Month: March 2014

Financial headlines have rightly been dominated by the largest 7-day sell-off of the Chinese yuan on record. Everyone’s speculating whether it’s been a deliberate move by the People’s Bank of China (PBOC) or not. The consensus is that it’s been PBOC initiated to shake out carry trade speculators who’ve used low US interest rates to borrow low-yielding US dollars and buy the higher-yielding yuan and yuan-denominated assets. This before a move to increase the daily trading band for the yuan. A minority believe the yuan has unraveled of its own accord driven by a shortage of US dollars leading to the liquidation of yuan instruments. Either way, carry trades are being quickly unwound.

Asia Confidential thinks the vast majority of commentary has missed the underlying reasons for emerging market currency volatility, with the yuan being the latest example. What we’re really witnessing is a major rebalancing of global economic trade. Prior to 2008, the US had a massive consumption bubble, financed by its current account deficit which exported U.S. dollars and fueled global trade. Since the crisis, US consumption has slowed but QE has stepped in to provide the U.S. dollar liquidity needed for world trade. With the tapering of QE, that dollar liquidity is diminishing. And emerging market currencies such as the yuan are having to adjust to reflect real US demand. With or without PBOC intervention, that was bound to happen.

The concern for emerging markets is that this isn’t just a currency issue. The carry trades and subsequent inflows of capital have created substantial credit and real estate bubbles in many of these markets. The unwinding of these bubbles is likely to lead to banking crises in several countries, including China and China proxies such as Hong Kong, Australia and perhaps Singapore.

The hit to global economic activity will hurt inflated stock markets. As well as commodities, particularly the likes of iron ore and copper which have been widely used as collateral to finance trade/purchases in China. The winners out of all this are expected to include the US dollar, given less dollar liquidity means reduced supply vis-a-vis demand. And US Treasuries too due to the deflationary consequences of the economic re-balancing.

Chinese whispers 

For years, the yuan has been a one-way bet. Even during the emerging market currency turmoil of last year, the yuan escaped unscathed and outperformed. Moreover, it’s done so with minimal volatility given a tightly-controlled trading band. That band involves the PBOC setting a daily fixing rate against the dollar around which the onshore yuan is permitted to rise or fall 1% a day.

Over the past week, things have changed rather dramatically. The PBOC guided the onshore currency weaker through higher fixes. The move caused consternation in some quarters. The one-way bet became two-way and many got burned.

The PBOC hasn’t adequately explained the move and it’s left everyone to speculate about the ultimate reasons. Most are in little doubt that it’s been orchestrated by the central bank.

The most common reason ascribed is that it’s a tactical move by the PBOC to introduce more yuan volatility before widening the trading band, a long-held aim of theirs. This could be right though it’s a clumsy way to go about it.

Another explanation is that it could be a move to bring onshore and offshore rates together before the trading band increase. By way of background, the onshore rate is obviously that within China itself. The offshore rate is via Hong Kong, where the yuan is better known as the CNH and trades without restrictions imposed onshore by Chinese authorities.

Two weeks ago, the spread between the CNH rate and onshore rate reached its widest since 2010. Some suggest this prodded the central bank into action.

A third explanation has been put forward also. That the Chinese want a weaker currency to help its exporters and support the economy. This could well have validity and the authorities wouldn’t exactly advertise if this were the case. It’s dangerous though as it could lead to capital outflows and tighter credit, thereby accelerating the country’s economic slowdown.

There’s an altogether different explanation though involving the yuan devaluation having nothing to do with Chinese authorities. The theory is that the yuan carry trade is unraveling of its own accord. Reduced US dollar liquidity triggered by QE tapering has resulted in reduced flows for the carry trade and the liquidation of yuan-related instruments. And that’s caused a surge in offshore CNH liquidity.

It’s difficult to pinpoint where the truth lies. But we are more certain that this isn’t the end of yuan volatility as it isn’t just a China issue. And it isn’t just a carry trade issue. And it certainly isn’t just a QE tapering issue. It’s deeper than that and the threads go back to the global trade imbalances of pre-2008 and the policies since which have covered them up … until now.

The great economic rebalancing 

To better understand this, let’s step back for a moment. As everyone knows, the US dollar is the world’s reserve currency. Given this, the US has to run large trade deficits (where imports exceed exports) in order to export US dollars and lubricate global trade. Other nations need US dollars to conduct trade and build foreign exchange reserves which bolster their own currency and provide the asset base for the expansion of credit within their own country.

The US had a massive consumption bubble prior to 2008. This was financed by its trade and current account deficit (trade is a large part of the current account). US consumption collapsed during the crisis and the current account deficit started to narrow.

Then Bernanke stepped in with QE, which in effect financed US consumption and global trade. It prevented the pre-2008 economic imbalances from correcting.

US deficits have continued to sharply decline due to the domestic energy boom (reducing the reliance on oil imports), cheap and more competitive labor given the more than decade declines in the US dollar and the end of the consumption boom. But QE1, 2 and 3 have filled the gap to finance global trade.

Now that the Fed is tapering QE, that’s reducing the supply of US dollars into the global marketplace. Global macro strategists, Gavekal, in a report called US Current Account and Vanishing Global Liquidity, describe the impact on emerging markets:

“…if the amounts generating by the US current account are insufficient to meet overseas nations’ needs, then these economies will…be forced to either borrow dollars (not a long term solution), flog domestic assets or run down foreign exchange reserves. Hence, when I see central bank reserves deposited at the Fed falling, I know we are getting close to a “black swan” event, as dumping these precious “savings” is, for any country, always a desperate last resort.”

And a reduction in foreign exchange reserves at the Fed is exactly what’s happening now.

It’s important to note, as strategist Vince Foster points out, reductions of foreign exchange reserves held at the Fed have usually preceded financial crises. And it should also be noted that the largest foreign exchange reserves belong to China and its reserves dropped sharply both before the 2000 downturn and the 2008 financial crisis. The expectation here is that China’s foreign exchange reserves may well start falling soon. This would shock many investors.

More EM drama to come

The good times were very good for emerging markets prior to mid-last year. Capital inflows led to currency appreciation which provided the liquidity for domestic investment and consumption booms.

Since the 2008 financial crisis, emerging market foreign exchange reserves have increased by US$2.7 trillion, their monetary bases are up US$3.2 trillion and money supply (M2) has risen by US$14.9 trillion.

Unsurprisingly, that’s fueled mammoth property booms. Hong Kong and Chinese residential real estate prices have doubled over the past five years, while Singapore’s are up 70%.

Carry trades have partly financed the asset booms. Bank of America Merrill Lynch estimates that emerging market external loan and bond issuance has increased by US$1.9 trillion since the third quarter of 2008.

And the banks are at the heart of this and other financing. Thus, Hong Kong banks have been the go-to for the China carry trade. And their net lending to China itself has increased from 18% of Hong Kong GDP in 2007 to 148% now.

QE is the trigger for an unwinding of all this. The weakest links, those countries with chronic current account deficits such as Turkey, have been hit first. Asia Confidential believes the next in line will be the countries where the largest credit bubbles have occurred.

And that’s where China comes into play. Those who insist that China doesn’t have a debt problem don’t get it. History shows that it isn’t the amount of debt, but the pace it’s gathered which matters when it comes to potential financial crises.

With this, China is in a league of its own. Since 2008, Chinese total outstanding credit has more than doubled. Its banking assets having grown by US$14 trillion, or the equivalent of the entire US commercial banking sector.

Credit growth in the years leading to the bursting of previous credit bubbles – such as the US pre-2008, Japan pre-1990 and South Korea pre-1997 – has been 40-50%. China’s credit growth has dwarfed this and it’s easy to see the dangers that represents.

We believe the next phase of this crisis will be felt in the banking systems of several countries. China is the obvious one and that’s already begun (with defaults in trust funds).

Hong Kong banks are among the most vulnerable outside of China. That’s not only because of the exposure to lending to the mainland. But overall bank assets now total around 800% of GDP. It doesn’t take a genius to work out the disproportionate impact that even a small percentage of those assets going bad would have on the city’s GDP.

Australia and Singapore don’t have the same direct China lending exposure but the risks to their respective banking systems are high also. The Australian economy is highly dependent on Chinese commodity imports and the country’s big four banks have financed a monstrous property bubble off the back of the decade-long mining boom. Moreover, the Australian banks rely on short-term external financing as loan-to-deposit ratios are close to 120%.

The Singapore banking sector is also at risk given its domestic credit boom which has seen bank assets increase to total 650% of the country’s GDP. Yes, Singaporean banks have large capital buffers but significant risk remains.

Winners and losers

There are a number of commentators, particularly out of the US, who suggest that the emerging market crisis won’t have any impact on developed market economies. They’re deluded.

Emerging markets account for more than 50% of global GDP. Moreover, emerging markets ex-China represent a third of global imports. Including China, they account for 43% of imports. An slowdown in emerging markets will hurt their imports and therefore exporters in the developed world.

In addition, the profits of many US and European companies depend on overseas markets, particularly in the developing world. For instance, more than 50% of S&P 500 profits are generated outside of the US.

So the emerging market crisis will substantially impact global economic growth. And stock markets, particularly elevated ones such as the US, are most vulnerable.

Commodities are likely to be hit too. China is the largest consumer of most commodities and a downturn there will reduce their previously insatiable consumption. Even precious metals may be impacted given the deflationary consequences of a China slowdown. Though bullish on gold, we suspect it may break key US$1,180/ounce levels and have a further lurch down before climbing again.

As for the likely winners as the emerging market crisis deepens, Asia Confidential would put the US dollar at the top. The reason is that a reduction in the exporting of US dollars will result in less supply amid growing demand. This could well result in a sharp spike in the dollar.

The fate of US treasury bonds is an interesting one. Declining foreign exchange reserves of emerging markets should mean reduced demand for treasuries. In theory, this should put pressure of bond prices. However, given accelerating deflationary forces, we’d suggest Europe and the US central bank will step in to plug the demand gap.

AC Speed Read

– The Chinese yuan has dominated headlines given its largest weekly loss on record.

– What we’re really witnessing in China and other emerging markets is a major rebalancing of global trade.

– Carry trades and subsequent inflows of capital have created substantial credit and real estate bubbles in many of these markets.

– The unwinding of these bubbles is likely to lead to banking crises in China and in China proxies such as Hong Kong, Australia and perhaps Singapore.

– That should lead to corrections in elevated stock markets, particularly in the US. Commodities are also expected to suffer.

– The biggest winners are expected to be the US dollar and US treasury bonds.

This post was originally published at Asia Confidential:
http://ift.tt/1hy1uuy

via Zero Hedge http://ift.tt/1eR8dKQ Asia Confidential

Following last week's confirmation that capital expenditure in the land of the Free runs a very poor third to buybacks and dividends (and well anything that props up the over-inflated share prices of US corporates), and merely confirming what we have been discussing for the last few years (that Fed policy has focused management on short-term gratification and not long-term growth and stability), ex-PIMCO shit-cleaner-upper Mohamed El-Erian notes six reasons why the collapse in capex spend will continue and how central banks have failed to prime the pump of the real economy.

 

As a reminder, capex is printing "recessionary" levels…

For now the only number that matters is the capital goods orders nondefense aircraft, aka core capex. It is here that while the sequential print was a modest increase of of 1.7%, compared to expectations of a -0.2% decline, it is the annual number that is of interest. We focus on this, because as can be seen on the chart, the annual change just posted its first annual decline in a year: in the past any such decline would mark the start of a recession, except of course for in 2012 when the New Normal central planning, and the trillions in Fed liquidity injections, made the business cycle as we know it meaningless.

 

So much for that $1+ trillion in QE: it is good to know that it went to stock buybacks and dividends… if not so much to actually investing in future growth.

 

 

Authored by Mohamed El-Erian, originally posted at Project Syndicate,

Some economists, like Larry Summers, call it “secular stagnation.” Others refer to it as “Japanization.” But all agree that after too many years of inadequate growth in advanced economies, substantial longer-term risks have emerged, not only for the wellbeing of these countries’ citizens but also for the health and stability of the global economy.

Those looking for ways to reduce the risks of inadequate growth agree that, of all possible solutions, increased business investment can make the biggest difference. And many medium-size and large companies, having recovered impressively from the huge shock of the 2008 global financial crisis and subsequent recession, now have the wherewithal to invest in new plants, equipment, and hiring.

Indeed, with profitability at or near record levels, cash holdings by the corporate sector in the United States have piled up quarter after quarter, reaching all-time highs – and earning very little at today’s near-zero interest rates. Moreover, because companies have significantly improved their operating efficiency and lengthened the maturities on their debt, they need a lot less precautionary savings than they did in the past.

However one looks at it, the corporate sector in advanced economies in general, and in the US in particular, is as strong as it has been in many years. Non-financial firms have achieved a mix of resilience and agility that contrasts sharply with prevailing conditions for some households and governments around the world that have yet to confront adequately a legacy of over-leverage.

But, rather than deploy their abundant cash in new investments to expand capacity and tap new markets – which they have been very hesitant to do since the global financial crisis erupted – many companies have so far preferred (or have been pressured by activist investors) to give it back to shareholders.

Last year alone, US companies authorized more than $600 billion of share buybacks – an impressive amount by any measure, and a record high. Moreover, many companies boosted their quarterly dividend payouts to shareholders. Such activity continued in the first two months of 2014.

But, while shareholders have clearly benefited from companies’ unwillingness to invest their ample cash, the bulk of the injected money has been circulating only in the financial sector. Little of it has directly benefited economies that are struggling to boost their growth rates, expand employment, avoid creating a lost generation of workers, and address excessive income inequality.

If advanced economies are to prosper, it is necessary (though not sufficient) that the corporate sector’s willingness to invest match its considerable wallet. Six factors appear to pose particularly important constraints.

First, companies are concerned about future demand for their products. The recent economic recovery, as muted as it has been (both in absolute terms and relative to most expectations), has been driven by the experimental policies that central banks have pursued to sustain consumption. Now, with the US Federal Reserve beginning to withdraw monetary stimulus, and with growth in emerging countries slowing, most companies are simply unable to point to massive expansion opportunities.

 

Second, with China such an influential driver of global demand (both directly and indirectly through important network effects), the outlook for the world’s second-largest economy has a disproportionate impact on projections of global corporate revenues. And, as China’s excessive domestic credit growth and shadow-banking system attract increased attention, many companies are becoming anxious.

 

Third, while companies recognize that innovation is a key comparative advantage in today’s global economy, they are also humbled by its increasingly winner-take-all nature. Successful innovation today is a lot less about financing and much more about finding the “killer app.” As a result, many companies, less convinced that “normal” innovation yields big payoffs, end up investing less overall than they did before.

 

Fourth, the longer-term cost-benefit analysis for would-be investors is clouded by legitimate questions about certain operating environments. In the US, many companies expect major budgetary reform; but they are not yet able to assess the impact on their future operating profits. In Europe, politicians are aware of the need for major structural reforms, including those required to solidify regional integration; but companies lack adequate clarity about the components of such reforms.

 

Fifth, the scope for risk mitigation is not as large as financial advances would initially suggest. Yes, companies have more hedging tools at their disposal. But the ability to manage downside risk comprehensively is still limited by incomplete longer-term markets and public-private partnerships that cannot be sufficiently leveraged.

 

Finally, most corporate leaders recognize that they owe a large debt of gratitude to central bankers for the relative tranquility of recent years. Through bold policy experiments, central bankers succeeded in avoiding a global multi-year depression and buying time for companies to heal.

But, working essentially alone, central banks have not been able to revamp properly the advanced economies’ growth engines; nor do they have the tools to do so. Though many corporate leaders may still be unable to grasp the precise threats, they seem uneasy about the longer-term collateral damage implied by running modern market economies at artificially repressed interest rates and with bloated central-bank balance sheets.

The good news is that each of these constraints on investment can – and should – be addressed; and recent US business investment data suggest some progress. The bad news is that it will take a lot more time, effort, and global coordination. In the meantime, the corporate sector will only gradually take on more of the heavy lifting. That will be enough to keep the advanced economies growing this year; unfortunately, it will not be enough to attain the faster growth that their citizens’ wellbeing – and that of the global economy – urgently requires.

via Zero Hedge http://ift.tt/1fAmjGq Tyler Durden

Overnight, there had been numerous rumors that the newly appointed chief of the Ukraine navy, who was just made head of the navy on Saturday, had defected to the Crimean people explicitly, and to pro-Russian forced in the region implicitly. The sourcing of most were various Russian outlets so we discounted these until we got confirmation from a “western” source. The BBC did just that moments ago.

New head of Ukraine’s navy ‘defects’ in Crimea

 

The newly appointed head of Ukraine’s navy has sworn allegiance to the Crimea region, in the presence of its unrecognised pro-Russian leader.

 

Rear Admiral Denis Berezovsky was only made head of the navy on Saturday, as the government in Kiev reacted to the threat of Russian invasion.

 

Russia’s troops have been consolidating their hold on Crimea, which is home to its Black Sea Fleet.

The moment of defection allegedly caught on digital media:

????????? http://ift.tt/NJWTdo

— Kashin?Kashin?Kashin (@KSHN) March 2, 2014

The move is not entirely unexpected: while the US may not have many issues with facing the Russian navy head on as it did last summer in the Mediterranean over Syria, others are not quite as excited with being on the receiving end of the Russian military juggernaut.

So if this has been confirmed, the rest of the news reported earlier by RIA is also true. To wit:

Ukraine’s autonomous region of Crimea confirmed Sunday that the majority of Ukrainian military units stationed on the Crimean peninsula have expressed their support of legitimately elected Pro-Russian authorities.

 

Earlier reports by Russian media about peaceful takeover of the military units by forces loyal to the Crimean government were denied by the Ukrainian defense ministry.

 

However, Crimean authorities said that most of the Ukrainian units sided on Sunday with pro-Russian forces “without a single shot fired,” and warned the commanders of a few units that remain loyal to Kiev that they would face criminal action if refused to surrender.

 

“I would like to warn commanders who force their subordinates to commit illegal actions that they will be punished according to existing laws,” Crimea’s Prime Minister Sergei Aksenov said in a statement.

 

The Crimean government said earlier that some 10 warships from the Ukrainian navy left their naval base in Sevastopol apparently on orders from Kiev.

 

Crimea is now at the center of the ongoing crisis in the country as pro-Russia groups move to distance themselves from a reformed national parliament that ousted President Viktor Yanukovych a week ago.

The map below is said to summarize all the Ukraine cities where the Russian flag has already been hoisted.

If anything, these bloodless victories will only embolden Russia to press on: hardly the resolution the west would like. Perhaps that explains why early unofficial quotes of the Russian Ruble see the currency dropping as much as 10%.

via Zero Hedge http://ift.tt/1kodLVl Tyler Durden

The week ahead could very well be the most important week of the month.  Four central banks from the high income countries meet, the latest purchasing managers surveys will be released and the latest reading on the US labor market will be announced.

 

At the same time, Russia’s move on Crimea and the US and European response may eclipse, at least partially, the economic focus of investors.  Lithuania and Latvia have invoked Article 4, which requires consultation over Russia’s actions when a member feels its security or independence is threatened.  It is only the fourth such action in NATO history.

 

1.  Ukraine (Moderate risk):  Neither the US nor Europe are inclined to try to use military force to push Russia out of Crimea.  There may be a short-lived wobble to the detriment of risk assets and beneficial for the dollar, yen and Swiss franc.  Yet, the impact of geopolitics tends to be transitory.  The early July G8 Summit in Sochi may be in jeopardy, but the G7/G8 had already been reduced to a caucus within the G20 and Russia’s special role had already been diluted.  Dis-inviting Russia from the G8 on grounds of not going to the UN for authority is laughable, given what happened in Iraq, but it does not mean it can’t happen.  

 

After Ukraine, Germany may have the most to lose from Russian actions.  Its energy program and efforts to de-nuclearize seems to force greater reliance on Russian energy.  The Soviet invasion of Afghanistan spurred an increase in military spending (which in the US began under Carter, not Reagan as often suggested).  Many countries in the West are reducing military spending presently.   There is some risk that China will use the West’s distraction to press is case in the South or East China Sea.  There may also be knock-on effect in the EU parliamentary election in May, where the anti-EU parties seemed to have moved into ascendancy.

 

2.  China (Low risk):  China reported its official manufacturing PMI eased to 50.2 from 50.5 in January. The Bloomberg consensus was for 50.1.  Output and orders slipped, while exports remained below the 50 boom/bust level for the third consecutive month.  The PMI for large businesses eased to 50.7 from 51.4, while the reading for small businesses is contracting, as the HSBC flash PMI showed. The final manufacturing read and its service PMI, along with the official one, will be released first thing Monday in Beijing.   In part, what is happening is a decline in investment, especially in the credit sensitive sectors, like infrastructure and real estate where investment has been excessive.   

 

We expect the RMB to stabilize in the week ahead, though last week’s decline did not prevent the Shanghai Composite from  finishing the week with a three-day rally or the MSCI Emerging Market equity index from ending February at its highest level since January 23. The depreciation of the RMB is too small, given the relatively low-value added being done by Chinese workers, too boost exports and therefore the direct impact on trade is likely minimal at best.   The National People’s Congress begins at midweek and a solidification of the reform agenda should expected.

 

3.  The Reserve Bank of Australia (Low risk): The RBA meets and the result will be announced Tuesday morning in Sydney.  At its last meeting, it indicated that a period of rate stability is best and although the labor market continues to deteriorate and activity outside mining is not picking up sufficiently quickly, it is too soon to expect much of a change in the RBA’s stance.  The market may decide to ease for it, by taking the currency lower.  Technically, the February rally looks over and a new push lower appears to have begun.   Its failure to resurface above $0.9000 signals initial downside risk back into the $0.8840-80 range.

 

4.  Bank of Canada (Low risk):  The Bank of Canada meets Wednesday March 5.  There is little to no chance of a rate cut and the BoC has already shifted its rhetoric to a more dovish/neutral tone since Carney went to the Bank of England.  As in the US, the extent of the weather-induced economic disruption is not immediately clear and reasonable people can and do disagree.  The February IVEY (Thursday) and jobs data (Friday), the latter to overshadow the January trade figures due out at the same time, may be more important for the Canadian dollar direction.

 

5.  Bank of England (Low risk):  Under Carney, the emphasis at the BOE is on using forward guidance to push against market fears of a rate hike sooner than the first part of next year.  There is practically no chance of a change in rate.  And because the BOE does not say anything when it does not do anything, there is no statement-risk a there is with the other central banks.  The three PMIs (construction, manufacturing and service) are expected to show that UK economic activity has leveled off a bit at a reasonably robust pace.

 

6.   European Central Bank (High risk):  Of the central bank meetings this week, the ECB’s is the only live one in the sense of a realistic possibility of a change.   The failure to act in a substantive way could see the euro appreciate.  Many, if not most, have focused on what we would regard as a symbolic 10-15 bp cut in the main repo rate.  We suspect the euro could rally on this, as it is not the significant rate.  It would unlikely even impact forward pricing.  With the PMI likely showing continued expansion for the region and the preliminary CPI reading unchanged, officials will not feel compelled to take drastic measures such as adopting a negative deposit rate or launching a sovereign bond purchase program.

 

There has been some speculation that to boost the excess liquidity to keep EONIA (the key rate) stable and low, the ECB could formally stop sterilizing the SMP purchases.  We suspect this would be a very controversial decision.  Recall two German ECB member, Weber and Stark resigned over the program.  In the absence of sterilization, this would leave the SMP too close to QE, given the treaty prohibitions.  We have advocated cutting the lending rate, which is the top of the official rate corridor and now sits at 75 bp.  It is true the cap on EONIA,  The ECB is also expected to use the new staff forecasts, that will project out to 2016 for the first time, to point to its belief that the low inflation may persist but the risk of outright deflation for the monetary union is slim.  The euro could rally on this because it would strengthen the view that there is no appetite for those drastic measures.

 

7.  US data (High risk): The US jobs data, with the February assessment due on Friday March 7, tends to be among the most important economic reports of the monthly cycle.  Yet, almost regardless of the report, whose thunder is partly stolen by the ADP estimate a couple days earlier, or the week’s other data, which includes auto sales, purchasing managers surveys, the Fed’s measured tapering pace is unlikely to be disrupted.  

 

The Fed’s tapering has not pushed up US 10-year yields this year, which have fallen by 38 bp through the end of February.  Nor has it lent the dollar support, which has fallen against all the major currencies and many emerging market currencies (including Indonesian rupiah, Polish zloty, Hungarian forint, South African rand, Mexican peso, Brazilian real and Turkish lira).  

 

Most of the US economic data in recent weeks have been reported below expectations.  It means that the market has not fully grasped the magnitude of the slowdown being experienced here in Q1.  Few really claim that it is only due to the weather, which has become a bit of a straw man in the blogosphere.  We highlight three other forces at work:  a) the inventory cycle, b) the end of the tax break for capex and c) the loss of income for 1.7 mln Americans who had been collecting emergency jobless benefits.  At the end of last week, there were a few secondary economic reports, notably new home sales, durable goods orders and Chicago PMI, were stronger than expected.  With more important economic data out this week, it will be important to monitor this pattern, and if, better than expected data lends the dollar support.  We suspect it may with a lag.  

 

For the record, the Bloomberg consensus is for a 150k rise in February nonfarm payrolls.  This is in line with the 3-month average of 154k, but below the 6-month average (177.5k), which is nearly identical with the 2-year average (179.6k).   Although the consensus does not expect a decline in the 6.6% unemployment rate, we see the risk to the downside in response to the loss of the emergency jobless benefits.  This is turn would reinforce expectations for a modification/evolution in the FOMC forward guidance at its March 18-19 meeting.  Judging from the Fed funds and Eurodollar futures strips, the market is not pricing in the first rate hike until the second half of 2015.  

 

Obama is expected to present the FY15 budget proposals on March 4.  This tends not to be a market mover.  Moreover, in recent years, due to the political paralysis, the Federal government has operated on the basis of continuing resolutions.  Yet the budget proposal will help shape the coming debate.  It takes place on the heels of  news that FY13 budget deficit was only $680 bln from $1.1 trillion the previous year.  The budget deficit fell to 4.1% of GDP from 6.8%.  It is projected to continue trending lower over the next few years.  Obama is expected to avoid further cuts in spending, drop efforts to use chain-weighted CPI measures to slow Social Security payouts and promote public investment.  

via Zero Hedge http://ift.tt/1hTxYNZ Marc To Market

As we warned yesterday, the military escalation in Ukraine has had dire consequences for the financial state of the country, its banks, and ultimately its people. The central bank promised to rescue domestic banks so long as they agreed to its complete control and it appears the first consequences of that “we are here to help you” promise is coming true:

• *UKRAINE’S PRIVATBANK LIMITS ATM WITHDRAWALS TO UAH1,000/DAY ($103/day)

Privatbank is Ukraine’s largest bank and while claiming this move is temporary (just like Cyprus’ capital controls), the bank has also ceased new loans amid what it calls “geopolitical instability”. In summary, you can’t have your money back! Expect long angry lines at Ukrainian banks on Monday morning (and at the pace of collapse in the Hyrvnia, hyperinflation next).

 

Via WSJ,

Ukraine’s largest commercial bank, Privatbank, announced temporary limits on cash withdrawals for its account holders and suspended writing new loans, saying in a statement the measures were intended to stop those undermining the political situation in the country.

 

“A temporary limit on withdrawals? is needed to stop the forces that are working to destabilize the situation [and] are using the cash for [their] sabotage,” the bank said in a statement. The bank didn’t clarify which political forces it was referring to.

 

The bank first announced withdrawal limits of 1,000 hryvnia ($103) a day at both automated teller machines and in over-the-counter transactions.

 

…

 

Privatbank’s announcement was the first case in which a major Ukrainian bank has limited customers’ immediate access to cash in the local currency since the military tensions erupted. Privatbank is the largest retail bank by number of clients in Ukraine, a country of approximately 45 million people.

 

Last week, the National Bank of Ukraine introduced a $1,500 daily limit on foreign-currency withdrawal.

But perhaps the most notable, somewhat hidden, comment from the bank was this:

Privatbank said it was suspending all its credit lines issued to both private and corporate customers, including credit cards. It said it would no longer accept debit cards from other banks in the Crimea.

In other words, we won’t allow the people of Crimea (the region now in play with the Russians) to ‘run’ on our bank…

Privatbank said its measures were a “rational” response to the current situation and they were designed to help the bank serve its customers and protect the national currency.

We wonder what ‘loophole’ the uber-wealthy will find (as in Cyprus deposit shifts to the UK) to extract their deposits before the real capital controls collapse the currency.

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While the developed world is focusing on the rapidly deteriorating developments in the Crimean, China, which has kept a very low profile on the Ukraine situation aside from the token diplomatic statement, is taking advantage of this latest distraction to do what it does best: quietly take over the global periphery while nobody is looking. 

Over two years ago we reported that none other than Zimbabwe – best known in recent history for banknotes with many zeros in them – was bashing the US currency, and had alligned itself with the Chinese Yuan. This culminated last month with the announcement by Zimbabwe’s central bank that it would accept the Chinese yuan and three other Asian currencies as legal tender as economic relations have improved in recent years. “Trade and investment ties between Zimbabwe, China, India, Japan and Australia have grown appreciably,” said Charity Dhliwayo, acting governor of the Reserve Bank of Zimbabwe.

Business Live reported then:

Exporters and the public can now open accounts in yuans, Australian dollars, Indian rupees and Japanese yen, Dhliwayo said. Zimbabwe abandoned its worthless currency in 2009.

 

It accepts the US dollar and the South African rand as the main legal tender. Their use has helped to stabilise the economy after world-record inflation threw it into a tailspin.

 

Independent economist Chris Mugaga said the introduction of the Asian currencies would not make a huge difference to Zimbabwe’s struggling economy.

 

“It is Zimbabwe’s Look East Policy, which has forced this, and nothing else,” he said.

And now, as a result of the “Look East Policy”, we learn that China has just achieved what every ascendent superpower in preparation for “gunboat diplomacy” mode needs: a key strategic airforce base. From the Zimbabwean.

China is planning to set up a modern high-tech military base in the diamond-rich Marange fields, says a German-based website, Telescope News.

 

The news of the agreement to set up the first Chinese military airbase in Africa comes amid increasing bilateral cooperation between Zimbabwe and China – notably in mining, agriculture and preferential trade. China is the only country exempted from the indigenisation laws which force all foreign investors to cede 51% of their shareholding to carefully selected indigenous Zimbabweans.

 

The airstrip at Marange has sophisticated radar
systems and ultra-modern facilities

 

The Marange story quoted unnamed military officials and a diplomat admitting knowledge of the plan to set up the base. Efforts to get a comment from the Zimbabwe Defence Forces were fruitless, as spokesperson Lt Col Alphios Makotore was consistently unavailable and did not respond to emails by the time of going to press.

 

The website speculated that China could be positioning itself for future “gunboat diplomacy” where its military presence would give it bargaining power against superpowers like the US. It would also be safeguarding its significant economic interests in Zimbabwe and the rest of Africa.

 

Veil of secrecy

 

“Military officials in Zimbabwe said details of the airbase plan were sketchy and mostly classified due to the veil of secrecy around President Robert Mugabe’s relationship with China’s Red Army. A sizeable number of Chinese troops are reported to have their boots on the ground in the Marange diamond fields, which have since been cordoned off as a high level security zone,” said the publication.

 

It added that a senior Air Force of Zimbabwe (AFZ) officer based in Harare confirmed that there were rumours of the impending establishment of the airstrip as a “follow up to a military treaty signed between China and Zimbabwe in July 2005”.

 

Telescope News has made sensational claims in recent weeks, among them that Defence Minister and Zanu (PF) Secretary for Legal Affairs, Emmerson Mnangagwa, was secretly anointed by the military to succeed President Robert Mugabe.

 

Key battleground

 

It quoted a former Asian diplomat deployed to Zimbabwe for almost a decade as saying: “Haven’t you heard that Africa is the battlefield of tomorrow, today? As such in terms of geo-politics Zimbabwe is already a key battleground, for various competing powers. During my stay there, we heard about many military agreements being signed between the two countries.”

 

Chinese companies are heavily involved in diamond mining, in partnership with the Zimbabwe Government. They are believed to have constructed the airstrip at Marange that many suspect is being used to clandestinely haul diamonds to unknown destinations. It has sophisticated radar systems and ultra-modern facilities.

At this point expect to see a prompt, and unexpected, escalation in hostilities in southern Africa, most likely due to latent ethnic conflict of some kind (and brought back to the surface with the help of a few CIA dollars), which in turn will be the justification for US drones to begin operations in proximity to Zimbabwe to keep up with China’s encroaching take over of Africa, now from the south.

 

Perhaps most interesting is the finding that Zimbabwe’s president-cum-dictator, Robert Mugabe, so widely despised by the west, is in fact on China’s payroll:

Confidential Central Intelligence Organisation documents leaked last year suggested that China had played a central role in retaining President Robert Mugabe in the July 31 elections, indicating that high level military officers had worked closely with the local army in poll strategies while Beijing bankrolled Zanu (PF).

 

China is Zimbabwe’s biggest trading partner after South Africa and has strategic economic interests in many African countries to guarantee raw materials, job sources and markets for its huge population.

 

The new Chinese Ambassador to Zimbabwe, Lin Lin, recently said trade between the two countries last year exceeded the $1 billion mark. Yet Zimbabwe is only 26th on the list of China’s 58 biggest African trading partners.

 

The Asian country has supplied Zimbabwe with military hardware, including MIG jet fighters, tanks, armoured vehicles and rifles, since Independence.

In other words, while nobody was looking, China just took over one more nation without spilling a drop of blood. And now back to the regularly scheduled Crimean War part X.

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Just in case Obama’s Friday message of “costs” should Russia invade Ukraine, which it did, was lost in translation, here is NATO with the clarification, and more harsh language:

NATO Secretary-General Anders Fogh Rasmussen convened an emergency meeting of NATO ambassadors in Brussels on Sunday to discuss the situation in Ukraine.

 

Ahead of the meeting he issued the following statement:

 

I have convened the North Atlantic Council today because of Russia’s military action in Ukraine. And because of President Putin’s threats against this sovereign nation.

 

What Russia is doing now in Ukraine violates the principles of the United Nations Charter. It threatens peace and security in Europe. Russia must stop its military activities and its threats.

 

Today we will discuss their implications, for European peace and security, and for NATO’s relationship with Russia.

 

Afterwards, we will meet in the NATO-Ukraine Commission.

 

We support Ukraine’s territorial integrity and sovereignty. We support the right of the people of Ukraine to determine their own future without outside interference. And we emphasize the need for Ukraine to continue to uphold the democratic rights of all people and ensure that minority rights are protected.

 

Ukraine is our neighbour, and Ukraine is a valued partner for NATO.

 

We urge all parties to urgently continue all efforts to move away from this dangerous situation. In particular, I call on Russia to de-escalate tensions.

And just in case both Obama and NATO were misunderstood, here is Kerry appearing on CBS’ Face the Nation laying down the law, and even more harsh language:

U.S. Secretary of State John Kerry on Sunday condemned Russia’s “incredible act of aggression” in Ukraine and threatened “very serious repercussions” from the United States and other countries, including sanctions to isolate Russia economically.

“You just don’t in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text,” Kerry told the CBS program “Face the Nation.”

Kerry, however, added that Russia still has “a right set of choices” that can be made to defuse the crisis.

“It’s an incredible act of aggression. It is really a stunning, willful choice by President (Vladimir) Putin to invade another country. Russia is in violation of the sovereignty of Ukraine. Russia is in violation of its international obligations,” Kerry added.

Kerry said U.S. President Barack Obama told Putin in a 90-minute phone call on Saturday that “there will be serious repercussions if this stands. The president … told Mr. Putin that it was imperative to find a different path, to roll back this invasion and un-do this act of invasion.”

Kerry said G8 nations and some other countries are “prepared to go to the hilt to isolate Russia” with a “broad array of options” available.

“They’re prepared to put sanctions in place, they’re prepared to isolate Russia economically, the ruble is already going down. Russia has major economic challenges,” Kerry said, as he also mentioned visa bans, asset freezes and trade isolation as possible steps.

Some great soundbites: we can’t wait for the White House to release the obligatory photo op, which we assume would look somewhat different than this.

Russia’s response? 

Kremlin spokesman Dmitry Peskov declined to comment on Sunday when asked for a response to harsh words from U.S. Secretary of State John Kerry, who condemned Russia’s “incredible act of aggression” in Ukraine. “No comment at the moment,” Peskov said.

Just laughter.

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