Financial Betting Markets

The Financial Markets - 7 Januray 2010

• Reuters reported that China’s Central Bank surprised the market by raising the auction yield of its three-month bills for the first time since mid-August, and the significant step-up in liquidity tightening sent offshore non-deliverable interest rate swaps (NDIRS) sharply higher. The People’s Bank of China is also set to drain a net $20 billion from the market this week, the biggest weekly drain in 11 weeks, as it intensifies the pace of quantitative tightening to curb excessive market liquidity. “Both the hike of the auction yield and heavy drain were unexpected as the market had thought that the Central Bank would at least be lenient ahead of the Spring Festival,” said money market analyst Liu Junyu at China Merchants Bank. Concerns about rising inflation and asset bubbles in the key property sector are also among reasons for the move.
  
  
• Post Greece / Iceland / the Baltics / Ukraine, is Argentina the next shoe to drop? Headline risk in Argentina is on the rise. The administration asked Cenbank President Redrado to resign over a refusal to transfer $6.5bn in international reserves to fund the Fondo del Bicentenario’s guarantee of 2010 Government debt service. Redrado refused to resign and was sacked. To remove him, though, the Executive needs the “advice” of a special Congressional committee. With Congress in recess, expect delays. Also, supposed Cenbank President-in-waiting Blejer has refused to take over, leaving the Fondo del Bicentenario on hold for now. The use of international reserves is bad economics as it weakens the independence of the Central Bank and opens the door for laxer fiscal policy. Asset prices are stable for now, but there is certainly downside risk.
  
  
• No surprises from the Bank of England’s MPC today as it held the Bank rate at 0.5% and the Quantitative Easing programme at £200bn. The Committee expects the announced programme to take another month to complete. The statement was brief, containing the usual line that the scale of the programme will be kept under review.
  
  
• The VIX (aka the index of fear) continues to make new complacent lows not seen since Lehman Brothers and this appears to be mirrored in other asset classes too, so tail risks are being priced out on a persistent basis. So Q1 looks like a continuation of the end of last year. Potential problems in the US housing market are possible in the spring and in Europe the question of whether lending is really hampering growth will only be more visible for discussion when firms start actively expanding. So it looks as if the near term has slightly improving economic data combined with lots of liquidity. Time for the contrarians to buy some cheap downside protection (aka “puts”).
  
  
• China overtook Germany as the world’s top exporter last year, data compiled by Global Trade Information Services showed. China shipped products worth $957.7 billion in the first 10 months of 2009, while Germany sold goods worth $917.7 billion to customers abroad. Exports from China exceeded German shipments every month since April last year. China has already slipped past Germany to become the world’s third-largest economy and is forecast to overtake Japan this year. Exports have driven a 15-fold increase in China’s economy to more than $3.8 trillion since the nation opened its doors to foreign trade and investment in 1978.
  
  
• In Japan, new National Strategy Minister Yoshito Sengoku said that “the current state of the Japanese economy is not favourable – my role is to ensure progress in the government’s emergency economic measures.” Sengoku also said that he wants debate about the consumption tax before a crucial mid-year election.
  
  
• And newly appointed Japanese Finance Minister, Naoto Kan, said that “it would be nice if the JPY weakened a bit more”. He comments that many Japanese firms are in favour of USD/JPY at around the ¥95 level.
  
  
• In Iceland, a Capacent Gallup poll showed that 51% of Icelanders disagree with President Grimsson’s decision to veto the Icesave bill. However, this compares with a recent newspapers poll which showed that 58% of citizens will vote the bill down.
  
  
• German retail sales fell 1.1% MoM in November following an unchanged index in October. The consensus forecast had anticipated a 0.2% increase. To put this in context, this monthly drop matches the decline seen in October 2008, right after the Lehman collapse, which in turn was the sharpest fall since October 2001 (right after 9/11). The fall is all the more remarkable since it happened on the face of a continued improvement in confidence indicators. Consumer confidence as reported today by Eurostat rose one point to -16, and the overall economic confidence indicator had a big jump of two and a half points to 91.3, thus recovering pre-Lehman levels. So this is a wake-up call that better confidence numbers will not necessarily translate into higher spending figures, and that the Euro area economic recovery stays under siege, with unemployment still on the rise and the effects of a stronger currency still having to work their way through the economic system.
  
  
• The Bank for International Settlements (BIS) will gather top central bankers and financiers this weekend amid rising concern about a resurgence of the “excessive risk-taking” that sparked the financial crisis. Some specific proposals include lowering return-on-equity targets banks as a way to discourage such risk taking. The BIS also expressed its concerns about deteriorating public finances warning. These meetings used to take place once a year in the past but have been more frequent recently.
  
  
• The Financial Times had a short note saying that the iTraxx Crossoverindex, an index of European credit default swaps (CDS) of underlying junk bonds, has fallen below 400 basis points, the lowest level for two years. CDS indices are indicators of market attitude towards risk, and the fall in the CDS index suggests that the markets are rediscovering their risk appetitive.
  
  

• Sainsbury’s Q3 like for like sales for the 13 weeks to 2 January came in at 4.2%, ahead of expectations of 3.7%. This represents a slowdown from the 5.4% recorded in Q2, although this decline is from the widely flagged reduction in inflation from the system. The good performance was driven by the continued strong performance in non food categories, which grew four times faster than non food. This adds to evidence that this has been a solid Christmas for UK food retailers, with Waitrose (John Lewis) being the outperformer.
  
  
• Following a market study into the industry, the OFT have decided to refer UK local bus services, excluding London and Northern Ireland, to the Competition Commission. This has been a widely publicised investigation and indeed it comes as no surprise that concerns identified by the OFT have been deemed sufficient enough to warrant a full investigation. Discussions we have held with respective management teams from FirstGroup, Stagecoach and National Express have indicated that all will vigorously defend their positions whilst fully co-operating with the Commission’s investigation. Of the three above mentioned operators, Stagecoach will potentially be the most impacted, given that it derives 39% of its revenues and 55% of its operating profits from UK Bus.
  
  
• A group of mobile phone operators has called for the proposed Merger between Orange and T-Mobile to be investigated by UK regulators rather than Brussels. O2 and 3 said the UK competition authorities were best placed to look at the planned joint venture between France Telecom’s Orange UK and Deutsche Telekom’s T-Mobile UK.
  
  
• Hewlett-Packard, the world’s biggest personal-computer maker, is testing Qualcomm’s Snapdragon chip for use in a scaled-down personal computer, a challenge to Intel’s dominance in the processor market. The device has a 3G wireless connection and supports Wi-Fi networking. Lenovo, China’s biggest PC maker, is also working on a so-called smart book computer that uses Snapdragon.
  
  
• Microsoft Chief Executive Officer Steve Ballmer introduced a touch-screen tablet computer from Hewlett-Packard and said US sales of PCs running Windows jumped 50% over the holidays. The computer will go on sale this year and was one of several machines that Ballmer showed off last night at the Consumer Electronics Show in Las Vegas.