Wednesday, February 4, 2009
Mid-Day Report: Dollar Pares Gain as Commodities and Stocks Rise, Euro and Swissy Soft
| Market Overview | Written by ActionForex.com | Feb 04 09 15:14 GMT | | |
| Euro and Swiss are the major losers today following downgrade of Russia's credit rating. Dollar rides on Euro's weakness and climbs against most major currencies but gives back some gains in early US session as commodities strengthens. Aussie recovers some of the earlier losses when Gold is back above 910 while Canadian dollar also rises broadly with crude oil back above 41. Some weakness is also seen in the Japanese yen in early US session after stocks are sent higher by better than expected ISM non-manufacturing index, which unexpectedly rose to 42.9 in Jan. Also from US, ADP private employment report showed another -522k contraction in the job market in private sector in Jan. Challenger report showed 241k planned job cuts in Jan, highest in more than seven years and 45% more than that in Dec 08. Euro's weakness earlier today is triggered by Fitch downgrading Russia's credit rating to BBB with a negative outlook. EUR/GBP's break of 0.8928 minor support argues that this week's recovery has completed and is heading for 0.88 level first. EUR/JPY also falls sharply from this week's high of 117.01 and breaches 114 level too. Economic data from Eurozone are also disappointing. Eurozone's service PMI came in at 42.2 in January, lower than initial reading of 42.5 but still improved slightly from 42.1 in December. Germany's service PMI was also revised down to 45.2 in January, down from 46.6 in the previous month. Retail sales in the Eurozone was flat in December on monthly basis, better than consensus of -0.3% drop and revised -0.1% drop in the previous month, as drops in non-food products were offset by sales growth in food, drink and tobacco However, on yearly basis, the gauge contracted -1.6% while November's figure was also revised down to -2.6% plunge. On the other hand, January's reading for the UK rose more-than-expected to 42.5 from 40.2 in December, suggesting the worst of contraction may have passed. EUR/USD Mid-Day OutlookDaily Pivots: (S1) 1.2874; (P) 1.2966; (R1) 1.3130; More EUR/USD's fall from 1.3069 extends further to as low as 1.2812 before recovering mildly. Rebound from 1.2706 might have completed and intraday bias is turned neutral for the moment. Below 1.2798 will suggests that recent decline from 1.4719 is resuming for retest if 1.2329 low. Though downside might be contained there initially and bring some consolidations first. At this point, while another rise cannot be ruled out, upside should be limited below 1.3329 resistance and bring fall resumption. However, note that firm break of 1.3329 will dampen this case and suggests that fall from 1.4719 has completed earlier then we thought. Strong rise could then be seen to retest this high. In the bigger picture, a medium term bottom in place at 1.2329. Whether such fall from 1.6038 to 1.2329 is impulsive or corrective in nature is debatable. But after all, with 1.4867 resistance intact, whole decline from 1.6038 is still expected to resume. Also, fall from 1.4719 is tentatively treated as resumption of such medium term down trend. Sustained break of 1.2329 will target 1.1639 medium term support next. Strong rebound from 1.2329 or above will argue that consolidation from there is still in progress could extend further between 1.2329 and 1.4719 before down trend resumption.
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ECB and BOE Rate Decisions May Show us Where Next?
| Daily Forex Fundamentals | Written by Lena Manousarides | Feb 04 09 15:02 GMT | | |
| Yesterday was a positive day for the markets, with DOW JONES and NIKEI closing on positive territory, amid better than expected economic data out of the US and also corporate earnings results coming out better than forecast. The euro also rose yesterday as the return of risk appetite was obvious and therefore it gave the EUR/USD a push towards 1.3050. However come today, the move was put on temporary halt, as the euro dived against the yen and dollar as renewed worry that the stimulus package wouldn't be approved by the Senate! Also getting closer is tomorrow's rate decision by the ECB making investors wary of the euro's direction! The EUR/USD has traded heavily since the beginning of the week and it seems to be trapped between important support/resistance levels of 1.27 to 1.31. The pair rallied yesterday, but traders were not prepared to commit themselves further before tomorrow's rate decision by ECB and therefore the move ended abruptly at 1.3060. The euro is still falling against the dollar with the next level to watch being 1.2830 - a good support level which if it gives way then 1.2760 may come back to play. Today the economic calendar featured news from the UK, where Services PMI came out slightly better than expected. The pound seems to be strong today in contrast with the euro and the EUR/GBP is reaching new lows of 0.8940 at the time of writing. We also had the ADP report out of US which always gives us an idea of what the number of Friday's payroll data may be. The number was -522.000 and market shrugged off the data as it braced for another negative month around that mark. The fact that in a space of three months we have seen jobs quickly evaporating which combined with high unemployment, gives investors jitters and their bullish mood is tough to sustain as risk aversion always prevails! We also have ISM non-manufacturing figures from the US, which are again expected to be negative; however we might be pleasantly surprised by a better number. Let's see how the market will react to today's economic data and also how the traders will position themselves for the big day tomorrow! The pound is looking strong so far, but it makes one wonder how investors will react if the BOE cut more than the 50 bps which is widely expected. As I mentioned before, tomorrow will be crucial for the pound's direction as it will show how King and his pals feel about the recent slide of their currency. Many analysts predict that the pound may reach parity against the dollar in the coming months, however let's be realistic before we start speculating extreme scenarios. The economic conditions continue to look dismal in UK; however as with all situations we might start to see signs of stabilization over the coming months. The latest data shows the recession is deepening further however there is a certain degree of optimism and it will be interesting to see where it all bottoms out! The dollar and yen seem strong today and the ever growing concern in the market over the stimulus package and the state of the US economy may make investors turn to those assets for safe haven in the current turmoil! The euro is waiting for Trichet's wise words in his press conference regarding the rates and the continuation of recession throughout 2009, where after traders will decide which way to go… Lena Manousarides Email: manousarides@yahoo.com Lena Manousarides is a professional Trader and an independent Market Analyst, who pioneers in Fx trading in Athens, Greece. After several years of professional trading in the Forex Market, Lena formerly worked with FXGreece as a Market Analyst, writing articles on a daily basis, using fundamental and technical analysis. She also writes for several major financial newspapers in Greece and is in the process of becoming professional Commodity Trading Advisor. | |
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Darling’s ‘Bad Bank’ Won’t Guarantee U.K. Rebound, Analysts Say
By Gonzalo Vina and Mark Deen
Feb. 4 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling should be careful about adopting proposals to create a “bad bank” because it would trigger a surge in U.K. government borrowing without ensuring lending resumes, economists said.
“The bad bank idea is still suboptimal,” Andrew Clare, professor of finance at Cass Business School in London. “There is no guarantee that it will work, and it will cost several hundred billions of pounds that will go onto the government’s balance sheet.”
Two weeks after pledging credit guarantees to U.K. lenders, Darling is weighing calls for full-scale nationalization of some banks against climbing costs of rescuing the financial system. Creating a state-owned company to take assets off the hands of troubled lenders is one option being studied, he said yesterday.
Before he acted, Darling would first have to identify and price the value of the loans the banks need to purge. JPMorgan Chase & Co. estimates the value of “toxic” assets owned by major U.K. banks at 260 billion pounds ($376 billion), or 22 percent of economic output. Moody’s Investors Service says up to 18 billion pounds in specialist loans must be absorbed.
“The big problem you come up against is how to value those distressed assets,” said Philip Shaw, chief U.K. economist at Investec Securities. “The political barriers to any such scheme might be quite large, especially as unemployment rises and the economy deteriorates.”
The risks for taxpayers are also spiraling. In addition acquiring majority stakes in Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, Prime Minister Gordon Brown’s administration has nationalized Bradford & Bingley Plc and Northern Rock Plc, two of the nation’s biggest mortgage lenders.
In all, Britain already has shifted about 1 trillion pounds of contingent liabilities from banks onto the government books, a sum that nears the 1.2 trillion-pound value of goods and services produced in the economy each year, according to the Institute for Fiscal Studies.
Brown and Darling are prodding banks into offering more loans to help businesses and households as the economy tips into its first recession since 1991. A bad bank alone won’t make that happen, said Mamoun Tazi, a financial services analyst at MF Global Securities Ltd.
“Just the bad bank itself will not be enough for banks to start lending,” Tazi said. “You do this as part of other measures. You provide the framework for things to recover slowly and for lending to come back.”
For now, the Treasury is watching the impact of its existing loan insurance plan that was announced on Jan. 19. It’s negotiating with banks about the terms of those loans and what securities it will cover.
“There is the whole question how you deal with toxic assets,” Darling told the House of Lords Economic Affairs Committee yesterday. “We have set up an insurance scheme and we have certainly not closed the door on a bad bank scheme. You do need a range of options.”
The U.K. is not alone in wrestling with how to fix the financial system. In Germany, Chancellor Angela Merkel and her coalition partners are split over the nationalization of Hypo Real Estate Holding AG. President Barack Obama’s administration in the U.S. “appears to be tying itself in knots” to avoid nationalization, economist Paul Krugman said this week.
Senator Charles Schumer said yesterday the U.S. Treasury should provide guarantees for toxic assets, rather than set up a bad bank to purchase them.
Even so, Brown faces growing pressure to make his next move as the U.K.’s recession deepens and his own popularity ratings slide. Brown said the government “soon” will announce its plans to tighten regulation of the banking industry, which is supervised by the Financial Services Authority.
“This confusion over such a sensitive area of policy gives the impression that the government doesn’t know what it is doing and risks further undermining confidence,” said George Osborne, a Conservative lawmaker who speaks on finance.
To contact the reporters on this story: Gonazalo Vina in London at gvina@bloomberg.net; Mark Deen in London at markdeen@bloomberg.net
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Asset Guarantees Gain Momentum in U.S. Bank Talks
By Robert Schmidt
Feb. 4 (Bloomberg) -- The Obama administration, aiming to overhaul the $700 billion financial-rescue program, is refocusing on an effort to guarantee illiquid assets against losses without taking them off banks’ balance sheets.
Treasury Secretary Timothy Geithner is skeptical of setting up a so-called bad bank to hold the toxic securities, an option that still may form part of the final package, people familiar with the matter said. Senator Charles Schumer yesterday said debt guarantees are becoming “a favorite choice” of options because a bad bank would be too costly.
The debate comes as some former officials warn against measures that stop short of stripping banks of the illiquid investments tied to mortgages and related securities. Government protection for $400 billion of Citigroup Inc. and Bank of America Corp. assets hasn’t sparked investor confidence in the firms’ viability.
“The tough decisions need to be made,” Frederic Mishkin, a former Federal Reserve governor and research collaborator with Fed Chairman Ben S. Bernanke, said in a Bloomberg Television interview. “You have to make sure that when all is said and done, you actually have financial firms that are either healthy and the ones that are not healthy can’t stay in business.”
‘Good’ and ‘Bad’
Mishkin, a Columbia University professor, and former International Monetary Fund chief economist Simon Johnson both yesterday advocated government interventions that would split banks into “good” and “bad” units. The “good” parts should later be sold off to private investors, they said.
The administration has said it will likely announce a comprehensive plan for revising the Troubled Asset Relief Program early next week and that nothing has been settled. It is likely to use a multi-pronged approach that includes the asset wraps, some type of an aggregator bank and a mortgage foreclosure relief strategy.
With the deliberations likely to extend into the third week of Obama’s term, it is clear that settling on a program is more difficult than expected.
“The financial package, whatever they’re going to do, has to be the centerpiece” of the administration’s response to the economic crisis, said Kenneth Rogoff, a Harvard University professor who serves with Geithner and White House economics director Lawrence Summers on the Group of Thirty counselors on financial matters. “I’ve been a little disappointed that we haven’t seen it already” he said in a Jan. 30 Bloomberg Television interview from Davos, Switzerland.
‘Two Problems’
Schumer, a New York Democrat who is on the Senate Banking Committee, said there are two problems with the bad bank, also known as an aggregator bank, solution. It would probably be “very expensive,” costing as much as $4 trillion. “Second, it’s very hard to value those assets,” and the prices could be set “so low that every other bank would go bankrupt.”
While debt backstops were used to help Citigroup and Bank of America, their share prices have fallen further. Citigroup is down 8.2 percent since Nov. 23, when the Treasury announced plans to protect the bank from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime debt and corporate loans.
Bank of America has lost 36.3 percent since the Jan. 16 government agreement to guarantee a $118 billion asset pool.
Size of Guarantee
To be effective, any loss-insurance program must be large enough to encourage private investors to come back in and recapitalize banks, said Eric Hovde, president of Hovde Capital Advisors LLC, which manages $1 billion in financial-services stocks.
The government has to tell banks “we will do this wrap, but you have to go out and raise a bunch of money,” Hovde said. Still, having banks manage the assets is a better option than the aggregator bank because “you don’t get into this whole issue of how you price the assets,” Hovde said. “The government doesn’t have the infrastructure to manage them.”
As part of its overhaul of the TARP, the administration also will tighten rules on executive compensation for some recipients of taxpayer funds.
President Barack Obama reiterated in a CNN interview his concern that Wall Street executives are “still getting huge bonuses despite that fact that they’re getting taxpayer money.” He said he’ll unveil today new limits on executive compensation.
‘Close to a Meltdown’
“You’ve got a banking system that is close to a meltdown, and we’ve got to figure out how to intelligently get credit flowing again” to small businesses and consumers, Obama also told CNN’s Anderson Cooper yesterday.
The administration plans to impose a cap of $500,000 on the compensation of senior executives for firms getting “exceptional” public financing, according to an administration official. The new rules, which will apply to future bailouts and won’t be made retroactive, also force greater transparency on use of corporate jets, office renovations and holiday parties as well as golden parachutes offered when executives leave companies.
With Geithner in his second week on the job, some Republicans in Congress are looking to the new Treasury secretary to provide some clarity about the next steps.
“The seemingly ad hoc implementation of TARP has led many to wonder if uncertainty is being added to markets at precisely the time when they are desperately seeking a sense of direction,” House Republicans including Minority Leader John Boehner said in a letter yesterday to Geithner.
To contact the reporters on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net.
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Norway Lowers Benchmark Rate to 2.5% to Revive Growth
By Johan Carlstrom
Feb. 4 (Bloomberg) -- Norway’s central bank cut the benchmark interest rate by half a percentage point to help revive the economy of the world’s fifth-largest oil exporter as it faces stagnation.
Norges Bank reduced the overnight deposit rate to 2.5 percent, it said on its Web site today. Twelve of 13 economists surveyed by Bloomberg had forecast the half-point cut, while one had expected a 1 percentage-point reduction.
“The downturn in the Norwegian economy may be deeper and more prolonged than Norges Bank has assumed,” Governor Svein Gjedrem said in a statement. “Inflation may in turn become too low. This would then indicate that the interest rate should be cut further. On the other hand, the key policy rate has already been reduced considerably.”
The mainland economy, which excludes shipping and oil, faces contraction for the first time in 20 years, according to Nordea Bank AB, the biggest Nordic lender. As receding demand restrains inflation, the central bank has turned its focus to galvanizing the economy and signaled last year it will cut rates from a two-year low after slashing them by 2.25 points last quarter.
The krone gained 1 percent against the euro to trade at 8.9038 as of 2:46 p.m. in Oslo.
“There’s nothing that indicates that Norges Bank has changed its views on future rate cuts,” said Kyrre Aamdal, an economist at DnB NOR ASA in Oslo. The central bank reiterated its view from December that the key rate should be between 2 percent and 3 percent until its next rate decision on March 25.
‘Considerable Uncertainty’
There’s “considerable uncertainty” surrounding the economic outlook, Gjedrem said in the statement. “Expectations of low and stable inflation now make it possible to use monetary policy actively.”
Norges Bank will probably cut the key rate by half a point in March and the same again in May, Aamdal said. That compares with the central bank’s rate path, which indicates a 0.25 percentage point cut in March or April and another 0.25 point cut in June, he said.
Norway’s $330 billion economy, home to StatoilHydro ASA, risks faltering this year as global growth stalls, sapping demand for oil. Global economic expansion will slow to 0.5 percent in 2009, the weakest level since World War II, the International Monetary Fund said on Jan. 28.
Central banks are cutting borrowing costs across the world in an effort to resuscitate their economies and ease access to credit. In the U.S., the Federal Reserve targets a key rate as low as zero percent, while the European Central Bank reduced its main rate to 2 percent on Jan. 15, matching a record low.
Contract
Sweden lowered its benchmark rate by 1.75 points to 2 percent on Dec. 4, the biggest reduction since 1992. In Denmark, the central bank, which pegs the krone to the euro, has cut by 2.5 points since October to 3 percent.
Norway’s mainland economy will contract 0.5 percent in 2009, DnB NOR ASA, the country’s largest bank, said last month. Norway probably entered a recession last quarter, Norges Bank said on Dec. 17.
Underlying inflation, which adjusts for energy and taxes, slowed to 2.6 percent in December from 2.7 percent in November, Statistics Norway said on Jan. 9. Average inflation will be slower than the central bank’s 2.5 percent target this year and next, Nordea estimates.
The government on Jan. 26 announced a stimulus package that, together with measures presented last year, amounts to 2.3 percent of gross domestic product. Government spending and tax cuts will boost the mainland economy by 0.75 percentage point this year, it said.
The central bank lowered its key rate by 1.75 percentage points last month after cutting it by a percentage point in two separate moves in October.
To contact the reporter on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net;
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ADP Says U.S. Companies Reduced Payrolls by 522,000
By Shobhana Chandra
Feb. 4 (Bloomberg) -- Companies in the U.S. cut an estimated 522,000 jobs in January as the economy weakened at the start of the year, a private report based on payroll data showed today.
The drop in the ADP Employer Services gauge was less than economists forecast and followed a revised cut of 659,000 for the prior month.
Employers are slashing workers as clogged credit markets and slumps from housing to manufacturing threaten to extend the longest recession in a quarter of a century. Persistent job losses will probably further curb consumer spending, which represents about 70 percent of the economy.
“We’re in for several more months of bleeding on the jobs front,” Joel Prakken, chairman of Macroeconomic Advisers LLC in St. Louis, said on a conference call with reporters.
ADP revised its methodology late last year to help limit differences between its calculations and the government’s payroll numbers. Last month, the new methodology overestimated the drop in December private payrolls by 162,000 after underestimating the count by about an average 116,000 a month in the first 10 months of 2008 before the revision.
The Labor Department may report in two days that the economy lost 535,000 jobs in January and the unemployment rate jumped to a 16-year high of 7.5 percent, according to median forecasts in a Bloomberg News survey. The U.S. lost almost 2.6 million jobs in 2008, the most since 1945.
Less Than Forecast
The ADP report was also forecast to show a decline of 535,000 jobs, according to the median estimate of 23 economists in a Bloomberg News survey. Projections ranged from decreases of 487,000 to 720,000.
Stock index futures rose following the report and Treasury securities were little changed. The Standard & Poor’s 500 futures contract was up 0.6 percent at 8:57 a.m. in New York. The yield on the benchmark 10-year note was 2.88 percent, the same as yesterday’s close.
ADP includes only private employment and does not take into account hiring by government agencies. Macroeconomic Advisers produces the report jointly with ADP.
Job cuts announced by U.S. employers more than tripled in January from a year earlier, led by planned cutbacks at retailers following the worst holiday-shopping season in four decades, the Chicago-based placement firm Challenger, Gray & Christmas Inc. said today. Firing announcements rose 222 percent last month from January 2008, to 241,749. It was the largest total since January 2002, when job cuts reached a record of 248,475, Challenger said.
Breakdown
Today’s report showed a reduction of 243,000 workers in goods-producing industries including manufacturers and construction companies. Service providers cut 279,000 workers. Employment in construction dropped by 83,000.
Companies employing more than 499 workers shrank their workforces by 92,000 jobs. Medium-sized businesses, with 50 to 499 employees, cut 255,000 jobs and small companies decreased payrolls by 175,000.
Businesses continue to announce firings. Rockwell Collins Inc., an aircraft-parts producer, yesterday said it will eliminate 600 positions in coming weeks, and PNC Financial Services Group Inc. said it plans to cut 5,800 jobs by 2011.
The economy will probably “remain in a severe recession with unemployment well in excess of 8 percent” through 2009, PNC Chief Financial Officer Richard Johnson said on a conference call.
The ADP report is based on data from 400,000 businesses with about 24 million workers on payrolls.
ADP began keeping records in January 2001 and started publishing its numbers in 2006.
To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net.
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