http://globaleconomicanalysis.blogspot.com/2013/06/fierce-selloff-in-emerging-market.html
( Of course sometimes we just see reality intrude..... )
Wednesday, June 12, 2013 12:02 PM
Fierce Selloff in Emerging Market Currencies; India Intervenes to Stop Plunge in Rupee; Brazil Steps Up Real Intervention; Root Cause of Crisis
I's hard not to laugh at the irony of recent central bank currency actions.
- After complaining for years about the strength of the Real, the Brazilian central bank stepped up intervention actions hoping to stop a plunge in the currency.
- Turkey now attempts to attract capital after taking measures for the past four years to stop the flow of money into the country.
- In India, the central bank seeks to stop a plunge in the Rupee which is at a record low of 58.95 to the dollar.
The Wall Street Journal reports Emerging-Market Currencies See Turnaround After Hefty Losses
The South African rand and other emerging-market currencies reversed course to gain against the dollar Tuesday after suffering heavy losses earlier in the session.Emerging Market Assets Suffer in Fierce Sell-Off
These currencies have plummeted rapidly in June, dragged down by expectations the Federal Reserve will taper its bond-buying program later this year. Ultra-accommodative U.S. monetary policy had helped drive investors to seek higher yields in emerging markets in recent years, analysts say.
India's central bank dove into foreign exchange markets Tuesday to stop the rupee's slide at a record low of INR58.95 to the dollar. Pressured to attract capital to the country, a top Indian economic official promised a new round of measures to allow foreign investment in currently restricted parts of the economy. The rupee pared losses against the dollar but still fell 0.3% on the day to trade at INR58.34 per dollar.
Turkey's central bank on Tuesday announced new measures to attract capital after spending much of the past four years trying to stop too much money from flooding into its economy. That helped to stem the lira's fall to near a multi-year low against the dollar as police moved in on protesters in Istanbul. Turkey's capital measures echoed Brazil's move earlier this month to eliminate a 6% tax on foreigners' bond investments.
Brazil's central bank stepped up intervention in the face of the rapid currency depreciation that began on May 28, with a series of foreign exchange swap auctions, including two on Tuesday.
The Financial Times reports Emerging market assets suffer in fierce sell-off.
Emerging market currencies, stocks and bonds suffered a fierce sell-off on Tuesday on rising investor concerns over the prospect of the US Federal Reserve reining in its programme of bond-buying to drive down long-term interest rates.Cause of the Selloff
The South African rand and the Brazilian real touched four-year lows against the US dollar on Tuesday, and the Indian rupee fell to a record low. Even relatively robust countries like the Philippines and Mexico – long favourites of investors – have been hit by a spate of selling.
The FTSE Emerging Markets index fell 1.7 per cent on Tuesday, taking its decline since its May peak to more than 10 per cent. Shares in Brazil – one of the four big emerging markets – closed 3 per cent in São Paulo on Tuesday. That pulled Brazilian shares into bear market territory – a drop of more than 20 per cent from a peak this year.
Both international and local currency emerging market bonds have been pummelled, sending borrowing costs higher.
Benoit Anne, a senior strategist at Société Générale, said central bank money had arguably inflated a bubble in emerging markets, which was now unravelling as investors priced in a change in Fed policy. “This will not be a short-lived sell-off,” he predicted.
Emerging market fund managers have also been hit by investor redemptions. Asset managers that focus on international bonds last week suffered the biggest investor withdrawal since mid-2007, according to EPFR. Emerging market equity funds were hit with the biggest redemptions since 2011.
Both the Financial Times and the Wall Street Journal pinned the blame on the possibility the Fed would stop its QE programs later this year.
I rather doubt that is the cause, and I also doubt the Fed is going to stop QE any time soon.
Instead, I propose this is what happens when bubbles burst. And a huge part of numerous bubbles was widespread belief the growth in China and India will last forever. Hot money plowed into emerging market countries and also commodity producing countries.
Australia is another casualty of the coming bust of China. For details please see Australian Dollar Plunges as Home Loans Dive; Australia Insolvencies Hit Record; Worst is Yet to Come.
To be sure, insane amounts of liquidity fueled various bubbles in stocks, in bonds, in emerging markets. But with the global economy rapidly slowing, and with much of Europe in an outright economic depression, the Fed is not that likely to curtail QE soon.
If the Fed does slow QE, it will not be because the US economy is strengthening, but rather realization by the Fed (not admitted of course) that various stock and bond market bubbles pose serious economic risks if allowed to grow bigger.
Root Cause of Crisis
By the way, all this extremely volatile currency action, as well as various equity and bond market bubbles, can be pinned entirely on central banks, fractional reserve lending, and lack of a gold standard.
Mike "Mish" Shedlock
http://www.zerohedge.com/news/2013-06-12/banks-rig-47-trillion-day-currency-markets-profit-clients
Banks Rig $4.7 Trillion A Day Currency Markets To Profit Off Clients
- Barclays
- Bloomberg News
- Bond
- Central Banks
- Citigroup
- default
- Deutsche Bank
- Japan
- LIBOR
- Merrill
- NYMEX
- Reuters
From GoldCore
Banks Rig $4.7 Trillion A Day Currency Markets To Profit Off Clients
The world’s biggest banks have been manipulating benchmark foreign-exchange rates used to set the value of trillions of dollars of investments, according to a Bloomberg investigation.
Employees have been front-running client orders and rigging WM/Reuters rates by pushing through trades before and during the 60-second windows when the benchmarks are set, said five current and former traders, who requested anonymity because the practice is controversial.
Dealers colluded with counterparts to boost chances of moving the rates, said two of the people, who worked in the industry for a total of more than 20 years.
The behavior occurred daily in the spot foreign-exchange market and has been going on for at least a decade, affecting the value of funds and derivatives and all investments.
The Financial Conduct Authority, Britain’s markets supervisor, is considering opening a probe into potential manipulation of the rates, according to a person briefed on the matter.
Informed observers have long warned that the global $4.7-trillion-a-day foreign exchange market, the biggest in the financial system has all the hallmarks of a casino.
The inherent conflict banks face between executing client orders and profiting from their own trades is exacerbated because most currency trading takes place away from exchanges.
The FCA already is working with regulators worldwide to review the integrity of benchmarks, including those used in valuing derivatives and commodities, after three lenders were fined about $2.5 billion for rigging the London interbank offered rate, or Libor. Regulators also are investigating benchmarks for the crude-oil and swaps markets.
“The price mechanism is the anchor of our entire economic system,” said Tom Kirchmaier, a fellow in the financial-markets group at the London School of Economics. “Any rigging of the price mechanism leads to a misallocation of capital and is extremely costly to society.”
The benchmarks are based on actual trades or quotes, rather than the bank estimates used to calculate Libor. Still, they’re susceptible to rigging, according to the five traders, who said they had engaged in or witnessed the practice.
The traders interviewed by Bloomberg News declined to identify which banks engaged in manipulative practices and didn’t specifically allege that any of the top four firms were involved. Spokesmen for Deutsche Bank, Citigroup, Barclays and UBS declined to comment.
It is becoming increasingly evident that many key financial markets are being rigged and manipulated by banks and central banks today. Some of the manipulation is overt, some is covert.
The world's largest banks are fixing prices in many key markets and benchmarks which is affecting the value of money itself and will ultimately leading to the value of money in your pocket becoming worth much less.
It is distorting markets and leading to a false sense of security and unwarranted and dangerous risk appetite.
It leads to a heightened risk of market dislocations, market crashes and monetary crisis. It could also lead to the much anticipated default on the COMEX as more and more nervous investors, individual and institutional, opt to take delivery of physical bullion.
This makes owning physical gold in your possession or in a vault that you can ship from at will more vitally important than ever before.
* * *
http://www.zerohedge.com/news/2013-06-12/wednesday-new-tuesday-overnight-equity-ramp-returns
Wednesday The New Tuesday As Overnight Equity Ramp Returns?
Submitted by Tyler Durden on 06/12/2013 - 07:09
Wednesday may be the new Tuesday (which halted its relentless and statistically impossible streak of 20 out of 20 up DJIA days last week), if only in terms of the overnight no news stock futures ramp, which today is back with a vengeance. In a session that was devoid of any news, the e-Mini is up enough to practically erase all of yesterday's losses. Whether this is due to a relatively calm Nikkei trading session, to no further surge (or collapse) in the USDJPY, or to the 10 Year trading flat inside 2.20% is unclear. What is clear is that the bipolar market swings from extreme to extreme on speculation about the largely irrelevant topic of whether the Fed will taper (because if it does, it will be very promptly followed by an untapering once risk assets around the world implode.)
http://www.tfmetalsreport.com/blog/4774/taper-talk
Taper Talk
The all-seeing, all-knowing Bernank is playing with fire.
Bernank The Magnificent thinks he has things under control but the daily parade of Goon-speak MOPE is causing an acceleration of the selloff in treasuries. What the heck is going on here?
Take a look at this chart of the 10-year Tresury note September futures contract. The selloff in bonds began with the May BLSBS data and it continues today, six weeks later.
The yield on the 10-year note is now up to 2.23%. That may not seem like much but, when you consider that not too long ago is was yielding near 1.40%, you realize that rates have moved up by more than 50% in the past 8 months. That's a lot. The acceleration in the decline since early May suggests only two possibilities:
- The discussion of a "Fed taper" isn't just talk...it's actually happening. Right here and right now. The reduced demand from The Fed leaves more sellers than buyers and bond prices are falling.
- The Fed has not begun to "taper" and is, instead, still directly monetizing $45B/month, augmented with the $40B/month in
corporate welfareMBS purchases from the Primary Dealers. Selling by all of the other market participants is overwhelming The Fed's daily bid and driving prices lower.
Which is it? Well, here's a chart of The Fed's balance sheet from back in late January when Fed "assets" eclipsed $3T for the first time.
And in the five months since, the total has grown to $3.342T according to the latest weekly press release. (http://www.reuters.com/article/2013/05/30/us-usa-fed-discount-idUSBRE94T12L20130530) Let's see...a little, quick back-of-the envelope math...$85B x 4 months = $340B...so this $3.342T number looks about right.
So, if The Fed is still pumping out $85B/month, we can rule out #1 above. Hmmm...I guess that leaves us with #2 (no pun intended)...and this is where it gets interesting.
Even leaving out the $40B/month in MBS purchases, The Fed is still directly monetizing $45B/month in treasury debt. Regardless, in the past month alone, bond prices have fallen by 5 points and rates on the 10-year note have backed up from 1.6% to 2.2%. Jeez Louise! It's as if there is currently no other buyer of bonds in the U.S. Every other market participant is selling! They have to be in order to swamp and over-run the Fed's daily bid to this extent. So, who are these sellers?
Are they the dreaded "bond vigilantes"? Haven't heard that term for a while but do a quick Google search and you'll find plenty of new references.
Is it the Creditor Nations? Seeing the "QE∞ writing on the wall", are the Chinese and the Russians accelerating their divestment of treasuries?
Is it just everybody? The vigilantes, The Chinese, The Russians, the hedge funds, the pension funds..
Either way, ole Ben's got quite a problem on his hands. When you are the bid of last resort...whenyou are the market maker or specialist...the responsibility falls upon you to provide liquidity. Youmust be there to buy when everyone else is selling otherwise you risk a panic and a crash. Obviously, a tremendous amount of selling is currently taking place in the U.S. treasury market. At the same time, popular opinion and SPIN holds that The Fed is contemplating a "taper" of their bond purchases. OK, great. So instead of buying more bonds to support the market, The Fed is going to buy less? Seriously?? And someone thinks this is actually going to end well???
And this is what so many of us have been warning since overt QE began in 2009. Once The Fed decided to enter the market, they made themselves the "specialist", the buyer of last resort, and now they cannot exit...ever...without causing a catastrophic jump in interest rates. Think I'm crazy? Rates have moved from 1.6% to 2.2% (a 40% increase) in six weeks on simply the MOPE and SPIN of a "taper". Can you imagine the move if The Fed were to actually decrease their buying? At this point, they may be left with no choice but to increase their monthly purchases. Recall that that specific language was inserted into the latest FOMC minutes but hardly anyone seemed to notice. (http://www.federalreserve.gov/newsevents/press/monetary/20130501a.htm)
In the end, I'm simply not a believer that The Fed will soon "taper their asset purchases". How can they? Yes, 10-year note prices will likely fall even farther in the days and weeks ahead, dropping through 128 and heading toward 124-125. You can see it coming on the chart below:
At that point, I expect the MOPE to reverse. Some type of crisis will arise that will stem the selling of treasuries as "global investors seek the safe haven" of the U.S. dollar and U.S. treasuries. Maybe Europe will be shoved back to center stage? Perhaps war will finally break out in the Middle East?Something will happen to cause a return flight back into treasuries, of that you can be certain. However, if that effort then fails, The Bernank will be left with no choice but to increase QE, whether he wants to or not. Rates simply cannot and will not be allowed to move through 2.5%, toward 3% and beyond. The resultant economic slowdown will crush tax revenues and the rate increase will exacerbate debt service levels...a double whammy which would serve to rapidly accelerate the demise and unraveling of The Great Ponzi.
And, finally, this is where it gets really, really dangerous. If current holders of treasuries, treasury futures and treasury derivative contracts continue to sell regardless, the amount of QE needed to stem the tide and support the bond market will grow exponentially. This is where ole Ben is truly playing with fire. He may believe that he is all-seeing, all-knowing and all-powerful but...if the global market chooses to over-run him...panic, chaos and hyper-inflation will follow.
Still thinking about converting your physical metal back into fiat? I hope not.
TF
http://www.zerohedge.com/news/2013-06-12/europes-eur500-billion-quasi-quantitative-easing
Submitted by Tyler Durden on 06/12/2013 08:43 -0400
Europe's EUR500 Billion Quasi-Quantitative Easing
- Bond
- European Central Bank
- European Union
- Eurozone
- France
- Germany
- Greece
- Gross Domestic Product
- International Monetary Fund
- Ireland
- Italy
- None
- Portugal
- Quantitative Easing
- United Kingdom
Submitted by Mark J. Grant, author of Out of the Box,
Five Eurozone countries now have loans for half a trillion Euros.
These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. On top of that are the emergency loans from the International Monetary fund (IMF) and bilateral loans from the solvent countries to the bankrupt nations.
Cyprus is set to receive 9 billion Euros from the bailout fund
The European Stability Mechanism (ESM) will transfer the first 3 billion Euros of the agreed 9 billion Euros to Cyprus this month. The ESM, the permanent bailout fund of the euro currency union, bears the brunt of this most recent bailout. Cyprus will receive another 1 billion Euros from the International Monetary fund. Cyprus, as of now, has financial obligations totaling 23 billion Euros. The odds are that soon they will line up for more.
Greece is currently on the hook for 243 billion Euros.
With several mismanaged bailouts, the European Union, various individual countries and the IMF have obligated themselves to Greece for 243 billion Euros. This bailout is being handled by the European Financial Stability Facility (EFSF), the temporary predecessor to the permanent ESM. According to the European Commission, the EFSF bailout fund has so far paid out 116 billion Euros, with 28 billion Euros still to be paid. To date, the IMF has paid out 20 billion Euros. The current rescue program is scheduled to be completed by the end of 2014. By 2020, Greece is projected by the EU/ECB and the IMF to reach a level of debt that is considered sustainable. These projections are a mockery of common sense.
It is going to have to be debt forgiveness, additional capital or a combination of these two schemes which will be required for Greece to be able to pay their debts. Given the continuing deterioration of the Greek economy it is impossible for Greece to finance their current debts. I predict the country is going to go bankrupt again before this botched process is completed.
Ireland has given 85 billion Euros to rescue its banks
The rescue program for Ireland expires at the end of 2013 at which point the country is hoped to be able to raise capital on financial markets again. Of the 85 billion Euros required to put its troubled banking sector, Ireland has raised 17.5 billion Euros itself from state assets and pensions. Of the remaining 67.5 billion Euros, 22.5 billion is coming from national funds of all EU member states, 12.8 billion from the EFSF bailout fund, 20 billion from the IMF and 3.8 billion from a loan from the United Kingdom. Whether Ireland will be able to sustain itself is a 50/50 proposition, given their economic numbers, regardless of all of the hype that is spread around by the EU.
Portugal is obligated for 78 billion Euros.
The approved 78 billion Euros is currently impossible for Portugal to pay unless their economy improves dramatically which I would not count on. The loan program for Portugal expires at the end of 2014. Portugal has received more than 60 billion Euros from the rescue program to date. The pledges are evenly distributed among the EFSF, the EU and the IMF, at about 26 billion Euros.
Spain went bankrupt but the money was loaned to their banks.
Spain, in fact, hit the skids but the EU and the IMF did not want to admit the problem. They feared that any sort of stability in the Eurozone might crack. To create a charade the Troika then lent money to the Spanish banks which then lent money to the sovereign. This also hid the real debt to GDP ratio for Spain which does not have to count contingent liabilities as part of their balance sheet. One hundred billion Euros from the ESM bailout fund has been pledged to the Spanish banks in this fantasy. Spain has so far taken about 41 billion Euros of the available 100 billion Euros. The government of Spain is liable, however, for this debt.
The Convoluted Rescue Funds
Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. Not all of this money has been paid in to the funds however and it is another case of contingent liabilities that are not counted towards the debt to GDP ratios of Germany, France and Italy. The rescue funds have now distributed 205 billion Euros, of which the EFSF has provided 155 billion Euros and the ESM 50 billion Euros.
The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. Again, none of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public.
As we near the end of these programs there are a number of new factors that are coming into play. Various governments no longer have the political will to lend their citizen’s money to other troubled nations. Cyprus was a severely botched process where 90% of bank depositor’s money is now tied up in worthless bank equity, the confiscation of funds and the freezing of the balance.
There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors. Since Cyprus and Greece involved the minimization of the due process of law I would say that the ownership of Eurozone bonds is far riskier than owning American credits. Yields have gone down as caused by the various forms of Quantitative Easing and the liquidity that has been provided but the risks remain. To not identify them may prove to be a very costly mistake.
These members of the Euro currency union are receiving loans from the one of two bailout funds which are financed by the other 12 Eurozone members. On top of that are the emergency loans from the International Monetary fund (IMF) and bilateral loans from the solvent countries to the bankrupt nations.
Cyprus is set to receive 9 billion Euros from the bailout fund
The European Stability Mechanism (ESM) will transfer the first 3 billion Euros of the agreed 9 billion Euros to Cyprus this month. The ESM, the permanent bailout fund of the euro currency union, bears the brunt of this most recent bailout. Cyprus will receive another 1 billion Euros from the International Monetary fund. Cyprus, as of now, has financial obligations totaling 23 billion Euros. The odds are that soon they will line up for more.
Greece is currently on the hook for 243 billion Euros.
With several mismanaged bailouts, the European Union, various individual countries and the IMF have obligated themselves to Greece for 243 billion Euros. This bailout is being handled by the European Financial Stability Facility (EFSF), the temporary predecessor to the permanent ESM. According to the European Commission, the EFSF bailout fund has so far paid out 116 billion Euros, with 28 billion Euros still to be paid. To date, the IMF has paid out 20 billion Euros. The current rescue program is scheduled to be completed by the end of 2014. By 2020, Greece is projected by the EU/ECB and the IMF to reach a level of debt that is considered sustainable. These projections are a mockery of common sense.
It is going to have to be debt forgiveness, additional capital or a combination of these two schemes which will be required for Greece to be able to pay their debts. Given the continuing deterioration of the Greek economy it is impossible for Greece to finance their current debts. I predict the country is going to go bankrupt again before this botched process is completed.
Ireland has given 85 billion Euros to rescue its banks
The rescue program for Ireland expires at the end of 2013 at which point the country is hoped to be able to raise capital on financial markets again. Of the 85 billion Euros required to put its troubled banking sector, Ireland has raised 17.5 billion Euros itself from state assets and pensions. Of the remaining 67.5 billion Euros, 22.5 billion is coming from national funds of all EU member states, 12.8 billion from the EFSF bailout fund, 20 billion from the IMF and 3.8 billion from a loan from the United Kingdom. Whether Ireland will be able to sustain itself is a 50/50 proposition, given their economic numbers, regardless of all of the hype that is spread around by the EU.
Portugal is obligated for 78 billion Euros.
The approved 78 billion Euros is currently impossible for Portugal to pay unless their economy improves dramatically which I would not count on. The loan program for Portugal expires at the end of 2014. Portugal has received more than 60 billion Euros from the rescue program to date. The pledges are evenly distributed among the EFSF, the EU and the IMF, at about 26 billion Euros.
Spain went bankrupt but the money was loaned to their banks.
Spain, in fact, hit the skids but the EU and the IMF did not want to admit the problem. They feared that any sort of stability in the Eurozone might crack. To create a charade the Troika then lent money to the Spanish banks which then lent money to the sovereign. This also hid the real debt to GDP ratio for Spain which does not have to count contingent liabilities as part of their balance sheet. One hundred billion Euros from the ESM bailout fund has been pledged to the Spanish banks in this fantasy. Spain has so far taken about 41 billion Euros of the available 100 billion Euros. The government of Spain is liable, however, for this debt.
The Convoluted Rescue Funds
Eurozone members receiving assistance from the two European rescue funds do not pay into it. That means the higher the assistance, the higher the obligations of the healthier countries. Germany already guarantees 27 percent of the loans, France 20 percent and Italy 18 percent. Not all of this money has been paid in to the funds however and it is another case of contingent liabilities that are not counted towards the debt to GDP ratios of Germany, France and Italy. The rescue funds have now distributed 205 billion Euros, of which the EFSF has provided 155 billion Euros and the ESM 50 billion Euros.
The rescue funds borrow capital, guaranteed by nations of the European Union, in the financial markets and then hand the money to the indebted countries. In doing this they engage in a kind of Quantitative Easing where money is printed based upon the various guarantees. Again, none of these guarantees are counted against the liabilities of any country when the debt to GDP ratios are made public.
As we near the end of these programs there are a number of new factors that are coming into play. Various governments no longer have the political will to lend their citizen’s money to other troubled nations. Cyprus was a severely botched process where 90% of bank depositor’s money is now tied up in worthless bank equity, the confiscation of funds and the freezing of the balance.
There is a new scheme underway where bondholders would have to pay for the vast amount of any losses with the money of depositors also in question. There is no agreement yet on this plan. What can be said is that the playing field is being tilted with much more risk now placed in the hands of bond owners and depositors. Since Cyprus and Greece involved the minimization of the due process of law I would say that the ownership of Eurozone bonds is far riskier than owning American credits. Yields have gone down as caused by the various forms of Quantitative Easing and the liquidity that has been provided but the risks remain. To not identify them may prove to be a very costly mistake.
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