Panic buying sends oil, dollar, and gold to new records

 

 

We are heading for three nice round numbers - the euro at $1.50, gold at $1000 and oil at $100. Yesterday, the financial markets took a giant step in that direction, with the euro going above $1.44, gold just under $800, and oil at $93. Equities were also going through the roof, ahead of today's meeting at the Federal Reserve. The FT reports that a surge in oil and gold prices boosted global resources stocks on Monday, while the dollar was undermined by rising expectations of a US rate cut.

One factor driving the commodities markets was a rise freight rates. The Baltic Dry index, a composite measure of shipping costs, rose to a fresh record of 11,033, thanks in part to the insatiable appetite for raw materials in China.

The FT quotes OPEC as saying that politics and market speculation, not supply shortfalls, were responsible for current prices.

The dollar hit a record low of $1.4438 against the euro, and a 47-year trough of C$0.9555 against the Canadian dollar.

Frankfurter Allgemeine says the rise in gold to $794 was the highest level in 27 years, and a 25% increase since the beginning of the year. The paper quoted an analyst as saying that the there is persistent demand from long-term investors, as evidenced by the boom of exchange-traded gold funds, and the sheer volume of physical purchases of gold bars. At the same time, the output of gold mines is falling.

In a separate article Frankfurter Allgemeine writes that the financial markets are certain of a 25bp rate cut, though a 50bp cut cannot be excluded. One analyst, from High Frequency Economics, said he expect a quarter point cut this week, and another one in December, and a level of 3.25% in September 2008. David Rosenberg, of Merrill Lynch, is quoted as forecasting a recession probability of close to 50%.

Il Sole 24 Ore reports that Italian president Giorgio Napolitano said the rise in the euro was not bad at all. He said the negative comments were largely based on false premises.

 

 

 

The credit crisis now hits monoline insurers

The FT reports that the credit crisis may be moving into the next phase, as monoline insurers saw their share price tumbe over concerns about rising permiums in the credit default swaps markets. Monoline insurers are a specialist companies that act as guarantors for bond issuers. Many of them have seen their share prices fall as the cost of protecting has risen. "Over the past week, sector leaders such as MBIA, Ambac, XL Capital Assurance, Radian and MGIC have all been hit hard. In recent years [the monolines] have moved away from their role of guaranteeing, or wrapping, bonds issued by US municipalities towards writing business related to structured asset-backed finance deals, such as mortgage-backed bonds and collateralised debt obligations."

 

         

A financial crisis history lesson for the US

There is a brilliant comment by Manuel Hinds and Benn Steil in the FT, arguing that there are parallels in financial instability crisis scenarios between the US today, and emerging countries in previous periods. "There are circumstances in which excessive monetary creation can destabilise the economy while the rate of CPI inflation remains low. These tend to be present when the danger of monetary destabilisation is at its highest because people have lost faith in the ability of money to keep its value through time."

They cite evidence from Jacques Rueff who pointed out in the late 1960s that people react to the growing insolvency of a reserve currency by buying “gold, land, houses, corporate shares, paintings and other works of art having an intrinsic value because of their scarcity”....

"This phenomenon is well-known in developing countries, where asset booms combined with low CPI inflation have preceded monetary and financial crises. In Mexico, for example, share prices rose 12-fold between January 1989 and November 1994, while inflation fell from 35 per cent to 7 per cent. Inflation then soared as the Tequila crisis exploded...

"The same symptoms have been visible in many other monetary crises in developing countries. They seem to be visible today in the US..."

 

 

FT's Lex column on Mifid

The FT Lex column gives a downbeat assessment of Mifid, the new EU securities market regulation that kicks in on Thursday. "Some regulatory changes really are earth-shaking. London’s 1986 Big Bang reforms and the US repeal of the Glass-Steagall barriers in banking and insurance upended global finance, opening the way to new competition and consolidation.

"Mifid, the European Union’s Market in Financial Instruments Directive, which kicks in on November 1, is not in the same league. Regulators and compliance officers, who have spent the past five years preparing, talk it up, saying it promotes liquidity and investor protection by imposing the same rules across the EU. But the practical effects appear relatively limited."

The article says it will have some effect on regional exchanges, and the development of alternative trading platforms, and it will affect paperwork and disclosure. Maybe Mifid will lower spreads in the long run. "But so far as a largely one-off, back-office event, Mifid arguably most resembles the Y2K computer changeover – without the fear and paranoia."

 

 

Sarkozy tells banks how to change lending practices

Le Figaro front page has the story that Nicolas Sarkozy yesterday received banks and insurance companies at the Elyssee to discuss their lending practices. Sarkozy has previously criticised lending practices in the financial service industry, and in particular with respect to mortgage lending. He accused them of providing insufficient information to the consumers, especially about the constraints and consequences of credit at variable rates without ceiling. The rise in interest rates over the last 18 months increased the repayments for households with such a mortgage drastically. Though this type of mortgage is not very common in France, the consumer association estimated that between 35000 and 50000 households with such a credit got into financial difficulties.

 

 

Balladur's 77 proposals for constitutional reform

Sarkozy yesterday received the final report of his institutional reform committee, a story covered by all French newspapers today. The committee under the presidency of the Socialist Eduard Balladur delivered 77 propositions to “reform and modernize the French constitution”. Opposition leader Francois Hollande said that his party will vote for all those propositions that reinforce the role of the parliament but not for those that give more power to the president. Sarkozy now receives the party leaders at the Elyssee Palace before deciding which of the 77 propositions he is going to adopt. Les Echos writes that this latest reform agenda is clearly an overdose of reforms in a country where the time between announcement and implementation of reforms starts to worry the citizens.

 

The disastrous economics of the French ecological reforms

In a comment in Le Monde Remy Prud’homme warns that the ecological reform agenda of environment minister Jean Louis Borloo could hit the economy as bad as the 35 hours law or even worse. The costs for reducing 100m tons of CO2 emissions could amount to €50bn annually or 3.1% of GDP, comparable to the costs of the 35 hours week. But there are two main differences. The costs for the 35 hours week were partly offset by more flexibility and wage moderation. By contrast the industry may find it hard to swallow the ecological reforms. Second, the benefit for the French were much more tangible under the 35 hours week. Prud’homme argues that the costs for the ecological reform agenda are too high for measures whose effects are too small.


 

Germans are once again increasing their savings

Frankfurter Allgemeine reports that Germans have raised their savings rate to 10.9%, the highest level since the mid-1990s. The reason behind this increase, the paper writes, is the public debate about the need to generate private savings for old age, though the most recent increase is possibly due to rise in VAT at the beginning of the year, which has led to a rise of purchases of durable goods in 2006. Another fact is that the Germans continue to place their savings in low risk securities, rather than equities, which would be a more appropriate form of long-term savings, according to some experts.

 

 

Why revaluable the renminbi will not solve all problems

Shang-Jin Wei argues in Vox that too much emphasis is placed on the renminbi exchange rate. This is his conclusion: "First, the notion that a flexible exchange-rate regime would facilitate a faster current account adjustment is in fact not well supported by empirical evidence. Second, the virtue of a flexible exchange-rate regime in enhancing the effectiveness of China’s macroeconomic policy may also be overrated.

"I still think that the benefits of moving to a more flexible exchange-rate regime likely outweigh the costs for China. On the other hand, China faces many challenges in its economy, including environmental degradation, rising income inequality, pervasive corruption, mining production safety, food production safety, and a constant threat of massive unemployment, to name just a few. In the grand scheme of things, when ranking all the reforms to do on the basis of benefit to cost ratio, how much priority this particular reform – the shift of the exchange-rate regime - should be given is a separate question."

 

 

The meaning of the UK housing downturn

The FT writes in an editorial that "there is now a greater chance than there has been for some years of sustained stagnation or falls in UK property prices. In the long run that would be good for the economy, and for the welfare of large groups of society, especially if the Bank of England were able to manage overall demand such that a housing slowdown did not result in recession. We may not have reached the tipping point yet, but when it comes, as it has done in the US, the results are likely to be dramatic."

 

 

Jean Quatremer on the muscial chairs in Brussels

Jean Quatremer, in his blog Coulisse de Bruxelles, has an interesting analysis about the jostling for the top jobs in Brussels after the Constitution. He noted that Sarkozy has endorsed Blair or Juncker for the job as president of the Council, and Barroso for a second term as Commission president. Quatremer says it all depends on what the states want to do with the Council. They might be tempted to nominate to the Commission someone who is week, someone who does get in the way of the new council president. Barroso would perfectly fits this bill. He behaves like a secretary general without imagination and charima, unlike for example Jacques Delors. The choice of a mediocre president for the Commission signals a clear power shift to the Council. The fact that Sarkozy supports him is evidence of the way Sarkozy's currently thinks about the EU.

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