Posts Tagged ‘central_banks’



By Albert Edwards, Société Générale, London 

The current situation reminds me of mid 2007. Investors then were content to stick their heads into very deep sand and ignore the fact that The Great Unwind had clearly begun. But in August and September 2007, even though the wheels were clearly falling off the global economy, the S&P still managed to rally 15%! The recent reaction to data suggests the market is in a similar deluded state of mind. Yet again, equity investors refuse to accept they are now locked in a Vulcan death grip and are about to fall unconscious.

The notion that the equity market predicts anything has always struck me as ludicrous. In the 25 years I have been following the markets it seems clear to me that the equity market reacts to events rather than pre-empting them. We know from the Japanese Ice Age and indeed from the US 1930’s experience, that in a post-bubble world the equity market merely follows the economic cycle. So to steal a march on the market, one should follow the leading indicators closely. These are variously pointing either to a hard landing or, at best, a decisive slowdown. In my view we are poised to slide back into another global recession: the data is slowing sharply but, just like Japan in its Ice Age, most still touchingly believe we are soft-landing. But before driving off a cliff to a hard (crash?) landing we might feel reassured when we pass a sign that reads Soft Landing and we can kid ourselves all is well

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Venezuela’s oil exports down 16% in second quarter

Aug 25, 2010

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, Aug. 25 — Venezuela’s oil exports dropped 16% in this year’s second quarter, largely due to increased use of domestic fuels for electric power, according to a quarterly report by the central bank.

The report showed the country’s gross domestic product down by 1.9%, led by a 2% drop in oil sector GDP.

“The behavior of this activity in the quarter is mainly due to lower crude output, which was offset by the growth in refined products to satisfy higher demand in the internal market related to the use of thermoelectric plants for energy generation,” the bank said.

The bank’s report coincided with the latest statistics from the Organization of Petroleum Exporting Countries, which said oil exports brought Venezuela revenue of around $54.2 billion in 2009, down nearly 40% from $89.1 billion in 2008.

OPEC blamed the fall in international oil prices across global markets for the country’s drop in revenue, with Venezuela’s basket price for 2009 averaging $57.08/bbl, down from $86.49/bbl in 2008.

However, Venezuela’s export revenues could decline as the country plans to take advantage of its hefty reserves of oil and gas to increase its use of thermoelectric power over hydropower during the next 5 years.

Venezuela now relies on hydropower for 80% of its electricity supply, while thermoelectric plants only supply 20%. Caracas wants to bring that ratio to 50-50 by 2015, according to official media.

Electricity shortage
The Agencia Venezolana de Noticias (AVN) reported the balance is needed as Venezuela faced shortages of electricity earlier this year due to a drought that reduced the power generation at main hydropower plants.

AVN last week reported water levels at the country’s main hydroelectric dam, Guri, are 3.04 m below optimum levels. The Guri plant supplies 70% of Venezuela’s electricity, but a drought brought water levels so low that the government was forced to introduce rationing across the country.

According to AVN, Venezuela aims to install 15,000 Mw of new electricity capacity over the next 5 years, of which 12,000 Mw would be generated by thermoelectric plants, while 3,000 Mw would come from new hydropower plants.

But that plan could create problems of its own. While more thermoelectric power could insulate Venezuela from electricity shortages due to drought, the use of more oil and gas could substantially reduce the country’s exports, its main source of foreign exchange.

In fact, Venezuela depends on oil for more than 90% of its export income, and a continued drop in revenues could affect its ability to meet spending and debt obligations.

PDVSA continues drilling
Meanwhile, Venezuela’s state-owned Petroleos de Venezuela SA this week said it began drilling in the Jusepin oil field with one of the rigs seized from Tulsa-based Helmerich & Payne Inc. earlier this year (OGJ Newsletter, July 12, 2010).

According to Venezuela’s Oil Minister Rafael Ramirez, who also serves as president of PDVSA, costs at the project have fallen more than 50% to $20,000/day from $43,000/day when H&P ran it. PDVSA said the well drilled by the nationalized rig should produce 2,000 b/d of oil.

Contact Eric Watkins at hippalus@yahoo.com

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Oil & Gas Journal Topic and Resource Categories:Venezuela's oil exports down 16% in second quarter – Oil & Gas Journal

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Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance

China and other global economies should increase interest rates to contain a surge in inflation, said investor Jim Rogers, chairman of Rogers Holdings.
“Everyone should be raising interest rates, they are too low worldwide,” Rogers said in a phone interview from Singapore. “If the world economy gets better, that’s good for commodities demand. If the world economy does not get better, stocks are going to lose a lot as governments will print more money.”
China’s central bank hasn’t increased rates since November 2007. In the U.S., the Federal Reserve this month left the overnight interbank lending rate target in a range of zero to 0.25 percent, where it’s been since December 2008, while the European Central Bank has kept its key interest rate at a record low of 1 percent.
Policy makers in Malaysia, South Korea, Taiwan and Thailand have increased the cost of borrowing at least once this year, while India has boosted rates four times in five months.
The global economy is at the risk of prolonging a recession after reports over the past two days showed U.S. home sales plunged by a record and Japan’s export growth slowed for a fifth month in July, he said.
“We never got out of the first recession,” Rogers said. “If the U.S. and Europe continue to slow down, that’s going to affect everyone. The Chinese economy is 1/10 of the U.S. and Europe and India is a quarter of China, they can’t bail us out.”
Rogers, who predicted the start of the global commodities rally in 1999, said he was short emerging markets and stocks and long on commodities.
“Commodities will go above their old high sometime in the next decade even if they only grow 5 to 6 percent annually,” said Rogers, who is a consultant for the Dalian Commodity Exchange.
Rogers said he would resume buying China’s stocks if they were to tumble as they did during the aftermath of the global financial crisis in 2008, when they plunged 65 percent. “I haven’t bought since the fall of 2008,” he said. “It it were to happen again, I hope that I’m smart enough to buy again.”
Allen Wan. With assistance from Chua Kong Ho. Editors: Richard Frost, Linus Chua
To contact the Bloomberg News staff on this story: Allen Wan in Shanghai at awan3@bloomberg.net

Rogers Says World Needs Higher Interest Rates, Commodities Set to Advance – Bloomberg

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THIS IS FURTHER GOOD NEWS FOR THE GOLD MARKET
China pushes for gold; India follows suit
Hot on China’s heels, India’s Central bank is mulling over a proposal to allow banks to trade in gold. If cleared, the move will only strengthen the validity of the bull case in gold.

Author: Shivom Seth
Posted:  Monday , 09 Aug 2010
MUMBAI  –  Mineweb

Hot on the heels of moves in China to expand the gold market in the country, several Indian bans have submitted a proposal to the Reserve Bank of India (RBI), India’s central bank, to permit them to trade in gold in the domestic market and also hedge their requirements.

These banks hope to take advantage of the current bout of bargain-hunting taking place in the country as investors take advantage of lower prices.

At present, banks are only allowed to buy gold. India’s central bank has permitted certain banks to import bullion on consignment basis for domestic jewellers and exporters but they do not stock gold. And, while a couple of the nominated banks authorised to import gold, sell gold coins at a premium of 10% to 15% over the market rate but, they are not permitted to buy back the gold they sell. Among their proposals, Indian banks have asked for permission to invest in gold exchange traded funds a move which is hoped will boost the trading of gold in demat and securitised forms.

Incidentally, banks and agencies such as the MMTC (Mines and Metals Trading Corporation) account for nearly 80% of the country’s gold imports.

Asian tiger

China’s central bank has said that it will allow its banks to import and export more gold as part of a programme to push forward the development of the country’s market in the precious metal. China is already one of the largest gold producers in the world and a leading consumer.
According to reports, China’s central bank is also ruminating over allowing second-tier institutions such as the Minsheng Banking Corp and China Merchants Bank to team up with four major state banks, including Bank of China, to hedge bullion positions in the overseas markets.
In a bid to increase the competitiveness of its domestic financial markets and broaden investment channels for ordinary customers, China’s central bank is also looking at allowing foreign suppliers to provide gold bullion directly to the Shanghai Gold Exchange.
Analysts have reportedly pointed out that China is keen that more of its banks trade with overseas counterparts, in a move that will reduce their reliance on the Shanghai Gold Exchange for hedging.
At the exchange, trading volumes have risen by more than half during the first six months of this year. HSBC and Standard Chartered are among five banks that are members of the Shanghai Gold Exchange.
For the full year 2009, India managed to import just over 35 tonnes, far below the 400 tonnes the country imported in 2008. China’s purchases in 2009, on the other hand, equalled 11% of global gold demand.
During the last quarter of 2009, however, demand for the precious metal increased 84% in India. The country already accounts for over 20% of the world’s gold demand.
Similarly, in the first quarter of 2010, India was termed the strongest performing market by the World Gold Council, as total consumer demand surged 698% to 193.5 tonnes. Indian jewellery demand rose 291% to 147.5 tonnes during the same period, the Council said.
World Gold Council’s investment managing director, Marcus Grubb, told reporters recently that the full-year gold demand in India was expected to be stronger than in 2009.

Reasons galore

Some bankers have noted that one of the major reasons why gold imports to India have been plunging in recent months is because Indian banks hold a lot of carry-over gold stocks. “Many consumers have stopped buying gold jewellery and are instead concentrating on imitation jewellery. Gold’s high price in the last four months is another factor that has kept some of them away, leading to a further slump in imports,” said an official with Mumbai-based Indian Bank, which is one of the 20 banks allowed to import gold. The bank’s proposal in 2008, to launch gold bullion trading, was stymied due to the disapproval of the Central bank.
A Bombay Bullion Association report noted that gold imports have fallen this year, from 34 tonnes in January to 13.8 tonnes in June, with the trend broken only in April, when the country imported 34.2 tonnes. The spurt in April was to meet additional demand during the Akshya Trithiya festival, considered an auspicious occasion to buy gold.
An executive of the Punjab & Sind Bank said:  “Gold is a popular investment vehicle in India, as well as being a traditional option for gifts. There is a lot of demand. In the present scenario, gold provides an excellent hedge against inflation, a source of liquidity and a form of savings as well,” the executive, who declined to be named, pointed out. The bank is also awaiting clearance from the RBI, and is eager to trade in gold.
It may be recalled that gold had stormed to record highs following news that India’s central bank had bought 200 tonnes of the metal from the IMF in October last. The Indian purchase had ensured that the RBI became the world’s 10th largest central-bank gold holder. It was the biggest single central-bank purchase in at least 30 years over such a short period, according to Timothy Green, author of The Ages of Gold.
“India did not buy that gold to sell it. It wanted to own it and keep it,” said the head of global markets at IndusInd Bank, another bank permitted by the Reserve Bank of India to import gold. “If banks are allowed to trade in gold, the move will only strengthen the validity of the bull case in gold,” the official added.
Citing the example of China, the official said, in its bid to overtake India as the world’s top consumer, Beijing has allowed more domestic banks to export and import bullion. China has reportedly increased its official gold holdings by more than 400 tonnes in the past few years to 1,054 tonnes.
“Beijing is keen to focus on bringing more gold into the country to satisfy domestic demand, but will not stir up global prices through official purchases,” the banker added. Other than banks, a few nominated government agencies and premier trading houses have also been allowed to import gold. With more banks in India now eager to step up to the plate, trading in the yellow metal could soon be a possibility.


Treasuries Lack Safety, Liquidity for China, Yu Says
Bloomberg
August 03, 2010, 4:08 AM EDT
By Bloomberg News
(Adds government researcher!s comment from 7th paragraph.)
Aug. 3 (Bloomberg) — U.S. Treasuries fail to provide safety or liquidity when it comes to managing China!s $2.45 trillion foreign-exchange reserves, said Yu Yongding, a former central bank adviser.
“I do not think U.S. Treasuries are safe in the medium-and long-run,” Yu, a member of the state-backed Chinese Academy of Social Sciences, wrote yesterday in an e-mailed response to questions. China is unable to sell the securities in a “big way” and a “scary trajectory” of budget deficits and a growing supply of U.S. dollars put their value at risk, he said.
The State Administration of Foreign Exchange, which manages the nation!s reserves, said last month that U.S. government debt has the benefits of “relatively good” safety, liquidity, low trading costs and market capacity. China!s holdings of Treasuries, the largest outside of the U.S., totaled $867.7 billion at the end of May, down from $900.2 billion in April and a record $939.9 billion in July 2009.
To help cool demand for the securities, China needs to curb the growth of its foreign reserves by intervening less in the currency market, Yu said. The People!s Bank of China said June 19 it would let the yuan float with reference to a basket of currencies, ending a two-year-old dollar peg.
The yuan has since appreciated 0.8 percent to 6.773 per dollar and analysts surveyed by Bloomberg predict the currency will end the year at 6.67, based on the median estimate. China limits appreciation by buying dollars, fueling its demand for Treasuries.
Less Intervention
“China has to depend more on demand and supply in the foreign exchange market for the determination of the yuan exchange rate,” Yu wrote. “Only God knows how much value that China has stored in the U.S. government securities will be left in the future when China needs to run down its reserves.”
The cost of pegging the Chinese currency to the dollar is “intolerably high” and threatens the welfare of Chinese people, Zhang Ming, deputy chief of the International Finance Research Office at the Chinese Academy of Social Sciences, wrote today on the website of China Finance 40 Forum.
“The U.S. government has strong incentives to reduce its real burden of debt through inflation and dollar devaluation,” he said. “Whichever way it is, the yuan-recorded market value of Treasuries will fall, causing huge capital losses to China!s central bank.”
Sliding Dollar
The dollar has weakened against all 16 major currencies monitored by Bloomberg in the past month, sliding 5.4 percent versus the euro and 4.7 percent against the pound. The Dollar Index, which the ICE futures exchange uses to track the greenback against the currencies of six major U.S. trading partners, is headed for its lowest close since April 15.
Premier Wen Jiabao in March urged the U.S. to take “concrete steps” to reassure investors about the safety of dollar assets after President Barack Obama stepped up spending to help end a recession. The White House predicts the U.S. budget deficit will hit a record $1.47 trillion this year, about 10 percent of gross domestic product.
An “appropriate” policy for China would be to allocate its reserves with reference to the weightings of Special Drawing Rights, a unit of account of the International Monetary Fund, Yu said in May. China bought a net 735.2 billion yen ($8.3 billion) of Japanese bonds in May, doubling purchases for this year.
–Editors: James Regan, Ven Ram
%CNY %USD
To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.net
To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net.

Treasuries Lack Safety, Liquidity for China, Yu Says – BusinessWeek

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Pimco caught out by strength of gilts

By David Oakley, Capital Markets Correspondent
Published: July 14 2010 10:57 | Last updated: July 14 2010 10:57

Pimco, the world’s second-biggest bond fund manager, has backtracked on its aggressive position of selling UK government bonds after the impressive performance of the gilts market this year.

Pimco, which took a negative view on the UK last year because of the widening budget deficit and poor public finances, has switched its stance to neutral or “agnostic” on gilts, according to people familiar with the situation.

Bill Gross, co-head of Pimco, in January described the UK government bond markets as so volatile that they were “resting on a bed of nitroglycerine”.

At the time, most investors feared that the worsening public finances and the uncertain political outlook before the general election in May would spark a big sell-off in prices.

However, the reverse has happened. Gilts have been one of the best-performing government bond markets of the year, becoming a haven from the troubles in the eurozone in recent months.

Gilt yields, which have an inverse relationship with prices, have fallen more than 20 per cent to 3.39 per cent since this year’s peak of 4.27 per cent on February 19.

Gilts have mainly been buoyed by buying of international investors, particularly Asian funds that switched out of peripheral eurozone bonds as the eurozone debt crisis deepened.

Investors have also been reassured by the new pact between the Conservatives and Liberal Democrats following the deadlocked May general election that produced a hung parliament. The Con-Lib pact’s promise to tighten fiscal policy sharply over the next five years has improved sentiment and even eased fears that the UK might lose its prized triple A credit rating.

Most investors have changed their forecasts for the gilts market in recent months, with some even saying gilt yields could fall further amid ongoing worries over European bank stress tests and the peripheral eurozone economies.

Pimco were not outright sellers of gilts, but set up a relative trade against Bunds, which fund managers say has been profitable.

Gilts have on occasion outperformed German bonds – but since the start of the year Bund yields have fallen more than those of gilts. Ten-year gilt yields have fallen 16 per cent while Bund yields have dropped 20 per cent.

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Eleven Banks Will Fail EU Stress Tests: Strategist

BANKS, EU, STRESS TESTS, ECONOMY, POLITICS
Posted By: Robin Knight | CNBC Associate Web Producer
CNBC.com
| 14 Jul 2010 | 08:20 AM ET
Eleven banks including Germany’s Commerzbank and Italy’s Banco Popolare will fail the European Union’s stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.
“We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank andSabadell,” a report from Macquarie Securities said.
Even though the number of banks likely to fail the test is relatively small, it may not allay fears onthe health of the overall European banking sector, the note said.
Of the 46 listed banks being tested by the EU, only eleven will have insufficient capital, but of the total 91 banks, including non-listed banks, the number will be greater, Roccati said.
“The key concern and the key differentiating factor is actually the cost of credit and not the decrease in revenues due to a slowdown of the economy,” he said.
European banks may need a minimum of 6 percent tier-1 capital ratio in order to pass the stress tests, according to a Dow Jones report Wednesday. Roccati pointed out that the current regulations require a 4 percent tier-1 capital ratio.
Banks that do fail the stress tests may have some breathing space in which to raise capital as they are unlikely to need to issue debt in the very short term, according to Roccati.
If the troubled banks can’t recapitalized themselves or be funded by their sovereign governments, it will fall to the EU’s central backstop fund to bail them out, he said.
Given the concerns over the sector, Macquarie said he favors BNP Paribas, UBS, SEB, DnB NOR, Nordea, and Erste Bank. Macquarie recommended caution on Iberian and Greek banks.
– Watch the full interview with Alessandro Roccati above.

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