Friday, May 21, 2010

Fed Governor Says U.S. Could Feel Europe’s Pain

The pace of bad news is picking up and will ultimately become a self fulfilling prophecy. So what you say? I think it will lead to a drop in the stock market like has happened previously.


Fed Governor Says U.S. Could Feel Europe’s Pain
Published: May 20, 2010

WASHINGTON — A top Federal Reserve official warned Thursday that Europe’s debt problems could amount to a “significant external shock” to the United States economy, harming American banks and exporters and stalling the global recovery.

Daniel K. Tarullo told a House panel that another credit squeeze was “not out of the question.”

The official, Daniel K. Tarullo, said in testimony at a House hearing that the Fed’s decision last week to reinstate dollar liquidity swap lines with the European Central Bank and four other central banks was a crucial measure to minimize the risk of further financial turmoil arising from the Greek fiscal crisis.

“In the worst case, such turmoil could lead to a replay of the freezing up of financial markets that we witnessed in 2008,” Mr. Tarullo told members of the Financial Services Committee.

Despite a nearly $1 trillion financing package assembled by the European Union and the International Monetary Fund, the downturn in stock markets and continued tight financing in Europe reflected persistent uncertainties, said Mr. Tarullo, who was President Obama’s first appointment to the Fed’s board of governors.

The United States is “in a very different position” than the debt-stricken European countries, he said. But their problems could hold lessons.

“Their experience is another reminder, if one were needed, that every country with sustained budget deficits and rising debt — including the United States — needs to act in a timely manner to put in place a credible program for sustainable fiscal policies,” he said.

Two subcommittees called a joint hearing after the Fed’s decision last week. Other experts also provided strong warnings on the state of the international economy.

Edwin M. Truman, a senior fellow at the Peterson Institute for International Economics, said the new financing package in Europe was “ambitious and demanding.” He added: “It may fail, but it is in the collective interest of the United States and the international community to give the people and authorities of Greece time to implement at least the first phase of their program.”

The European Union has responded to economic imbalances since the late 1970s by providing financing without requiring adequate fiscal adjustments, with the result that European countries turned to Brussels rather than Washington for relief, Mr. Truman said.

“During those decades, policy makers in Washington were generally content that E.U. countries were not borrowing from the I.M.F. because the I.M.F. could then concentrate its limited resources elsewhere,” Mr. Truman said in a written version of his testimony. “However, in retrospect U.S. policy makers should have promoted European adjustment assertively, including through the I.M.F.”

He added: “As a former Federal Reserve official, I hold myself partly to blame for this failure.”

Carmen M. Reinhart, an economist at the University of Maryland, College Park, said that a restructuring — or a partial default — by Greece seemed probable but was “no panacea.” While other European conditions may not require a restructuring of government debts, she said, “there is a pressing need to facilitate a restructuring of private debts, notably those of financial institutions.”

At most, the newest financing package buys time for other heavily indebted countries in Europe to impose austerity measures and restructure private debts, but “it does not change Greece’s, nor anyone else’s, levels of outstanding debts and their even more worrisome profile in the period ahead,” Ms. Reinhart said.

Peter Morici, a professor at the University of Maryland’s Smith School of Business, predicted that a default by Greece would result in much higher borrowing costs for Portugal, Spain and potentially other countries. “Crisis could easily spread from Europe to the United States, much as the recent U.S. mortgage and broader financial crisis spread to Europe,” Professor Morici said.

Mr. Tarullo laid out how that contagion could spread. If sovereign debt problems were to broadly affect Europe, American banks could face large losses on their overall credit exposures, as asset values declined and loan delinquencies mounted. Money market mutual funds that hold commercial paper and certificates of deposit issued by European banks also would be hurt. The result could be a further contraction in bank lending.

“Although we view such a development as unlikely, the swoon in global financial markets earlier this month suggests that it is not out of the question,” Mr. Tarullo said.

Thursday, May 20, 2010

Stocks Fall as Strains Accumulate! What does this mean?

Euro "collapsing" becoming "radioactive" China's growth slowing, the Commercial property fallout yet to fully realized. How many new developments like the W hotels and others are up for renegotiation? How much empty commercial real estate is out there? Whilst the bad news wont have a true devastating effect for everybody the news will make it sound dire. In "charting terms" following the Dow or similar this will result in the second leg of a W movement. A share price collapse followed by a share price increase in a short space of time.

Lets watch Aivars

Stocks Fall as Strains Accumulate


U.S. stocks tumbled, leaving key indexes on pace for their first corrections since rallying from March 2009 lows.

Industrial and materials stocks led the decline as worries mounted that Europe's debt woes, in addition to possible slowing growth in China, will sap global demand. The broad retreat in stocks mirrored selloffs in many markets around the world, from the Australian dollar to metals, as investors shed riskier assets in favor of safer bets such as U.S. Treasury debt.

Worry over Europe persisted as unions went on strike in Greece and investors remained concerned that trading regulations like those introduced this week in Germany could be adopted in other countries.

"Confidence and patience are beginning to wear thinner" as no new solution emerges to calm the euro zone's turmoil, said Tim Evnin, equity portfolio manager at Evercore Wealth Management.
[0520stock] Reuters

Trading Specialist Geoffrey Friedman works on the floor of the New York Stock Exchange, May 20.

"The global interdependence is terrific when everything's working," he said, "It works in both directions. We can't immediately disassociate ourself with parts of the world that are doing badly."

The Dow Jones Industrial Average was down 277 points, or 2.6%, to 10168, in recent trading. The Standard & Poor's 500-stock index fell 32 points, or 2.9%, to 1083. Earlier selling intensified after the measures broke below their 200-day moving averages, at 10258 and 1102, respectively. The S&P 500's slide through 1100 was a key psychological move that fueled more selling, traders noted.

The measure was also on pace to post a correction of 10% from its 2010 high last month, along with the Nasdaq Composite, which was recently down 73 points, or 3.2%, at 2225. If the S&P 500 remains below 1096 through the close, and the Nasdaq is still below 2278, the measures will be down more than 10% from their 52-week closing highs reached in late April.

Sectors with the greatest global exposure posted the biggest drops, led by the material and industrial sectors as investors worried that international demand might decline.

The Dow's leading decliners included Alcoa, which dropped 4.5%; Caterpillar, which fell 4%; and Boeing, which slid 4%. Financial stocks also weakened as new trading restrictions in Europe and the U.S. Senate's debate over financial legislation continued. Hartford Financial Services slid 6.1%, while American International Group fell 6% and Citigroup slid 4%.

Shortly before 12:30 p.m., 3.7 billion shares had traded hands in New York Stock Exchange Composite volume, with 98% of volume in a downward price direction.
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Reflecting the market's heightened unease, the CBOE Market Volatility Index jumped to its highest point since April 2009, posting an intraday high above 45 before pulling back slightly.

New data added to the worries about the economy. The Labor Department said that initial claims for jobless benefits rose by 25,000 to 471,000 in the week ended May 15. Economists had predicted claims would fall by 4,000. In addition, the Conference Board's index of leading economic indicators fell in April for the first time since March 2009.

"Today's jobless claim report is evidence that there's not a strong, discernible trend that employment is stable and increasing," Mr. Evnin said.
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The euro edged down to $1.2368 on Thursday, surrendering gains made a day earlier after comments from a euro-zone official suggested coordinated central-bank intervention to stem the euro's slide was off the table.

The euro was also weighed down by uncertainty over whether other euro-zone countries would follow Germany's ban on naked short sales of certain investments. Markets are also awaiting a crucial vote Friday in the German parliament over its contribution to the European Union/International Monetary Fund rescue package.

The U.S. Dollar Index, reflecting the U.S. currency against a basket of six others, edged up 0.1%. Treasurys also advanced, pushing the yield on the 10-year note down to 3.25%. Crude-oil futures fell to nearly $70 a barrel, as did gold futures.

The Euro Turns Radioactive!

As more of these headlines come out what do you think will happen to the value of the Euro vs the USD?


The Euro Turns Radioactive
Longer-Term Investors and Companies, Not Just Hedge Funds, Shun the Currency
Some of the world's largest money managers and central banks have become increasingly skeptical of the euro, presenting a threat to the common currency's prospects.
In an interview with Dow Jones Newswires, John Lipsky, first deputy managing director of the International Monetary Fund, speaks about reactions to the global recession, comparisons between Greece and Japan, and plans for fiscal adjustment in Japan.
So far during the euro's months-long descent, attention has been focused on hedge-fund selling of European assets but central banks and large managers have a much-larger influence on foreign-exchange markets. Even if they don't dump euro assets, a mere pause in their buying could weigh heavily on the currency.
The euro on Wednesday rose to $1.2385, bouncing from $1.2143, its lowest level against the dollar in four years hit during the day, and from $1.2210 late Tuesday in New York. It was only the second gain in seven days against the dollar for Europe's shared currency, which has slumped nearly 15% against the dollar this year.
South Korea's central bank, which has about $270 billion in foreign-currency reserves, among the biggest in the world, said this month that the euro zone's sovereign debt problems make the euro, used by 16 nations, less attractive as a reserve currency. Iran's central bank chief this week said that country may rethink its reserves, which the Central Intelligence Agency estimates around $81 billion. And Russia, with $400 billion in foreign-currency reserves, said it shifted its mix of reserves away from the euro last year.
Mutual-fund data show that in recent weeks, European and U.S. investors have shifted out of euro-zone equity funds. Asia's largest bond fund, Kokusai Asset Management's Global Sovereign Fund with $40 billion under management, lowered its euro allocation from 34.4% in March to 29.6% on May 10, according to a company manager. And portfolio managers with huge money pools, such as Allianz SE's Pacific Investment Management Co., or Pimco, and Baring Asset Management, expressed caution on the euro in interviews with The Wall Street Journal.
To be sure, not all money managers are selling euros, and some see the currency's weakness as a buying opportunity. An adviser to China's central bank, the biggest player in currency markets with more than $2 trillion in reserves, said this week it planned to keep diversifying its vast dollar holdings, which has in the past involved buying euros.

Recent euro weakness is a sign that longer-term investors and companies, not just hedge funds, are heading toward the exits. The shift is causing worries that central banks could be next. WSJ's Mark Gongloff discusses.
China, Russia and large emerging-market holders of currency reserves have tried in recent years to shift their mix of holdings in favor of euros, expressing worries about the fiscal health of the U.S. While China's may still diversify, many banks began paring their euro exposure late last year, and the wariness has lately become more apparent.
"The program of diversifying out of dollars has come to a screeching halt," said Collin Crownover, managing director and global head of currency management for State Street Global Advisors. "If the downward progression of the euro continues, then you see outright selling of euro-zone assets, and it snowballs and gets worse."
Money flowed out of Europe at an annualized pace of $50 billion in the first two months of 2010, according to Jens Nordvig, managing director of currency research at Nomura Securities International. That pace has likely increased in recent months, contributing to the euro's recent decline.
That outflow is likely due almost entirely to large investors, partly because hedge funds likely have reached the upper limit of their ability or desire to place bets against the euro, suggests Mr. Nordvig.

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"Somebody new is selling now," he said.
And unlike speculative investors, long-term investors likely won't quickly change their recent behavior even if the euro enjoys a respite.
"It's too early in the evolution of this particular crisis to assume all's well and investors should jump back into places that have burned them in the past few weeks," said Scott Mather, head of global portfolio management at Pimco, the world's largest bond-fund manager.
Many "real money" investors that might be expected to buy the euro on dips in value are staying on the sidelines given Europe's discouraging economic outlook and persistent grumblings in Germany over the cost of bailing out crisis-racked Greece.
"It's making a few people think, 'What am I getting into?' " said Colin Harte, director of fixed-interest and currencies at the London office of Baring, which has more than $47 billion under management. "What if you buy the euro and the Germans vote with their feet and leave" the currency union?
While Mr. Harte would normally buy the euro at its current rate, he says he can't really predict where the euro will go from here. His forecast ranges from $1.10 to $1.34 by year-end.
Central banks, which held a combined total of around $7.5 trillion in reserves at the end of last year, form the backbone of the currency markets. Their slow and steady shifts out of the dollars they generally receive from trade or commodities exports, and into other currencies, play a big role in determining exchange rates.
Reserve managers wouldn't need to sell euros at this point to hit the currency hard. Instead, they would merely need to slow down the pace of euro purchases, and that risk is needling market watchers now.
Central banks "are not as active as they had been," said Adam Reynolds, co-head of currencies and fixed income at Societe Generale in Hong Kong. His firm, like others, processes currency trades on behalf of central banks, sovereign-wealth funds and private investors.
—Katie Martin, Andrew Monahan and Min Zeng contributed to this article.

Wednesday, May 19, 2010

China in Trouble as the Euro falls!

Many articles posted (including October 2009)that supported my belief that the USD was not in trouble and that the Euro was likely to fall as the cost base was not more productive than the US and we had not seen the debt fallout yet from Europe. Well now we have the European debt crisis and the Euro is starting to slide. Watch how the currency manipulators incorporate the Volcano eruption into the story as to why the Euro is not worth as much as the USD.


Europe’s Debt Crisis Casts a Shadow Over China
HONG KONG — The pain of the European debt crisis is spreading as the plummeting euro makes Chinese companies less competitive in Europe, their largest market, and complicates any move to break the Chinese currency’s peg to the dollar.
Enlarge This Image

Qilai Shen/Bloomberg News
The China Import and Export Fair in Guangzhou last month. The euro's slide is a threat to inexpensive Chinese exports.

Chinese policy makers reached a rough consensus early last month about breaking the dollar peg and letting the currency, the renminbi, rise in value somewhat, according to people close to Chinese currency policy makers. Uncoupling the currencies would make American goods more competitive against Chinese products. But for various reasons, China has not yet put that policy into place.
And in light of the euro’s nose dive, such a move could be difficult. Letting the renminbi rise against the dollar would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe.
The euro has plunged against the renminbi in recent weeks, at one point Monday reaching its lowest level since late 2002.
The steep rise of the renminbi prompted a Commerce Ministry official in Beijing to warn Monday that China’s exports could be threatened.
The official’s comments were the most explicit yet on the implications for China of Europe’s recent financial difficulties. The comments also suggest that even China — the world’s fastest-growing major economy and increasingly the engine of global growth — is not immune to the crisis that started in Greece and threatens to spread across much of Europe.
“The yuan has risen about 14.5 percent against the euro during the last four months, which will increase cost pressure for Chinese exporters and also have a negative impact on China’s exports to European countries,” Yao Jian, the ministry’s spokesman, said at a news conference in Beijing, according to news services, using another term for China’s currency.
It is a potentially awkward moment. The American secretary of commerce, Gary Locke, is in China this week leading the first cabinet-level trade mission of the administration of President Obama.
Some economists warn that China may face more problems. The biggest reason Chinese exports plunged early last year was not weakening demand in industrialized countries but a sudden, temporary disappearance of trade finance from Chinese and foreign banks. The availability of trade finance could easily become a serious problem again soon, said Dong Tao, the chief Asia economist at Credit Suisse.
Chinese exporters rely very heavily on bank letters of credit to finance their shipments. The availability of the letters of credit is closely linked to overnight lending rates between banks. When banks have trouble borrowing money themselves — as has been happening as a result of worries about European banks’ possible losses from the region’s sovereign debt crisis — they tend to cut sharply the issuance of letters of credit for trade finance.
The banks see that as a quick, easy way to conserve cash without violating the terms of other financial obligations, like established lines of credit for big corporations.
Interbank lending rates surged late last week and on Monday and must now come back down very quickly to persuade banks to keep issuing letters of credit, Mr. Tao said. “Without trade finance, trade won’t happen,” he said.
The Shanghai stock market plunged Monday, with the composite index falling 5.1 percent on worries about global demand as well as concerns about possible further moves in China to limit a steep rise in real estate prices this spring.
Some Chinese companies are already running into difficulty because of the euro’s fall against the renminbi.
“We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.
“They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.
The renminbi is rising along with the dollar against the euro. The Chinese government has continued to intervene heavily in currency markets in recent weeks to prevent the renminbi from rising against the dollar, maintaining an informal peg of 6.827 renminbi to the dollar, the level since July 2008.
Because American companies in particular compete in the Chinese market with European companies in many industries, the euro’s weakness against the renminbi is putting American companies at a disadvantage. The American commerce secretary, Mr. Locke, said Monday in Hong Kong that Mr. Obama’s goal was to double American exports by 2015. Short-term currency fluctuations do not detract from that goal, he said in an interview, adding, “Who knows what the euro will be next month, six months from now or a year from now?”
Steve Jennings, one of the American executives traveling with Mr. Locke, said that the weakness of the euro would help European companies compete against American companies in export markets all over the world.

Gary Locke, the United States commerce secretary, on Monday with Rita Lau, his counterpart in Hong Kong. He said President Obama’s goal was to double American exports by 2015.

The New York Times
“As the euro continues to decline, they’re going to have some advantages,” said Mr. Jennings, the chief marketing officer of BPL Global, a company based in Oregon that manufactures electricity monitoring equipment.
Chinese leaders reached a consensus in early April to break the renminbi’s peg to the dollar. That ended a dispute that had spilled into public view in March when Commerce Ministry officials warned in speeches and interviews in Beijing and Washington about the dangers of any change in the renminbi’s value. The ministry halted those warnings immediately after the consensus was reached, and Chen Deming, the commerce minister, even reversed himself publicly by saying that China’s trade deficit in March was nothing to worry about.
But events since then have delayed adoption of the consensus, including public attention paid to a visit to Beijing by the United States Treasury secretary, Timothy F. Geithner, followed by the Qinghai earthquake and now the euro’s slide.
The United States is far from alone in calling for China to let the renminbi rise.
Government officials in Singapore, India and Brazil have also called publicly in the last three weeks for the Chinese government to break the renminbi’s peg to the dollar.
Continued Chinese inaction would antagonize many commercial rivals of China, and could fuel pressures in Washington for Congress to draft trade legislation threatening restrictions on Chinese exports.
The euro’s difficulties have also inflicted tens of billions of dollars in losses on the value of China’s $2.4 trillion in foreign exchange reserves, according to Western economists. China had been trying to limit its dependence on United States Treasury securities for those reserves in recent years, fearing that the United States might someday suffer from budget problems or inflation, and did so by expanding its holdings of European government bonds.
But China’s State Administration of Foreign Exchange, which administers the reserves, does not have to mark them to market daily — record their fluctuating value — so it is not clear what effect, if any, the losses will have on policy.