Stocks fall and government bonds rise on flight to quality
LONDON (MarketWatch) -- Fears of a potential sovereign default by Dubai roiled financial markets Thursday, sinking stocks in Asia and Europe and pushing up government-bond prices as investors sought safe havens.
Dubai late Wednesday said it would restructure Dubai World and announced a six-month "standstill" on repayments of the state-run wide-ranging conglomerate's debt.
Analysts said Dubai's woes were a blow to sentiment, serving as a reminder that potential trouble spots remain.
"I don't see this as a massive issue but it's another warning to where the world got itself last year with loose monetary conditions [and] loose lending," said Naeem Wahid, market strategist at Lloyds TSB. "And, in a few cases, the problems are still out there and we could continue to see these kinds of nasty surprises" in the future.
The news sent the cost of insuring the emirate's sovereign debt against default soaring for a second day. The developments also weighed on other emerging markets, boosting the cost of insurance against default against other Middle Eastern and emerging-market countries and undercutting Central and Eastern European currencies.
Asian stocks fell early Thursday. European stocks were under pressure, with the pan-European Dow Jones Stoxx 600 index off nearly 2%.
London trading was halted for a technical problem. But before the halt, concern about the exposure of British banks to Dubai helped send London's FTSE 100 index down nearly 2% and weighed on the British pound, strategists said. See London Markets.
U.S. financial markets are closed Thursday for the Thanksgiving Day holiday.
The Japanese yen benefited from safe-haven inflows, setting a 14-year high versus the U.S. dollar. The greenback, however, rebounded versus most major rivals on haven-related inflows. See Currencies.
Dubai-related jitters undercut the euro and commodity-oriented currencies that have tended to rally amid rising market optimism and investor risk appetite.
The dollar index (DXY 74.59, -0.80, -1.06%) , a measure of the greenback against a trade-weighted basket of major rivals, rose 0.3% to 74.495. The euro slipped 0.4% versus the dollar to $1.5069 and dropped 1.1% against the Japanese yen to 130.75 yen.
Analysts at Credit Suisse estimated Thursday that European banks they cover could have exposure of around 13 billion euros ($19.6 billion) to Dubai.
The broker said a 50% loss on the exposure would be equivalent to around a 5% increase in provisions in 2010 or a hit of around 5 billion euros after tax for the European banking sector as a whole. Analysts cautioned that the numbers are difficult to quantify and exposures will differ from one bank to another.
Dubai five-year credit default swaps soared to 571 basis points on Thursday, up 131 basis points from the close Wednesday in New York, according to CMA Datavision in London.
That means it would cost $571,000 a year to insure $10 million of Dubai's sovereign debt.
Five-year CDS spreads for other nations in the Middle East also rose, with Abu Dhabi rising to 169 basis points from 136.4. Qatar rose to 129.5 Thursday from 103.7, CMA said, while Saudi Arabia rose to 114.7 from 90.4 and Bahrain rose to 222 from 194.5
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MARKETS JITTERY AFTER DUBAI refuses to pay bond holders, requesting a debt stand still for 6 months. Shanghai fell 3.6%, FTSE-100 fell 99 pts before trading at the London Stock Exchange was frozen due to technical difficulties and the YEN REMAINS THE STRONGEST CURRENCY as we repetitively warned over the last 5 weeks. The Dubai story was minimized as the announcement took place AFTER local bourses shut for a 4-day holiday. Next week, US and Gulf markets return from their break, coinciding with ECB meeting and US jobs report. Talk of SNB intervention after EURCHF bounced from 1.5008 to 1.5090s, but no official confirmation by SNB. Similarly, Japanese officials warned against excessive JPY appreciation after USDJPY hit fresh 14-month low of 86.30.
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16713 is tough nut to crack, last week we breach, failed to hold then made a low which was an outside bar on the previous week. this week is currently (but not confirmed, inside bar and a pin) If we close Friday like this i am looking short from 16500 level.
USD SELLING NO LONGER TAKING PLACE with the usual advances in oil prices. The inverse correlation between USD index and US crude oil weakened from -0.75 in October to -0.56 in November (1st-25th), while the correlation between EURUSD and crude fell from 0.9 in October to 0.49 in Nov. This could well be a case of oil bulls unable to keep up with USD weakness, especially as the lack of broad follow-up in global equities may not warrant real demand for oil prices to regain its $82.00 highs of the year. Meanwhile, OIL/EURUSD ratio is now below 50.75, further declining from 51.85 when the chart was first posted http://bit.ly/3eJEdfRead more…
The first round of U.S. economic data this morning helped to support the rally in risk currencies. The EUR/USD has finally taken out the key 1.50 level which should not be surprising for our readers since we said throughout the week that a break is imminent. We continue to believe that the U.S. dollar could fall another 5 to 7 percent (more like 4 to 6 percent at this point) over the next few months.
The big surprise this morning was the sharp decline in jobless claims. For the week of Nov 21st, 466k Americans filed for unemployment benefits, the lowest level since Sept 2008. Continuing claims also dropped to the lowest since February which signals that job losses continue to moderate. Yet there are still alot of vulnerabilities in the U.S. labor market. Earlier this month, companies like AOL, Sprint and Electronic Arts continued to dole out pink slips. If Black Friday and the holiday shopping season as a whole proves to be weak, more retailers may be forced to close stores, which could translate into even more layoffs. Part of the improvement in continuing claims is undoubtedly tied to benefits expiring. Also, for the swelling population of unemployed, finding new work remains very difficult. The takeaway is that jobless claims have improved but traders should not get overly excited by the latest numbers.
The personal income, personal spending and core PCE figures all beat expectations which is line with the stronger retail sales figures earlier this month. Durable goods dropped 0.6 percent and if you exclude orders for transportation products, they dropped by a larger 1.3 percent. Orders for defense, computer and electronic products took the biggest hit but even though the data was very weak, the negative sentiment was offset by the 1 percent upward revision to the September data. Durable goods orders can also be very volatile and therefore the market has downplayed its significance.
The final University of Michigan consumer sentiment report for the month of November is due for release at 10am NY time along with new home sales. Unless there is a big surprise, we do not expect these reports to dent the risk appetite in the foreign exchange market. U.S. equities should open higher and support the rally in the EUR/USD.
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Are we seeing a pause for breath? Hidden Divergence here on 15M. We also know 16698-700 level is support. Possible pullback to buy back in. Although i would like to see more confirmation. Break of 16880 negates Divergence. This is why we wait!!
The price action in the currency market over the past 24 hours suggests that foreign exchange traders may have already gone into holiday mode. Intraday trading ranges are beginning to shrink and the performance of the dollar was mixed against the key currencies. For example, the dollar traded higher against the British pound and commodity currencies (AUD, NZD, CAD) but fell against the euro, Japanese Yen and Swiss Franc. Although U.S. equities ended the NY trading session in negative territory, it was off its lows. With the holiday looming in the U.S., forex traders are hesitant about taking the dollar to a fresh year to date low against the euro and Japanese Yen. However the fact that the EUR/USD remains above 1.49 and USD/JPY is trading at a one month low suggests that we could see further losses in the U.S. dollar.
Federal Reserve Expects a Jobless Recovery
According to the minutes of the November 4th monetary policy meeting, Fed officials have grown increasingly aware of the risks associated with low interest rates and a weak dollar. Some of the FOMC members noted the possibility of negative side effects that might result from very low interest rates such as excessive risk taking in financial markets or an unanchoring of inflation expectations. Although the likelihood of this happening is “relatively low,” they are telling the markets that they will keep an eye on these risks. As for the dollar, so far the Fed believes that the decline is orderly but they are growing wary of the falling dollar’s impact on inflation. In other words, low rates and a weak dollar are not immediate threats, but the Fed is closely watching the effects of these two dynamics on the economy. The risks to growth are roughly balanced with financial market trends supporting the recovery but capital spending is likely to be subdued. Commercial real estate poses a downside risk to their forecast of a stronger economy over the next 2 years. The central bank also released their latest economic forecasts. As indicated by the table below, the Fed revised their growth and inflation forecast upwards and revised their unemployment forecast downward. Unfortunately, the central bank expects unemployment to remain “quiet elevated” throughout the recovery which means that they do not expect to return to the 4 to 5 percent unemployment rates that we enjoyed between 2007 and 2008 within the next 2 years. In other words, the Fed expects a jobless recovery.
U.S. Economic Data Indicative of Uneven Recovery
The latest economic reports confirm the uneven recovery in the U.S. economy. Third quarter GDP was revised from 3.5 to 2.8 percent in the third quarter. Personal consumption took the biggest hit with growth revised to 2.9 percent from 3.4 percent. According to S&P/Case-Shiller, house prices rose for the fifth consecutive month. The house price index stabilized which can still be considered positive. However the Richmond Fed index took a big tumble which suggests that the recovery in the manufacturing sector may be slowing. Consumer confidence edged higher but the Conference Board’s report is at odds with prior sentiment surveys. With the U.S. markets closed on Thursday, Wednesday will be a particularly data heavy day. Personal income, spending, durable goods, PCE, jobless claims, new home sales and the final University of Michigan Consumer Sentiment survey are due for release. Overall, we believe that the odds are skewed towards stronger reports given the rise in retail sales in October and the improvement in the manufacturing ISM survey earlier this month.
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WASHINGTON (Reuters) - Federal Reserve officials are increasingly confident the U.S. economic recovery is sustainable, but they do not see employment picking up soon, according to minutes from their November meeting released on Tuesday.
Policymakers also expressed concern about possible adverse repercussions from their vow to keep interest rates low for an extended period, including unwanted speculation in financial markets.
"Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates," the central bank reported in the minutes.
Some investors and policymakers have argued that the Fed's policy of rock-bottom borrowing costs may be driving investors to beef up their bets by using the falling dollar to fund their trades.
President Barack Obama, during a recent visit to Asia, was lectured on the subject by top government officials in China.
The Federal Reserve Open Market Committee, the U.S. central bank's policy-setting body, did not believe such speculative activity had taken place to date, contending that the dollar's decline had thus far been "orderly."
"Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching," the minutes said. The U.S. currency dropped to a 15-month low against a basket of major currencies last week.
NO INFLATION HERE
For now, the minutes indicated policymakers are not widely concerned about inflation in the medium term. This was already evident from a string of recent speeches in which even the hawkish regional presidents of the Dallas and Philadelphia Feds have expressed dovish views on the prospects for a sustained rise in consumer prices.
The "central tendency" forecasts of policymakers were slightly more sanguine on the economy's prospects but not dramatically so. Gross domestic product was expected to shrink substantially less this year than previously estimated.
Similarly, the jobless rate, currently at a 26-year high of 10.2 percent, was now expected to come down more quickly than policymakers believed back in June.
"Most participants now view the risks to their growth forecasts as being roughly balanced rather than tilted to the downside," the minutes said.
Nonetheless, there was a sense that any turnaround in the labor market would not happen quickly enough to stem the rising tide of joblessness.
"The weakness in labor market conditions remained an important concern," the minutes said. "The considerable decelerations in wages and unit labor costs this year were cited as factors putting downward pressure on inflation."
Still, some officials worried that the recent spike in commodity prices, which some analysts say is a byproduct of the Fed's emergency liquidity measures, could hold the seeds of future inflation
The Fed not only slashed interest rates sharply as the global financial crisis gathered pace last year, it also instituted a number of special lending vehicles -- some of them controversial -- to keep the financial system afloat.
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Subject to confirmation at close we have a very interesting set up on the daily. Yesterday saw an inside bar after 3 down days, today we could see a pin bar form.I will be looking long from this set up once we clear the high of the larger red bar. (Friday) if you pull down fib levels you can see we failed to break 61.8%
US Q3 GDP was revised down to 2.8% from the initial 3.5% reading while the personal consumption component was revised to 2.9% from 3.2%. Risk currencies are faring better than prior to the figures, but with equity indices yet again failing to near those 50% retracement levels (we shall not stop emphasizing this point as long as the indices remain near them), we continue to have a clear case of lower highs in JPY crosses and the inability for EURUSD to regain $1.5050. The release of the FOMC minutes (19:00 GMT) from this months meeting could cause further drag on USD if they reveal a little or no consideration towards reducing liquidity among Committee members.
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