Saturday, May 15, 2010

Euro : Govt Intervention in the works?

FINAL UPDATE: [Link]
NEW YORK (Dow Jones)--The euro rebounded strongly from four-year lows Wednesday on market speculation that European authorities are preparing a response to the common currency's rapid decline.
Conjecture in the market that the European Central Bank could take steps to try to arrest the euro's decline--which could be becoming too rapid--has helped boost the currency more than 1% against the dollar on the day by noontime trading.
The Federal Reserve declined to comment on speculation the ECB and other major central banks are preparing to intervene in the foreign-exchange markets to prop up the flagging euro. The ECB also declined ........


The Euro has stabilised somewhat on the believe that central banks will intervene. However, there is great uncertainty and instability due to unwinding of the 'risk trade'. The large currency movements have shakened investments from commodities to emerging market equities. Looking ahead it is pretty uncertain where things are headed.


FURTHER UPDATE: Trichet : Economy in Deepest Crisis since WW2. The only thing good about what Trichet talked about in his interview is the realisation of the severity of the mess they are in. Trying to fix it with austerity now can stall the economy and doing nothing risks sovereign insolvency. There is little they can do except delay the day of reckoning - ultimately living standards will have to fall in the EU. Even buying time is not so simple with speculators eager to bring forward the dire consequences of their past profligacy by sinking the Euro. Graceful degradation is best...but speculators want chaos. The day when you wake up and see the euro plunging 10cents in one day may not be too far away....and that will shock the fragile system reversing the gains of past 12 months. That is why it make sense to intervene to shore up the euro- buy time and some hope the global growth can overcome global problems. The US had debt several times its GDP just after WW2...but rapid growth made the debt manageable. There is little chance of that kind of rapid growth for Europe in today's economy but some growth can make debt servicing less painful... . Now more on the possibility of currency intervention I was talking about. The falling euro hurts confidence in Europe and the rising Yen is threatening Japan's exit from deflation( Read : Tokyo Alarmed by Yen Rise) so there is plenty of incentives to intervene and calm markets ...this is a very worthwhile time to do it. The Japanese used to intervene every other week to keep the Yen down in the 80s so that its exports sector remained strong. These days intervention is a G7 effort done to ensure that all members benefit from from it. We are now at a psychological tipoff point when markets are about to declare the $1T package inadequate and watching the euro plummet makes that idea sink in threatening to plunge the markets into next crisis of confidence. I don't know for sure whether they will intervene but I certainly think it would be one of the most appropriate times to do so.

UPDATE: The Wikipedia page on the 2010 European sovereign debt crisis is up. I remember reading the Wikipedia page on the subprime crisis when that crisis was in the infancy and there was a write up on the "worst case scenario". Most of what was described in that scenario actually happened. The contagion scenario for the current unfolding crisis is described here.


This posting is more for my own reference as I'm watching the current market turmoil closely. Do feel free to post any comments/opinions.

The $1T European bailout package calmed markets in the early part of the week. The package in fact appeared to be working because the ECB was able to narrow interest rate spreads of Italian and Spanish bonds[Link] and the Italian govt was able to conduct bond auctions[Link] receiving good demand. This means the tailend risk has subsided and that was probably the basic idea behind the bailout to buy time, implement austerity to cut deficits over the long term and stem the panic. The ECB was about to get all this done spending only about 20B euros. However, late Thursday, currency speculators started shorting the Euro again bringing it down to the lowest levels since the Lehman collapse. The sharp movements in the currency markets caused equities, commodities and oil to be sold off. The carry trade is again disrupted by the large currency movements. Looking at the turmultous markets one may be led to think that things are falling apart because there is a lack of confidence in the Eurozone countries. But think hard about this is the Euro falling because there is lack of confidence in Eurozone countries or is the fall in the Euro itself undermining confidence? The sharp falls in the Euro is creating a negative feedback loop that will lead self-fufiling prophesy that speculators want and profit from. So what can govts do under such situation? During the Asian Crisis govt were not able to do anything and that led to foreign funds fleeing Asian countries and a catastrophic collapse of Asian economies. Letting the Euro go into a freefall will lead to dire consequences for the global economy for sure given we are still in a nascent recovery. Something has to be done soon....

I did some research on what govts did in the past when the Euro fell sharply. The last time that occurred was in Sept 2000 when the Euro fell 30% from the the level it was launched in Jan 1999. During that period, the Euro's fall also threaten to derail the global economy. The then US Treasury Secretary Lawrence Summers led the coordinated effort to shore up the Euro. 48 hours later, the speculators came back to attack the currency but the central banks kept them at bay for the next 6 weeks...2 years later the Euro was 50% higher. Already there is plenty of reports of behind the scenes coordination of by leaders - Barak Obama was said to be working behind the scenes to persuade the EU get last weekend's package through[Link]. Given how interconnected market are these days, no major economy is immune from EU's problems. There were also reports that Obama himself persuaded Portugal & Spain to accept new austerity measures to shore up confidence[Link].

The US, Japanese and others govts have taken many big steps to get the global economy back to the point where it is starting to grow. It is unlikely they will stand by and watch speculators pick it apart by shorting the Euro and disrupting market. There is also precedence for successful coorperation. I believe the govts will act soon before the damage to confidence becomes permanent....maybe as early as Monday next week. There is really no benefit to wait any longer.

34 comments:

Anonymous said...

For Singapore I think it will still be status quo or even better for quite some time.

That is:

1. Stocks and property remain at their high levels.

2. Interest rates remain at their super low levels. Pity those who only know how to put money in FDs only.

3. Things are feeling better. For instance my company has many unprecedented resignations since the start of this year due to staff getting better job offers. Even some old timers in their 40s also got better offers. And the company has much more projects compared to last year.

4. The queues are getting longer at my favourite restaurants.

So I am wondering. Are things as bad as portrayed in blogs?

Anonymous said...

Dear Lucky

The economy will bounce back eventually *somehow* because life goes on regardless.

Obama was doing the equivalent of hanging pig heads for the banksters!!!

Deutsche Bank is no angel!

And Germany is a major beneficiary of a euro decline!!!

Its really amazing how u made so much $$$ knowing so little. No wonder you are called Lucky.

jamesneo said...

Hi Lucky, the French, German and US banks who are being bailout are actually using the money given to them to short the Euro unlike the case in 2000 when it was the retail investors trying to attack the currency. So i do not expect the Euro to go up, i believe the Euro will hit parity with the US in 12-18 month.( Of course i may be wrong as the US dollar might devalue faster than devaluation of Euro ha)

To the 15/5/10 Anonymous 11:20, things are worse than portrayed here if you actually go and look in the US, Canada based blogs things are not getting rosy. The impact on Singapore will be delayed so any big problem there will not surface here until 6-12 months after it occurred unless it is a big event.

"The economy will bounce back eventually *somehow* because life goes on regardless" Yes it will but the bounce back might take 10 years of stagflation first as the debt unwinds or the money printing to solve the debt problem continue in earnest.

Divali said...

Hi Lucky

Hope this Infographic is useful to yr fans:

"Current State of the Euro"

http://www.visualeconomics.com/current-state-of-the-euro_2010-05-13/

unfaxed,positive thinker said...

"6-12 months... take 10years for stagflation"

Ahhh! shucks.. just as I thought: slow, suffocating death.. delightful!

I got time.. can even wait 25 years!
left my money under the mattress..
all $750K of it after en bloc, and buying new place.. this is the left over.

Yes, everything will bounce back again.. sorry to say this blogger has doom & gloom all over.. why live in the future?

The major economies will never ever allow failure.. they have demonstrated that convincingly.
The reason is: otherwise the world goes into freefall and world war 3 will start.. no body wants that..( though it can be a good thing to cull the excess and allow natural selection to take place)

Relax Lucky!.. you will still get Hor Fun, cuppucino,broadband and rack of lamb with barollo wine.

remember, it is just slow death..

Anonymous said...

Hi Lucky

Read 'Euro Pain Could Blow Back on US Banks' by David Reilly, 15 May 2010. (The Wall Street Journal, access Factiva db). JP Morgan Chase, BoA, CitiGroup, Morgan Stanley and Goldman Sachs have exposures to France & Germany, along with second-tier Euro countries. I think, for now, OKAY. So long as turmoil doesn't drag

Lucky Tan said...

anon 15:23,

You said "for now, OKAY. So long as turmoil doesn't drag". I think the whole situation is a lot more serious. My posting merely speculate on what central banks and govt can do not that it will work and things will go back to 'normal'soon.

I humble advice is do not have to high an expectation. Things can go very wrong. Safety first.

Anonymous said...

Hi Lucky!

Acknowledge your advice. Me, prudent person - well usually. I recall what a friend said during Asian Financial Crisis, "I feel I'm being tumbled about in a washing machine!"

Unconvinced said...

Hey Lucky,

You seem to be of the conviction that governments should do anything and everything to prevent "recessions". Don't you think it might be good to have a few recessions to curb the excess? Does the term "moral hazard" ever appear in your book?

If I'm not wrong, Keynes advocated fiscal stimulus to get out of recession, NOT to avoid recession...

Anonymous said...

All these are brought about by imbalances in Global Trade.

These imbalances have been shored up by sovereign debt.

Western countries have enjoyed years of prosperity brought about by economic colonialism, with millions of Chinese toiling to make stuff destined for Western factories, which the Western countries cannot afford, and are paid for by borrowing from the Chinese.

We live indeed in exciting times.

Anonymous said...

itell you, be contented with tau yew and white rice. you be safe or saved. only those sit in high tower will backside get satay satay. those eat tau yew and white rice and everyday iron money will be happy happy ending.

Anonymous said...

Reply to 15/5/10 11.32. I believed that Lucky always done his research and talk sense. Of course opinion can be different and one can uncovers some other research to back one;s opinion. But it is better than you that just talk cock without doing any work and back up your piece of non sense.

good job Lucky and always enjoyed your first class analysis.

Victor Ee said...

I think the current Euro plunge is triggered by a banking cabal that has a vested interest in weakening the Euro.

http://license.icopyright.net/user/viewFreeUse.act?fuid=ODI4NzQ4Nw%3D%3D

By Robert Fisk
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

In the most profound financial change in recent Middle East history, Gulf Arabs are planning - along with China, Russia, Japan and France - to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place - although they have not discovered the details - are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil - yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power - along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system - which has prompted the latest discussions involving the Gulf states.

Victor Ee said...

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq - blocked by the US until this year - and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements - the accords after the Second World War which bequeathed the architecture for the modern international financial system - America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

Anonymous said...

Dear Anon 6:54 aka Lucky arse-kisser

your beloved lucky just agreed w me that austerity program forced by Obama is no good!

And ur fellow James guy also agreed that the German banks are shorting euro!

Can u liberals make u ur mind?

Opportunist said...

# 1
The Chinese hold lots of US Treasury Bills & Bonds denominated in US$ ( more than US$800 Billion ).It is in their interest to have US$ stable. That means: no rocking the boat.

# 2
Oil will continue to be traded in US$
because there is no other currency that can replace it. The Euro is weakening and has never been a strong proxy for trade, due in part to weak fundermentals in the Euro zone, Only Germany & France have the clout to strengthen it.

# 3
Japan is trying to keep its head above water for over 15 years, it is still trying to cope with excess fat ( from property & banking bubbles )

# 4
China cannot take over as an economic power since their success stories are all in the coastal cities. More tha 3/4 of their population is still struggleling.
View pictures of high rise and smiling faces as adverts. They are still communists: its in the blood.

# 5
Britain is in turmoil from effects of sub prime and its own excesses.
It will take more than 5 years for it to get back on track ( back to 2003 levels )

# 6
The rest of the world, India, Korea,Australia, Canada, Russia are just tagging along for the ride and will be deeply affected by all this slow down.

#7
Singapore: ah! my dear homeland!
we go where the money is.. Middle East,Indonesia, China, India. These countries have much to offer in terms of commodities ( oil,gas,etc) and lower costs in manufacturing and production. Who will buy? their own populations.. domestic demand.

Conclusion:
The US and most Western populations are broke. What happens to our stock market and your investments?.. It will drop, since 90% of trading is done by day time speculators. The big investment houses are still trying to form a strategy and have been paralysed by analysis, from fear of another meltdown.

What to do?

A) keep cash
B) Buy Gold
C) invest in companies with exposure to Middle East, China, India
D) Do all this slowly

There will not be any big bang.. but slow decline.. so slow that you do not feel it.
Do you see any big issues in Singapore? ( besides prominent people passing, and possible elections ) COE up/Home prices up/ Salaries up/Jobs up/ Tourist arrivals up/ Company reports up/

but its slow death.. sit back, watch carefully.. strike when the prices are weakest.. one guide:
benchmark prices should be around 2004 prices.. example: STI ETF @2.60, Kep Corp@8.20, Singtel at2.30... get the idea.

Baron Rothchilds: " invest when there is blood on the street "

wait for the blood.

Anonymous said...

Wait for the blood??

Slow death where got blood?

Even got blood means died already!

Victor Ee said...

>Oil will continue to be traded in US$ because there is no other currency that can replace it. The Euro is weakening and has never been a strong proxy for trade, due in part to weak fundermentals in the Euro zone, Only Germany & France have the clout to strengthen it.<

US government is printing fiat paper money at will with blatant disregard for holders of US dollar as reserves.

This cannot persist indefinitely.

Anonymous said...

To Victor Ee:16/05/10-12:45

Yes, US Gov prints money and so will the EU and many others. It works.

Yes, it cannot go on indefinitely. You and I will not be around when things go 'pop'. It will take THAT long.

Meanhwile, what are we to do? attend GKS funeral? vote for SDP?
Don't play anymore becaues scared kenna 'pasang"?

People still buy cars despite Singapore being the world's most costly place to buy one.

Let the big boys play their big printing of money games. Nothing you and I can do about it.
Like one posting says: buy gold.

Victor Ee said...

It might actually pop sooner than you think...

Anonymous said...

I hope all this crisis after another just end with a big boomz and then we can get on with our lives.
At the moment things are so uncertain
I wish the hangman would just hang and we can move on.

So unsettling.

Unconcerned said...

Follow Pol Pot style:
- Create Year Zero
- Start from scratch again
- Everyone gets $100 to start
- Best man wins after 20 years

Anonymous said...

the irony is that most of these problems are caused by "talents" and entrepreneurs. these are the people who drive progress and the economy. no other places believes in this more than us. we have made it our vision to ensure we get the best talents to do what's necessary to achieve the pinnacle of our well being.

judging from our past successes, these tested formulas seems to work for us though cracks are getting more pronounced.

that provided the impetus to pursue old formulaic and this maybe our unravellings.

the unravellings of our pursue of wealth are actually unfolding in countries like china(lucky us) who adopted our economic ideology. the costs of living and pressures to keep pushing ahead there are taking its tow on its people.

some have become so frustrated with the system that they take to killing children for being ignored and treated unjustly by the authorities.

needless to say, corruptions are rampant in the pursue of wealth and prosperity.

will there be a happy ending to all these?

it all depends on how we define "talent" now.

Ghost said...

I think what really calm the markets are the new austerity measures adopted by Portugal & Spain. No one want to be the new Greece.

Anonymous said...

Mr Lucky

Looks like Mr Wang is going to be your ex-rival soon.
You must work harder to fill the space!

No tribute/cursing of Dr Goh?

Anonymous said...

Mr Lucky

Germany declares war on Obama!
Are we going to see the power of the atheist's God (aka vapors squid) unleashed?

Anonymous said...

Dear gold bugs

good news!
JPM will be setting up storage facilities for your tungsten bars :)

Anonymous said...

Mr Lucky

eurusd 1.21!

Hapless Christian democrats to be devoured by godless hedgie lions!

Evolution in action!

Anonymous said...

Hi Lucky,

I know you are not a teacher. But recently, a letter by Aisha Quek regarding the poor working conditions of her husband in the ST forum page gathered a lot of interest.

An article on this letter was later featured on Yahoo.com.sg a few days later, and within 2-3 days, over 2500 comments were registered; far more than any article on local singapore news.

Looks like poor working conditions exist in the civil service, and there are alot of disgruntled teachers around. I wonder if the opposition can capitalize on this matter and turn it into an election issue.

http://sg.yfittopostblog.com/2010/05/16/are-singapore-teachers-overworked/

Anonymous said...

lucky
you might want to check out this website www.zerohedge.com
gives great insights on what's happening or rumoured to be happening in the market
i read about germans' plans to ban short seelling long before it appeared as news in mainstream media
going by the lingo used, people behind it are probably professional traders

Anonymous said...

Mr Lucky

eh ... various central banks (de facto or otherwise) already intervened. Many times!

Retailers playing FX w/o tight stops are going to be wiped out.

The euro went up 1.21 to 1.26 but equities continued free fall should already tell u how accurate your theory was!

Nothing to do with the vote on banking reform. *snigger*

Today is D-Day for greece. And I think options expiration.

Are you feeling lucky?

Seriously, no new posts?

Anonymous said...

Mr Lucky

http://www.bostonoptions.com/pdf/Expiration_Calendar_2010.pdf

Singapore cannot afford its sole remaining notable blogger with conscience to go under.

Anonymous said...

Hey Lucky why so silent lately ? Hope everything is ok with u. Market will be depressed until the world cup is over. The rich super players want to enjoy their lives. However if the problem in Europe escalate out of control than all bets are off.

Anonymous said...

Hi Lucky!

Never mind - when inspiration strikes, the blogger begins.

Seriously, hope luck sticks to U.