Fed Seen Tapering QE to $65 Billion at September Meeting - Here is the opening to this interesting report, based on a survey of economists, from Bloomberg this evening:
Federal Reserve Chairman Ben S. Bernanke will cut the Fed's $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey.
The survey of 54 economists followed Bernanke's press conference yesterday, in which he mapped out a timetable for an end to one of the most aggressive easing strategies in Fed history. His remarks prompted economists to predict a faster reduction in purchases: in a June 4-5 survey, only 27 percent of economists forecast tapering would start in September.
Bernanke, speaking after a two-day meeting by the Federal Open Market Committee, said the Fed may begin dialing down its unprecedented bond-buying this year and end it in mid-2014 if the economy achieves the Fed's objectives. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
"The committee, and even Bernanke's remarks, showed a surprising degree of confidence in the outlook," said Michael Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York and a former Fed economist. "I'm a little more surprised that they were willing to signal they're on the path of moving out of this set of Fed policies."
My view - There is little evidence that Fed Chairmen or any other leaders like to be told what they are going to do by surveys of economists, so this poll is surely more revealing in terms of market sentiment.
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Email of the day (1) - On Aberdeen First Australia Income Fund: "I've been a happy subscriber to Fullermoney for the last few years, and would appreciate your opinion on whether the Aberdeen First Australia Income Fund which as quite a few Government Bond funds is the type of fund that should be sold as per your recording this evening. Attached is the fact sheet on this fund." My comment - Thanks for the feedback and fact sheet.
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Email of the day (2) - On the timing of the end of QE:
"I wonder if there is another influence at work with regard to the timing of the termination of QE.
"Each freshly elected government likes to get all their detrimental decisions to their chances of being re-elected out of the way as early in their term as possible. More voter friendly policies are introduced closer to the election to give the incumbents a better chance of being re-elected. The democrats are not going to want bad news and a volatile stock market in 2015/16.
"Although Bernanke and the Federal Reserve are supposed to be independent, I can imagine he and they will be under political pressure to get 'bad news' and its negative consequences out of the way so that 2015/16 will provide a sunlit path for the democrats. If the Fed is proving less than malleable could this explain Obama's attitude? Incidentally a ranging market, or at least one without much real upside between now and the end of next year, could provide the platform for your oft reported phenomenon of a rising stock market in the third year of a second presidential term. Pure conjecture of course, and may be a little wishful thinking."
My comment - These are interesting points, although I would add that a number of US economic commentators have been calling for an end to QE, fearing that it was creating bubbles. I think we certainly had Bubbliciously low yields in 10-Yr T-Bonds ( weekly & daily) at their July 2012 trough of 1.379%. I also think President Obama has reason to be concerned over the increasing cost of borrowing as those yields have surged higher since early May.
Precious metals review - This item is in the Subscriber's Area.
Additional commentary by Eoin Treacy
End of the commodity super-cycle and implications for Asia � Thanks to a subscriber for this interesting report from Deutsche Bank which teases out the implications of lower commodity prices in real terms over the next decade. The full report is posted in the Subscriber's Area but here is a section:
In conclusion, we consider some geopolitical implications. The fact that one of the key discussion items between Japan and the US during PM Abe's inaugural visit to Washington in February was about clearing regulations to allow natural gas exports from the US to Japan illustrates the importance of shale developments. Given the cost savings involved, Japan's eagerness is understandable, and would clearly further solidify Japan-US cooperation.
Beyond the issue of natural gas production, a lacklustre price outlook for oil has a range of implications. If the US oil production surplus, for instance, ultimately leads to the Brent benchmark falling precipitously with WTI to a level below the fiscal and budgetary level for key oil producers in the Middle East, the economic strain could ultimately lead to potentially widespread social unrest in that region.
Large scale spending on social programs in the Middle East has increased the breakeven oil price for many countries in recent years. According to our EM research team, the average GCC breakeven price last year is estimated to be around USD80/bbl (Brent basis), a 60% increase since 2008. This rising trend is likely to remain in place. And while USD80/bbl is the fiscal/budgetary breakeven, indications are that OPEC members are more comfortable with prices at around USD100-110/bbl. Similarly, the relationship between European energy importing economies and Russia could be altered fundamentally if price weakness continues in the oil and gas sector. Russia's pricing power would be weakened, with adverse budgetary implications.
We have already pointed out that major Asian commodity producers like Australia, Indonesia, and Malaysia could see their investment, exports, and growth prospects dampened. Consequent fiscal stress and overall economic weakness could have adverse implication for the political incumbents in these economies. The end of the commodity super-cycle would warrant a wide range of economic and political changes, in our view. My view � The increased volatility that has gripped markets over the last week has accelerated the pace of the corrective phase we have been speaking about for the last few months. However, despite deteriorating sentiment, the medium to long term outlook for stock markets remains bullish. Once this corrective phase has run its course, valuations will have improved and when support has been found we will be presented with an attractive entry point.
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Email of the day (1) � on Chinese credit markets:
"There are some warnings about credit in China. Don't know if you have read this, but would love to hear your views. Some analysts also point to a relative overvaluation of the Chinese currency vs USD that could also contribute to a lacklustre performance of the Chinese market in USD terms."
My comment � Thank you for this question and article by Ambrose Evans Pritchard for The Daily Telegraph. Here is a section:
"The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation," said Charlene Chu, the agency's senior director in Beijing.
"There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling," she told The Daily Telegraph .
While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. "It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property," she said.
Property prices in almost all of China's major conurbations rallied in the first half of the year which has deterred the PBOC from easing monetary policy. Concurrently, weak demand growth in China's export markets and the strength of the Renminbi have pressured the domestic economy. Since containing speculation in the property market has been one of the primary aims of tightening, we can anticipate additional measures to temper investor appetite but measures to protect the banking sector are also required.
This section continues in the Subscriber's Area. Email of the day (2) � on Chinese interbank rates:
� Some interesting charts of Shibor-shows quite a liquidity squeeze developing. �
My comment � Thank you for this instructive website which may be of interest to subscribers. Please see my piece above for more on this subject.
Germany Said to Seek Cyprus-Style Wipeouts in ESM Bank Aid Rules � This article by Rebecca Christie and Radoslav Tomek for Bloomberg may be of interest to subscribers. Here is a section:
Germany is leading a push for all bank creditors except insured depositors to take losses before the euro area's firewall fund could provide direct aid to troubled financial institutions, according to two European officials.
Euro-area finance ministers meeting in Luxembourg today are battling over what losses to require for private-sector creditors, particularly while the European Union sets up broader rules on how to restructure failing banks. The ministers are trying to agree on an outline for how banks can tap the 500 billion-euro ($660 billion) European Stability Mechanism without damaging their nation's balance sheets. Germany, Finland and the Netherlands want to require senior creditors to take losses before ESM aid could be considered, according to the two officials. This contrasts with the European Commission's view that only junior bondholders and shareholders should be written down before state-funded restructuring can begin. If the German effort is successful, it would mean that future bank bailouts within the currency zone would look more like the rescue terms for Cyprus, rather than the path taken by Ireland, Spain and the Netherlands. The debate shows that euro-area ministers remain divided over how to break the link between banking-sector and sovereign-debt struggles a year after they offered the prospect of direct ESM aid to calm market fears.
My view � Fullermoney has long argued that a deposit insurance corporation similar to the USA's FDIC is an integral part of the nation building process currently underway within the Eurozone. Therefore, the only logical conclusion is that the approach to Cyprus's failed financial sector is a template we can expect to see implemented elsewhere in the event of bank failures.
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Email of the day (3) � on an addition to the Chart Library:
� Well, the equity markets are getting interesting again. Would you be kind enough to add RBGLY to the Chart Library? Thanks so much, �
My comment � Thank you for this suggestion which has been added to the Chart Library. I agree interesting is definitely one word to describe today's action.