I was writing about the end of the US dollar US Treas Sec Geithner was telling us how he actually liked the idea of a global currency as purported by China’s central bank governor. Of course the news didn’t go down too well in the FX markets, with the dollar dropping like a stone before Mr Geithner realised the error of his ways and clarified his comments. He went on to say the dollar is still the best reserve currency in the world but added a caveat that this would only continue if the economy and markets got back on their feet. The pros and cons of a new reserve currency have now been much debated and as noted in my previous post it will provide great fodder for markets at the G20 meeting in London next week.

As usual we are all in for disappointment, however. There will be no great change in perspective on the dollar or any other currency as UK PM Brown hinted today. Instead G20 officials will do their best to show an act of unity whilst sniping at each other’s stimulus plans in the background. Do not expect conrete policy measures emerge either. It has been a rare occassion when such get togethers yield more than a nice photo shoot of world leader.

On a completely different note it is intriguing to see how deep the loss in wealth has become when the likes of the comedian John Cleese are renegotiating their divorce settlements. A local free Hong Kong newspaper put it as the “battered rich want divorce terms slashed”.  Battered indeed.

Posted in Currencies, Economics, US administration. Tags: , . Leave a Comment »

End of the road for the dollar?

March 25, 2009 — Mitul Kotecha

The comments by China’s central bank governor  about the US dollar have provoked much speculation ahead of next week’s G20 meeting in London about the potential for the world’s biggest reserves holder (around $2 trillion) to shift away from dollars. The idea of China’s central bank governor is to use SDRs as an alternative to the US dollar. China’s concerns focus on the risks of a big increase in inflation in the wake of the Fed’s plan to move to full blown quantitative easing by buying US Treasuries as well as the massive blowout in the US budget deficit. This would hit the value of China’s massive (over $700 billion) holdings of US Treasuries.

Don’t get too excited though. The likelihood of any change in the use of the dollar as a reserve currency is extremely limited. Using the SDR would itself involve many technical issues in terms of how much to issue and whether companies and investors would accept the use of SDRs rather than dollars. Such a move would take years. The reality is that the risks to the dollar have clearly risen and the crisis and money printing by the Fed has fuelled significant risks over the medium term, to foreign holders of US debt such as China. Nonetheless, there is no other currency that is in a position to displace it at the moment and possibly for several years. Eventually the use of the euro and even the Chinese yuan may reach a point when they share the status of reserve currency with the dollar, but this is not going to happen anytime soon. In other words there is no need to go get rid of your Greenbacks just yet.

Posted in Asia, Currencies. Tags: , , , , . 2 Comments »

Running out of steam

March 25, 2009 — Mitul Kotecha

The euphoria in markets over recent days appears to be fading but only after a fairly solid rally in equities amounting to around 20% in some stock indices from their lows. Financials have led the gains over recent weeks helped more recently by a warm reception to US Treasury Secretary Geithner’s plans to fix banks.

Although I am doubtful about the staying power of the recent improvement in market sentiment I have to admit that there are clearly positive steps in action in the US both from the Fed and the US Treasury.  In fact the US authorites have gone all out to get things turned round.  This appears to have put a floor under risk appetite for now. 

Ok there are still a lot of questions to be asked such as how quickly the Geithner’s bank plan will work or whether banks will be unwilling to offload toxic debt at a significant loss or whether the deal is a raw one for US tax payers who seem to be bearing most of the downside and not too much upside if things go well.  All of that aside something is better than nothing even with its faults.

As for equity markets this still smells like a bear market rally or put another way a dead cat bounce.   I could be wrong and will be happily eat my words but I can’t see how the rally can be justified given the struggle ahead for both banks and the economy.   At best, what to expect is a period of high volatility before a real recovery arrives. 

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Fed throwing everything but the kitchen sink at the crisis

March 20, 2009 — Mitul Kotecha

The aftermath of the Fed’s surprise decision to buy US Treasuries was dramatic across markets, with Treasury yields dropping, equities rallying and the dollar sliding. The Fed has now moved from what was initially credit easing to full blown quantitative easing. Effectively the Fed is throwing everything but the kitchen sink at the problem and is arguably the most aggressive central bank at present.

What are the implications:

1) Equities like the news and it helped extend a rally that had been in effect for a couple of weeks. But the momentum is likely to run out quickly as the bad news starts to filter back into the market once again.

2) Commodity prices rallied, especially gold. Why? Inflation concerns intensified following the Fed move due to the risk that the Fed will not be able to end it’s programme of “printing money” quickly once the economy starts to turn around. Commodities are set to rally further.

3) The dollar dropped like a stone, and although it is difficult to see it regaining much ground in the wake of a central bank that flushing the market with dollars, its falls looks overdone. For now, the dollar looks like it has entered new weaker currencies and may even benefit if the market appetite for risk declines again.

4) Other central banks in particular the European central bank will be under huge pressure to follow the Fed. The Bank of England, Bank of Japan and Swiss National Bank have already moved but not as aggressively as the Fed. So far the ECB has been reluctant to act and technical issues mean that it can’t act in the same way as the Fed. Nonetheless, the rise in the euro means that something may need to be done and quickly.

5) The move by the Fed shows that policy makers are doing all they can to turn things around, but this is merely a reflection of the severity of the crisis. Economic recovery is still some months away

Posted in Bond markets, central banks, Commodities, Currencies, Economics, equity markets. Tags: , , . Leave a Comment »
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