How linked are the markets? US equity markets declined yesterday after the Citigroup earnings announcement heightened concerns that the subprime mess is not gone yet and oil over $86. Immediately, bonds rally and the currency markets avert from risk by selling yen carry. Today, more of the same after Nomura announced it took a hit (Y145.6 bn loss ($1.24 bn) because of subprime and is exiting the US RMBS market. Here’s my point: the Nikkei drops, but the yen rallies? To show how disjointed this logic is, since when does oil at $87 help a nation that imports 98% of the black stuff? The US dollar index is up .18 at 78.27. Lot’s o’ chatter from the Japanese and Europeans over the weak US dollar, Japanese yen, and Chinese yuan as we lead up to Friday’s G8 meeting. GBP, Euro, and US overnight and 3mth Libor fixings showed little change.
If you are trading volatility in the Hang Seng, you are livin’ large as that index continues to be the Molotov cocktail of equity indices. It dropped almost 2% today and risking 2.44% yesterday. S&P 500 is down 7.4 pts in pre-opening trading. The generic Itraxx crossover index on Bloomberg (ITRXEX57) is up 8 at 285. The CRB index is at 338.29, corn is at 360.50, and wheat is at 819.20. Oil a big mover as it’s up $1.35 to $87.50 as some are predicting $90 by the end of the week. Nat. gas is at $7.52 and home heating oil is at $2.3284. Metals are mixed with gold down $3 at $756.15, silver is at $13.645, and copper is at $8,150.
Bank O’ Canada Overshadowed by TIC: Left interest rates on hold at 4.5% as expected as they did the two handed economist routine with expressing concerns over a slowing US economy while stating that the Canadian economy is operating above its production potential. Again, they mention that the Canadian dollar is trading above where the Bank of Canada’s models projected it. The shocker is the massive drop in the US net long term capital flows. They were expected to be up $60 billion and came in at a negative $69.3 billion. This is the clearest example of money running home from the US during the credit crisis in August. What may be more shocking is the lack of market reaction to the news. Bonds are about unchanged, the US dollar is not much lower, and equities are about unchanged as well. IP and CU came out as expected.
Bernanke, “I’m Not Indifferent!: Overnight, we had the chairman of the Federal Reserve give a speech entitled, “The Recent Financial Turmoil and its Economic and Policy Consequences.” After providing a history lesson on panics, he did get to some interesting tidbits during the Q&A. He said that he cannot deny that there is some inflationary impact from a weaker dollar and that no central banker can be indifferent to the home country’s currency. What a relief! I didn’t think anything got past that sweater vest.
Another Angle to the Iraq Mess: Turkey moved closer to opening a new front in the Iraq war Monday, with the government asking parliament to approve a cross-border offensive against Kurdish rebels AP reports. Turkish PM Erdogan said that he expects it to pass and that the vote would happen today. Iraq announced that it plans to sell 6 million barrels of Kirkuk crude that is sent through its northern province. The possible disruption of that flow due to an invasion has sent crude oil surging this week. Iraqi PM Nouri al-Maliki is attempting to hold emergency talks with Turkish leaders today to avoid the crisis.
This comes as the US House of Representatives decides to hold a vote on designating the killing of Armenians during the last years of the Ottoman Empire as a genocide. Tony Fratto, a White House spokesman, said President Bush would not intervene in any vote on the genocide resolution in Congress, although the administration has tried to persuade lawmakers to reject it. (AP) “There should be no question of the president’s views on this issue and the damage that this resolution could do to U.S. foreign policy interests,” Fratto said Monday aboard Air Force One. Fascinating how a complex situation can increase its complexity parabolically once it begins to go the dark side.
Andrew Busch
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