Posts Tagged ‘United States dollar’

Warns Of Severe And Violent Sell-Off

In Financial Markets, High Frequency Trading, International Econnomic Politics, Law & Regulations, Quantitative Finance, Views, commentaries and opinions on 16.10.10 at 16:02

Legendary economist John Williams have just released his probably strongest warnings about the economic conditions of the US so far. In the latest newsletter from Shadow Government Statistics he describes the Federal Reserve’s monetary policy, and the markets reactions to it, as euphoric inflation insanity. According to Williams, a severe and violent sell-off in stocks and US currency could come with minimal, if any, warning.

“Who cares about risk? The FED will never let anything drop in price ever again.”

Zero Hedge

“Buying US stocks because the FED says it will proactively debase the US dollar is like sitting on the beach in order to get a great view of an incoming tsunami. Any pleasure so derived should be short-lived, when the terror of underlying reality quickly takes hold,” John Williams at Shadow Government Statistics writes in Friday’s newsletter.

“If one were to view movement in the price of gold as a surrogate for anticipated inflation, for example, the issues begin to come into focus,” Williams continues.

“Consider that last night’s respective S&P 500, Dow Jones Industrial Average and NASDAQ Composite closing levels were up by 7.5%, 10.8%, 12.1% from a year ago, but the price of gold was up by 29.6% in the same period,” he points out.

“Relative to gold, which tends to hold its purchasing power over time — albeit sometimes in an anticipatory manner — the S&P 500, Dow Jones Industrial Average and NASDAQ Composite have declined respectively by 22.1%, 18.8% and 17.5% year-to-year. This is against the prospective inflation environment being discounted by the gold market.”

While stock prices do tend to rise in an inflationary environment – where revenues and profits are inflated – rising stock prices do not always stay ahead of inflation.

On a constant-dollar or real, inflation-adjusted basis, stocks go through bull and bear markets, just as they do otherwise, Williams explains.

“If prices do not stay ahead of inflation, investors lose value in terms of the purchasing power of their assets.”

The equity markets may rally in the upcoming inflation, but the systemic implications and current gold behavior suggest that the circumstance will not give investors a positive real return, Shadow Government Statistics writes in their “Hyperinflation Special Report”.

Severe And Violent Sell-Off

“Given the current systemic distortions and extreme irrationality in the equity markets, a severe and violent sell-off in stocks would not be a shock, and it could come with minimal, if any, warning. It also might be coincident with a U.S. dollar-selling panic,” Williams writes.

There is particular risk of recent dollar selling, according to Williams, which has been closing in on historic lows.

This could easily turn into an outright dollar-dumping panic, which not only would roil the domestic U.S. markets, but also would set the stage for a rapid acceleration of domestic consumer inflation.

“Irrespective of any near-term market volatility, gold and silver, as well as the stronger currencies, remain the best long-term liquid hedges against loss in purchasing power of the U.S. dollar.”

Who Cares?

However, no warnings are taken seriously amongst the market participants these days, as most remains convinced that we’ll have a repetition of the 60% stock market rally of 2009 when the Federal Reserve conducted the first round of quantitative easing, the QE1.

Now, everyone is expecting another crazy rally on the wave of QE2.

As Tyler Durden at Zero Hedge insolent and accurate points out:

“We sympathize with John’s sentiment, but who cares about risk? The FED will never let anything drop in price ever again. It is now far too late to prevent the biggest bubble in the history of the world, and its subsequent collapse.”

Shadow Statistics

Walter J. “John” Williams was born in 1949. He received an A.B. in Economics, cum laude, from Dartmouth College in 1971, and was awarded a M.B.A. from Dartmouth’s Amos Tuck School of Business Administration in 1972, where he was named an Edward Tuck Scholar. During his career as a consulting economist, John has worked with individuals as well as Fortune 500 companies.


John Williams


For nearly 30 years, Williams has been a private consulting economist and become a specialist in government economic reporting.

One of his first clients was a large manufacturer of commercial airplanes who had developed an econometric model for predicting revenue passenger miles.

The level of revenue passenger miles was their primary sales forecasting tool, and the model was heavily dependent on the GNP (now GDP) as reported by the Department of Commerce. Suddenly, their model stopped working.

Williams realized the GNP numbers were faulty, corrected them for the company, and the model worked again, at least for a while.

This was the beginning of a long process of exploring the history and nature of economic reporting and in interviewing key people involved in the process from the early days of government reporting through the present.

For a number of years, Williams conducted surveys among business economists as to the quality of government statistics. The results led to front page stories in the New York Times, Investors Business Daily, considerable coverage in the broadcast media, including several meetings with representatives of the government’s statistical agencies.

“Despite minor changes to the system, government reporting has deteriorated sharply in the last decade or so,” John Williams says.

Alternative Data

Here’s a few examples of Shadow Government Statistics alternative data, with courtesy of


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Betting On The FED

Currency: The Weapon of Choice in Trade Wars

QE Expectations Continues To Fuel The Risk Rally

Commodities: Dollar Movements And QE2 Sets The Agenda

Why Gold & Silver Prices Will Continue to Explode Higher


Report: Offshore Banking Needs To Be Revisited

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 21.09.10 at 22:42

A new report by the Monetary and Economic Department of the Bank for International Settlements, economists argue that the offshore banking system needs to be revisited. Offshore accounts can be beneficial for the emerging markets economies, but pose a threat to financial stability in the home countries. However, its possible to manage these risks, the BIS economists says.

“Expansion of central bank balance sheets amid fiscal expansion in the world’s major economies has, in some views, called into question the major currencies’ reliability as stores of value.”

Dong He/Robert McCauley

The offshore markets intermediate a large chunk of financial transactions in major reserve currencies such as the US dollar. McCauley and He argue that the emerging market economies who are interested in seeing some international use of their currencies, offshore markets can help to increase the recognition and acceptance of the currency, while still allowing the authorities to retain a measure of control over the pace of capital account liberalization.

However, the development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed, the two economists points out.

Adding: “The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks.”

Securing The Dollar Dominance

According to the report, a significant portion of the international use of major reserve currencies, such as the US dollar, takes place offshore.

In particular, when non-US residents use the US dollar to settle trade and make investments, they do not transact onshore through banks and in financial markets in the United States.

Rather, they concentrate their transactions in international financial centers such as the euro-dollar market in London.

“In fact, one may argue that, without the offshore markets, the US dollar would not have attained the dominant position in international trade and payments that it occupies today,” the report says.

“We show that non-US residents reveal a strong preference for doing their dollar business outside the United States. That is, they tend to deposit US dollars in banks abroad and to buy US dollar bonds issued by non-residents outside the United States (and probably to hold them in European depositories as well).”

Need For Clearing Arrangement

Judging from the US dollar, global investors prefer to transact in a particular currency through the offshore markets.

Non-US residents, private and official alike, keep the bulk of their US dollar deposits outside the United States and invest disproportionately in US dollar bonds issued by non-US residents.

“The payment flows associated with these accounts and investments ultimately pass through bank accounts in the United States, just as payment flows associated with non-bank financial intermediaries in the United States ultimately pass through banks in the United States. While the US authorities put in place capital controls from the late 1960’s until the early 1970’s, they never impeded the flow of payments through US banks to allow the settlement of offshore trade and investment transactions. Offshore markets in a currency can flourish if offshore financial institutions are able to maintain and to access freely clearing balances in the currency with onshore banks. In other words, non-resident convertibility of the currency is allowed at least for overseas banks. Once this condition is met, both long and short positions in the currency can be built up offshore even without a wholesale liberalization of capital account controls by the onshore country authorities. If offshore banks do not have free access to clearing banks kept with onshore banks, then offshore markets can still exist, though in a more limited fashion, through non-deliverable contracts,” Dong He and Robert McCauley writes.

Threat To Stability

The development of offshore markets in a given currency poses several challenges to a central bank’s responsibility for maintaining monetary stability.

An offshore market in a given currency can increase the difficulty of defining and controlling the money supply in that currency. Equally, an offshore market in a given currency can pose a challenge to measuring and controlling bank credit.

“Offshore activity in the currency might also affect the shape of the yield curve or the exchange rate. If the central bank sets the overnight (or some other short-term) rate with a view to targeting inflation and growth, then policymakers would have to factor these effects into their inflation forecasts and set the short-term interest rate appropriately.”

Manageable Risk

The BIS economists makes the following concluding statements:

* “For emerging market economies that are interested in seeing a larger share of their international balance sheets denominated in their own currencies, offshore markets can help to increase the recognition and acceptance of the currency among exporters, importers, investors and borrowers outside the country. This process can begin (but not end) while substantial capital controls are still in place, allowing the authorities to retain a measure of control over the pace of capital account liberalization.”

* “The development of offshore markets could pose risks to monetary and financial stability in the home economy which need to be prudently managed. The experience of the Federal Reserve and of the authorities of the other major reserve currency economies in dealing with the euro markets shows that policy options are available for managing such risks. The lesson to be learnt is that the home authorities need to be alert to such risks, and factor in the additional influence of offshore markets on domestic monetary conditions and financial risks when making monetary and financial policies.”

* “Would the global financial system benefit from a wider array of internationalized currencies with offshore markets? The offshore dollar markets described in the first part of this paper, dominated by non-US banks, issuers and investors, have limited the rents flowing to the United States from the global use of the dollar, at least by comparison with the heyday of sterling. So the issue may be less distributional and more whether greater pluralism in international finance is conducive to global financial stability. The long-standing arguments regarding the stability of leadership/hegemony, on the one hand, and pluralism, on the other, need to be revisited in the light of the experience with the dollar shortage during the financial crisis.”

Here’s a copy of the full report.

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China To Dump Euro?

In Financial Markets, International Econnomic Politics, National Economic Politics on 27.05.10 at 16:57

First Japan, now China. Two of the worlds largest savers are thinking about getting rid of their holdings in the troubled European currency. Just a few months ago, the mighty Asians announced plans to reduce their dollar reserves in favor of the euro. Now the tables have turned completely.

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

Anonymous investor (Financial Times)

Representatives of China’s State Administration of Foreign Exchange, or SAFE, which manages the reserves under the country’s central bank, has been meeting with foreign bankers in Beijing in recent days to discuss a reduction of euro related assets in the nations foreign exchange reserves, the Financial Times reports.

We have already heard that Japanese investors – some of the worlds’ largest savers – have turned extremely negative on the euro.

Now it’s being reported that the Chinese officials of SAFE, the state administration of foreign exchange – who are the world’s largest investors – are evaluating their holding of euros.

China, which boasts the world’s largest foreign exchange reserves, is reviewing its holdings of euro zone debt in the wake of the crisis that has swept through the region’s bond markets, the Financial Times writes.

The importance of this news is not so much that it signifies a sudden short-term withdrawal of funds, but a long-term strategic shift.

70% per cent of China’s official reserves of $2.5 trillion are invested in dollar assets, and China had planned to re-balance this portfolio in favor of euros – which would have strengthened the euro’s global role.

The crisis has now reversed this trend – and put paid to any hopes that the euro could benefit from a stronger global role.

(By the way; the euro dropped below $1.22 on the news in Asian trading last night).

One investor says to Financial Times:

“This is a big strategic shift. Last year, the Chinese were trying to reduce their exposure to dollar assets by buying euro zone assets. This would be a complete reversal.”

A spokesman for SAFE refused to comment.

An estimated 70% of China’s foreign reserves are held in U.S. dollar securities, but the composition and management of the funds controlled by SAFE are regarded as state secrets.

However, analysts point out that SAFE rarely cuts its existing holdings significantly, due to the vast amount  of new money to invest every month.

Instead, it reduces the proportion of new investment devoted particular assets, and thereby reducing the weighting of that asset in its overall portfolio.

According to the latest figures announced by SAFE, the country’s foreign exchange reserves totaled almost 2,5 trillion dollar at the end of March, up by USD 174 billion in just six months.

Separately, a Chinese diplomat says he is “worried about” the effect of Europe’s debt crisis and the weakness of the euro on the global recovery and China’s country’s exports.

“The euro’s fluctuation will have an impact on China’s thinking, but it’s only one element” in any decision to allow the Chinese currency to rise vice foreign minister He Yafei  says, according to Bloomberg.

China’s official reserves have been growing at a rapid pace for years, driven by inflows of foreign capital, a large trade surplus and restrictive cross-border capital controls.

SAFE, which holds an estimated $630 billion of euro zone bonds in its reserves, has expressed concern about its exposure to the five so-called peripheral euro zone markets of Greece, Ireland, Italy, Portugal and Spain.

Any move by SAFE would mark a significant change in direction, as Beijing has been trying to diversify away from the US dollar in recent years by buying a greater proportion of assets denominated in other currencies.

The consequences of such action by Chinese authorities can only be imagined.

Market Snap Shots

Today’s movement in eur/usd illustrates more than anything else that investors are not sure what to believe.

However, after a short rally earlier Thursday, the RSI is now overbought, and a reaction down can be expected any time soon.



Pretty much the same pattern in the eur/jpy relation.

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European Banks: “Leman Times Ten”

Welcome Back to Earth, Mr. Market

Proposal For New Single European Bond

RBS Analyst Warns Investors

Euro-Slide Continues After Spanish Bank Rescue

Albert Edwards: Europe On The Edge Of A Deflationary Precipice

“Sending Europe Back To The 1950′s”

Fitch: Credit Markets Still Deteriorating

Stock Market Guru: Sell Everything!


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Rethink The Global Money Supply

In Law & Regulations, Learning on 10.05.10 at 21:31

Less reliance on the U.S. dollar by international reserves would be widely beneficial, director of Earth Institute at University of Columbia, Jeffery D. Sachs, writes.

“This special role of the dollar in the international monetary system has contributed to the global scale of the current crisis.”

Jeffery D. Sachs

The surge in the U.S. money supply was thus matched by a surge in the money supplies of countries linked to the U.S. dollar. The result was a temporary worldwide credit bubble, followed by a wave of loan defaults, falling housing prices, banking losses and a dramatic tightening of bank lending, Jeffery D. Sachs points out.

The People’s Bank of China jolted the financial  world in March with a proposal for a new global monetary arrangement. The proposal initially attracted attention mostly for its signal of China’s rising global economic power, but its content also has much to commend it.

A century ago almost all the world’s currencies were linked to gold and most of the rest to silver. Currencies were readily interchangeable, gold anchored exchange rates and the physical supply of gold stabilized the money supply over the long term.

The gold standard collapsed in the wake of World War I. Wartime financing with unbacked paper currency led to widespread inflation. European nations tried to resume the gold standard in the 1920s, but the gold supply was insufficient and inelastic. A ferocious monetary squeeze and competition across countries for limited gold reserves followed and contributed to the Great Depression. After World War II, nations adopted the dollar-exchange standard.

The U.S. dollar was backed by gold at $35 per ounce, while the rest of the world’s currencies were backed by dollars. The global money stock could expand through dollar reserves.

President Richard Nixon delinked the dollar from gold in 1971 (to offset the U.S.’s expansionary monetary policies in the Vietnam era), and major currencies began to float against one another in value. But most global trade and financial transactions remained dollar-denominated, as did most foreign exchange reserves held by the world’s central banks.

The exchange rates of many currencies also remained tightly tied to the dollar.

This special role of the dollar in the international monetary system has contributed to the global scale of the current crisis, which is rooted in a combination of overly expansionary monetary policies by the Federal Reserve and lax financial regulations.

Easy money fed an unprecedented surge in bank credits, first in the U.S. and then elsewhere, as international banks funded themselves in the U.S. money markets. As bank loans flowed into other economies, many foreign central banks intervened to maintain currency stability with the dollar.

The surge in the U.S. money supply was thus matched by a surge in the money supplies of countries linked to the U.S. dollar.

The result was a temporary worldwide credit bubble, followed by a wave of loan defaults, falling housing prices, banking losses and a dramatic tightening of bank lending.

China has now proposed that the world move to a more symmetrical monetary system, in which nations peg their currencies to a representative basket of others rather than to the dollar alone. The “special drawing rights” of the International Monetary Fund is such a basket of four currencies (the dollar, pound, yen and euro), although the

Chinese rightly suggest that it should be rebased to reflect a broader range of them, including China’s yuan. U.S. monetary policy would accordingly lose its excessive global influence over money supplies and credit conditions. On average, the dollar should depreciate against Asian currencies to encourage more U.S. net exports to Asia. The euro should probably strengthen against the dollar but weaken against Asian currencies.

The U.S. response to the Chinese proposal was revealing. Treasury Secretary Timothy Geithner initially described himself as open to exploring the idea; his candor quickly caused the dollar to weaken in value—which it needs to do for the good of the U.S. economy. That weakening, however, led Geithner to reverse himself within minutes by underscoring that the U.S. dollar would remain the world’s reserve currency for the foreseeable future.

Geithner’s first reaction was right. The Chinese proposal requires study but seems consistent with the long-term shift to a more balanced world economy in which the U.S. plays a monetary role more coequal with Europe and Asia. No change of global monetary system will happen abruptly, but the changes ahead are not under the sole control of the U.S.

We will probably move over time to a world of greater monetary cooperation within Asia, a rising role for the Chinese yuan, and greater symmetry in overall world monetary and financial relations.

By Jeffrey D. Sachs

Director of the Earth Institute at Columbia University

This article was first published by Scientific American in June 2009.

An extended version is available at

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Fitch Warns Of New Speculative Oil Spike

In Financial Markets, International Econnomic Politics, National Economic Politics on 06.05.10 at 21:19

Fitch Ratings have released a special report in where they warns against another speculation driven spike in the price of crude oil. According to Fitch, there is a risk that the price of crude oil might be pushed up to around 150 dollar a barrel, at a time when companies still struggle with recovering from the recession.

“As a result, under this scenario, Fitch anticipates that the potential for negative ratings actions could be higher than previously experienced.”

Fitch Ratings

“Despite this evidence of lack of tightness in oil markets, the possibility of further increases in crude oil pricing based on dollar weakness remains an ongoing risk for corporate issuers, given widespread investor concerns about the unprecedented expansion of the U.S. money supply in the wake of the global recession and looming structural deficits,” the Fitch analysts writes.

“While such a spike does not represent Fitch’s base case expectation, Fitch believes there is significant analytic value in thinking through possible impacts that such a scenario could have on credit quality across a range of corporate sectors and credits outside of exploration and production in the current still-fragile economic environment,” they continue.

Fitch’s outlook for the oil and gas sector in 2010 calls for $70 base case oil prices in 2010, but the rating agency points out that non-fundamental factors are a significant driver of crude prices in the current environment.

Low-Hanging Fruit Have Already Been Plucked

“An important credit consideration for most sectors across the space is the degree to which companies have already performed aggressive adjustments to maintain margins and financial flexibility in response to the last crude oil run-up and subsequent recession.”

These actions include workforce reductions, general and administrative cuts, facility closures,reductions in discretionary capital expenditures, lower dividends, and changes to healthcare and pension benefit programs, among others.”

“As a result, the ability to offset a future spike in energy input costs through further restructurings in other parts
of the business is limited at this point in the cycle, as the low-hanging fruit have already been plucked.”

Unsustainably high oil prices, by definition, tend to sow the seeds of their own destruction as consumers respond to high end-user prices by cutting back on demand.

“Note that while this report focuses solely on oil, a scenario of dollar weakness would also affect other dollar-priced commodities which could exacerbate the pressures mentioned in this piece,” Fitch adds.

As seen in the chart below, dollar depreciation accounted for a significant portion of $150 per Barrel Crude Oil:

“The scenario of a U.S. dollar depreciation based on a run-up in oil prices would likely create a tailored version of this event, as the spike in pricing and accompanying demand response would be expected to be largely concentrated in the U.S and dollarpegged currencies. However, even with the rapid growth of oil demand in emerging markets, the U.S. remains a large enough oil consumer (approximately 22% of 2009 global demand) that a significant U.S. demand response would be expected to be sufficient to eventually push global pricing back down. Similar to the aftermath of the 2008 run-up and collapse in crude pricing.”

“Fitch anticipates that a crude oil spike could create a period of wrenching adjustment for a number of corporate issuers, including airlines, trucking, chemicals, and consumer products industries. From a credit perspective, however, a key difference between a future crude oil spike and the most recent run-up lies in the reduced ability of many corporate issuers to offset the impact of higher energy costs through adjustments and restructurings in other parts of their business, given the aggressive actions most have already taken to preserve margins and maintain credit quality.”

As a result, under this scenario, Fitch anticipates that the potential for negative ratings actions could be higher than previously experienced, the analysts conclude.

These industries will be hit hardest:

Here’s a copy of the Fitch Oil Report.

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China: “Mother of All Black Swans”

Gas Shortage For Freezing Brits

Saxo Bank’s “Outrageous Predictions 2010″

UniCredit: Double Dip and Oil Shock


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In The Bright Minds Of IMF

In Financial Markets, Health and Environment, International Econnomic Politics, Views, commentaries and opinions on 12.03.10 at 23:15

Sometimes you may wonder what is going on in the minds of our top international leaders. Like the IMF-boss Dominique Strauss-Kahn who’ been touring Africa recently, praising the continents central banks for their way of handling The Great Recession when in fact Africa was never in one.

“When America sneezes, Africa’s tuberculosis gets worse.”

Raila Odinga

The global recession has barely begun to hit Africa. Its banks and stock exchanges have been isolated enough from the wider capital markets to suffer few shocks, foreign investment remaine steady and oil-rich countries such as Angola continues to boom.

But dampened demand for African exports last year, together with the shrinking of many venture-capital funds, has now hit the continent hard after a long period of unusually perky growth.

Countries south of the Sahara together grew by less than 2% in 2009, and in many places income has fallen and unemployment started to rise.

According to the IMF’s own figures, sub-Saharan Africa’s economy will grow overall by 4.5% this year.

But that may be distorted by a large boost from oil and gold, as well as from the guaranteed aid that makes up half the budget in some countries.

Kenya will struggle to grow by 3% this year and even that depends on an upswing in tourism.

Nearly every African economy will grow more slowly than the 6% that many development economists reckon is the minimum to enable countries with rapidly increasing populations just to stand still.

The problems are obvious, but the fact is that Africa hasn’t experienced negative economic growth yet, and will probably not do so in the foreseeable future either.

So, it sounds very strange when Mr. Strauss-Kahn is traveling through the continent praising Africa’s central banks.

He even says that Africa’s economies were more dynamic than most of Asia’s. The main point, he said, was that Africa was recovering from the global crisis faster than expected.


What if we apply the same degree of accuracy to some of the other statements made by the IMF chief:

“There is evidence of new thinking in recent financial sector reform proposals.”

(Financial Times, 03.17.2010)

“This time it’s different.”

(Huffington Post, 03.12.2010)

“My belief is that Haiti—which has been incredibly hit by different things—the food and fuel prices crisis, then the hurricane, then the earthquake—needs something that is big. Not only a piecemeal approach, but something which is much bigger to deal with the reconstruction of the country: some kind of a Marshall Plan that we need now to implement for Haiti.”

(IMF statement, 01.20.2010)

“The current international monetary system have demonstrated resilience during the crisis, with the U.S. dollar playing the role of a safe haven asset.”

(IMF press release, 02.26.2010)

“The IMF has already moved quickly to help many of our member countries in this time of crisis, including by protecting social spending in order to cushion the impact of the crisis on the most vulnerable.”

(The Guardian, 03.26.2009)

“Human society is not a force of nature. The financial crisis was a catastrophic event, but one created by human hand. The lesson we all need to learn is that even a free market economy needs some regulation, otherwise it cannot function.”

(Der Spiegel, 09.14.2009)

Get’s kinda confusing, doesn’t it?

In the election campaign against Nicolas Sarkozy in 2007 Strauss-Kahn was described as “talented and imaginative”.

Imagine All The (Black) People

“When America sneezes, Africa’s tuberculosis gets worse,” Kenya’s prime minister, Raila Odinga, told a sympathetic Mr Strauss-Kahn, as he passed through Nairobi to herald a new IMF Green Fund, The Economist writes in its latest issue.

Full details will be released in April, but Mr Strauss-Kahn said the fund would focus on mitigating climate change in Africa.

A figure “rising to $100 billion by 2020” was mentioned, but this made some people wonder whether the IMF was simply trying to take over responsibility for the $100 billion that rich countries vaguely promised to spend on poor ones at December’s climate-change conference in Copenhagen.

Should so vast a dollop of cash become available, Mr Strauss-Kahn hints it would be divvied up along the lines of the IMF’s existing quota system.

He told Africans they would be hit first and hardest by climate change, so the need for the Green Fund was urgent.

Of course, the climate change!

Well, that’s another side of the story.

Statement by IMF Managing Director Dominique Strauss-Kahn at the Conclusion of His Visit to Zambia

Statement by IMF Managing Director Strauss-Kahn at the Conclusion of his Visit to Democratic Republic of Congo

Statement by IMF Managing Director Strauss-Kahn at the Conclusion of his Visit to Kenya

More from The Economist:

The IMF’s plan for Africa

Ian McEwan’s “Solar”

Nuclear proliferation

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Global Markets: "The Fear Is Still Out There"

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 08.02.10 at 14:10

The European stock markets started the week in positive territory after last weeks substantial downturn. But the fear is still out there, and by noon Monday several major stock indices are back in the red as the dollar slides and commodities rise. Are the analysts too optimistic and the investors too pessimistic?

“All in all we maintain a positive market view and believe that the end of the correction is in sight.”

Orion Securities

Most European stock markets continue to slide Monday, as currency and commodities struggle to find a direction and U.S. index futures drops.

With a fall of 0.5% last week Wall Street was off to a weak start of the year.

European stock markets fell 2-3%, while the Oslo Stock Exchange ended down 3.2%.

Uncertainty around public finances in Greece, Portugal and Spain was an important driver for the decline.

Disappointing Initial Claims numbers from the U.S. questioned the improvement in the U.S. labor market.

While most economists estimate that the number of available should be reported under 420.000-430.000 for it to be consistent with rising employment, it was reported about 480,000 new job last week.

The U.S. employment report, however, gave some support to the market. It showed that unemployment fell from 10.0% in December to 9.7% in January.

The number of employed however, fell by 20,000 to an expected increase of 15,000. “We interpret the figures to suggest that the U.S. labor market is the gradual improving, but it will take time before we see a substantial increase in employment,” the Norwegian brokerage firm Orion Securities writes in a note to their clients Monday.

“In commodity markets there was also a broad decline driven by risk aversion and strong dollars.”

Oil prices fell 2.6%, while aluminum and copper fell respectively 5.5% and 8.9%.

In the bond market long prime interest rates moved slightly higher, while credit extended further.

Risk premiums on government debt for countries around Mediterranean continued to expand.

In the currency market the dollar rose 6 cents to dollars, while the euro fell by 3 cents. The dollar rose 1.4% against the euro.

A New Crisis Or The End Of  A Correction?

“The last two weeks of decline may mark the end of last year’s ascension, but not the start of a new market decline,” analysts at Orion Securities writes.

“We envision a positive exchange of these levels, but a fairly flat market for 2010 as a whole. Our expectations based on the following:”

The global economy has bottomed out and will expand in the future. However, there is uncertainty associated with when, and how quickly, the U.S. employment will increase. Historically, employment starts to pick up approximately six months after the economy out of recession. Therefore we should see growth soon if the history repeats itself. Last weeks Initial Claims numbers can indicate that growth will come later rather than sooner, but the positive trend does not seem to be broken. The U.S. employment report Friday indicated that unemployment moves towards a gradual improvement, and that employment rates have moderated.

Limited risk of another financial crisis. Greece is struggling to finance its national debt, and the challenges for Spain and Portugal is rising. With further global risk aversion may companies once again get trouble with refinancing, that in turn can lead us into a new financial crisis. We doubt, however, this scenario and believe the financial markets will stabilize and that the current fears are exaggerated.

The global stock exchanges are affordable given the analysts’ earnings expectations. Earnings estimate for S&P’s 500 is 78 for 2010, rising to 94 for 2011. Forward P/E has peaked since January, and fell from 15.0 to 13.3. As long as the global economy growth does not derail the downside is probably limited at the current level.

Analysts and investors disagree in terms of the future. While analysts believe in a V-shaped rebound performance, investors are more pessimistic. This is reflected in the pricing of the stock market in 2010 – and 2011-estimates. We think the analysts are somewhat optimistic, and that investors are too pessimistic.

The U.S. companies earnings reports have surprised on the upside this season. Strong results have been driven both by higher than expected revenue growth and effective cuts in costs. Attractive valuation and strong corporate figures underpin our fundamentally positive outlook.

History has a tendency to repeat itself. In the five-year rising market from 2003 to 2007, we saw seven corrections. On average, it took between six and eight months between each correction. There are now seven months since the correction in June 2009. The decline we have witnessed the last three weeks has several similarities with the previous ones.

U.S. listed companies are currently valued at only 13.3 times estimated earnings over the next twelve months. This is the lowest level in seven months and well below the long-term historical average is around 15. As long as the upswing in the global economy don't derail, and a new recession gets a grip, it is probably a modest downside at these levels. But how big is the risk of another recession? It can in no way be amortized, and it's probably premature to anticipate such worries at this point.

“All in all we maintain a positive market view and believe that the end of the correction is in sight,” the analysts concludes. “Risk aversion has increased because of the uncertainty surrounding Greece, Portugal and Spain, but this should not put a significant damper on global growth prospects.”

Will the uncertainty undermine the price of oil?

“The uncertainty has dragged the euro down, and the dollar has continued to strengthen. Greek credit spreads has gone to new record levels and has dragged Portugal and Spain along with them. Uncertainty associated with some of the countries in the euro zone pushed the euro down to its lowest level against the dollar in seven months. Historically, a rising U.S. dollar has been negative for oil prices and commodities in general. If the unrest related to Greece, Spain and Portugal increase in strength, it could put a damper on oil prices and Oslo Stock Exchange. Anticipation of cold weather in the eastern part of the United States will, however, support oil prices in the coming weeks. In the short term we believe the markets will be characterized by high volatility and uncertainty.”

The Norwegian brokerage firm has 2 buy recommendations at Oslo Stock Exchange this week:

1. Simrad Optronics

2. Atea

Here’s the full research note from Orion Securities (only available in Norwegian).

European Markets Snap Shots:

Oslo Stock Exchange (OSEBX)

Frankfurt Stock Exchange (DAX)

(With Relative Strength Index and On-balance Volume Indicator)





Related by the Econotwist:

Denmark In Danger Of Becoming The “New Greece”

Dissecting The U.S. Labor Report

Nordic Central Banks Agree On Baltic Bank Bailout

Greece: From Bad To Worse?

Fears “Dutch Disease” In Norway

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The Greek Bond Bomb Keeps Ticking

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 01.02.10 at 15:41

The risk premiums on Greek government debt continued the ascension, and ended at a record high levels. Friday. If this trend continues, the Greek state will soon not be able to borrow money in the private market, and the danger of a public bankruptcy will be imminent.

“As long as the Greek debt bomb is ticking, the financial markets will remain nervous.”

Orion Securities

Greece seems to be caught in a self-reinforcing negative spiral, and it is difficult to see any quick and easy way out of the mess, analysts at Orion Securities writes to their clients Monday, and says that the hope is that other EU countries like Germany will come to aid, but this is far from certain because such a rescue will be most unpopular with German voters.

The leading Western stock exchanges, fell 1.2% last week, pressured by concerns about the sustainability of the global economic upswing and the situation in Greece.

Oslo Stock Exchange however, managed a lift of 1.6%.

The rise was led Marine Harvest, TGS and RCL which rose respectively 14%, 8% and 7%.

Among shares who pulled in the opposite direction, was Statoil and Golden Ocean, which fell 2% and 4%.

In the foreign exchange market the main focus was on Greece, which helped sending the dollar up 2% against the euro.

In the commodity markets, there was an extensive downturn. Aluminum and copper fell 5 – 6%, while Brent Oil weakened by over a dollar per barrel.

In the freight market bulk rates fell 11%, to its lowest level in three months, and in the tanker market, the arrows also pointed down.

In the bond market the ascension in Greek state interest continued, while German and U.S. government interest rates were slightly down.

Is The Stock Market Correction Over?

“This can hardly be said with certainty, but we do think the most of the decline is over. However, we recommend to follow closely developments in Greece,” analysts at Orion Securities underline.

“As long as the financial tensions continue to rise, it pays to be probably careful with risk assets in general and resources stocks in particular,” they conclude.

So, why is Greece important?

“Because the Greek problems helped to send the dollar up against the euro, and a strong U.S. dollar, in turn, undermines the commodity market. A strong dollar is also negative for Wall Street because competitiveness of American business is being reduced.”

What’s next for Greece?

“The country seems to be caught in a self-reinforcing negative spiral, and it is difficult to see any quick and easy way out of the mess. The hope is that other EU countries like Germany will come to Greece aid, but this is far from certain that such a rescue will be most unpopular with German voters.”

What happens if Greece is forced to declare a debt moratorium?

“Basically not much since Greece is a small and insignificant economy. The main risk is however, that such an event sets in motion a domino effect that affects new and far more important countries.”

“Therefore, a public bust in Greece will be bad news,” Orion Securities warns.

European Markets Afternoon Snapshots:

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