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Analysis and Charts of Global Markets

written by Gary Dorsch, Editor and Publisher
Cold War “Lite” - the Battle over the Russian Rouble
Mar 20, 2014
In truth, the Kremlin’s tactical triumph in annexing Crimea does not threaten to plunge Europe towards a new Cold War. But it has caught German Chancellor Angela Merkel and US President Barack Obama flat footed, and they’re struggling to come up with a response to Moscow’s land grab. The West is reluctant to take sanctions to the next level, because it could spiral into a destructive trade war that could topple Europe’s wobbly economy into a “triple dip” recession. Instead, the secret G-7 game plan, - working to weaken the Russian rouble, and exert upward pressure on Russian interest rates, in order to topple the Russian economy into a severe recession, and ultimately force the Kremlin to roll back its takeover of Crimea.
Global Markets Throw a “Taper Tantrum”
Feb 6, 2014
“A trend in motion will stay in motion, until some major outside force knocks it off its course.” While it’s best to ride the gravy train for as long as possible, contrarians are also mindful to spot the contradictions between the mix of macro-economic data and the mix of the global markets. Such was the case in the fourth quarter of 2013, when a wide mismatch was unfolding. Most notably, - there was a sharp slide in the exchange rates of the Australian and Canadian dollars and the Emerging market currencies, versus the value of the US-dollar, and other the other side of the equation, yen carry traders were bidding up the exchange traded funds linked to the German DAX, Japan’s Nikkei, and the US-stock market indexes.
Can the Yen Carry Trade offset Fed Tapering?
Jan 8, 2014
There is a risk that the unwinding of the Fed’s QE-3 scheme could re-incarnate the bursting of the dot-com bubble of the 2000’s. As an added insurance policy, central bankers are hopeful the liquidity flowing from the “yen carry” trade could offset the negative impact on the Japanese and US-stock markets. “There’s a lot of uncertainty about how a monetary policy exit will occur with a very large balance sheet,” said New York Fed chief William Dudley on January 4th. “There’s no question that there could be unintended consequences.”
Will the “Least Loved” Bull throw a “Taper Tantrum?”
Dec 4, 2013
It’s been dubbed the “Least Loved” Bull market in history. The US-stock market rally is now 57-months old, and over this time period, the S&P-500 index has climbed a “wall of worry,” rising +170% from its March 9th, 2009 low, and hitting an all-time high, above the 1,800-level. It’s managed to accomplish this impressive feat, amid the weakest US-economic recovery from a recession since the 1930’s. So far, , the vast wealth on Wall Street hasn’t trickled down to Main Street. Instead, shareholders reaped the rewards of increased profitability, at the expense of workers.
The ECB’s Tough Balancing Act – Bubbles vs Deflation
Nov 6, 2013
If the ECB decides to do nothing, and kicks the can down the road, it would risk allowing the BoJ’s and the Fed’s money printing operations to push-up the value of the Euro to $1.40 or above, which in turn, would risk the return of a triple-dip recession, beset by deflation. Yet if the ECB decides to enforce negative interest rates, it might force European banks into making more bad loans. In any event, traders in the high flying German DAX can always rely on the support of the Euro /yen carry trade for at least another year, to expand the DAX bubble towards 10,000.
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Cold War “Lite” - the Battle over the Russian Rouble
Updated 7:13 AM, Mar-26, Wed
The Kremlin’s tactical triumph in annexing Crimea without a shot being fired in anger has so stunned the West that the degree to which the West was outsmarted and out maneuvered has yet to sink in. Russia’s de-facto annexation of the Black Sea peninsula does not threaten to plunge Europe towards a new Cold War. But it has caught German Chancellor Angela Merkel and US President Barack Obama flat footed, and they’re struggling to come up with a response to Moscow’s land grab. German Chancellor Merkel told an extraordinary EU summit in Brussels on March 9th, “One can’t just go on like nothing has happened.” ---------------------------------- All the Western political actors stepped up the empty rhetoric to a fever pitch last week, in a desperate attempt to persuade Russian kingpin Vladimir Putin out of formally annexing Crimea. However, on March 17th, Russian kingpin Vladimir Putin called Merkel’s bluff. He signed a decree recognizing Crimea as an independent state following its majority vote of 97% to secede from Ukraine and to join Russia in a referendum. Defying Western protests, Putin signed a treaty on March 18th, making Crimea part of Russia again. “In the hearts and minds of people, Crimea has always been and remains an inseparable part of Russia.” Putin later told a flag-waving rally in Red Square. “Crimea has returned to home port.” ------------------------- Russian markets Stabilize as Putin declares cease fire, While Putin was lashing out against the West in a major speech before the Russian parliament on March 18th, with old Cold War fury, currency traders were busy covering short positions in the Russian rouble. The sudden stability of the rouble was also seized upon by bargain hunters, and short sellers, as a reason to buy beaten down Russian bonds and stocks. The Euro slipped -2% from an all-time high of 51-roubles to slightly below 50-roubles. Similarly, the US-dollar slipped about -2% from a five year high at 36.75-roubles to as low as 35.95-roubles. ------------------------ In turn, the rouble’s relief rally helped to knock Russia’s 10-year Treasury bond yield -27-basis points lower to 9.29% on March 20th, from a five year high of 9.57%. Still, Russian bond yields are considerably higher than the 7.70% level that prevailed on Dec 24th. Going forward, traders expect the Russian rouble’s exchange rate versus a basket of the Euro and US$, to be the key driver influencing the direction of Russian bond yields. ---------------------------------- Behind the relief rally for the Russian markets, were clear messages sent across the newswires that the West had grudgingly accepted the loss of Crimea, and that both sides had agreed to a cease-fire. On March 18th, Russian kingpin Putin sought to reassure leaders in Berlin, Paris, and London, that Moscow did not seek any further division of Ukraine. “Fears have been expressed in Kiev that Russia might move on the Russian-speaking eastern parts of Ukraine, where there has been tension between some Russian-speakers and the new authorities. Don’t believe those who try to frighten you with Russia and who scream that other regions will follow after Crimea. We do not want a partition of Ukraine,” Putin declared. -------------------------------------------------- The next day, on March 19th, US President Obama said he had ruled out the use of military force in the Ukraine crisis, and that the international response to Russia’s seizure of Crimea will be limited to diplomacy. “We are not going to be getting into a military excursion in Ukraine. What we are going to do is mobilize all of our diplomatic resources to make sure that we’ve got a strong international correlation that sends a clear message.” In Moscow, bankers were greatly relieved that the situation hadn’t deteriorated so far that Europe and the US-Treasury would detonate the “nuclear option” of freezing Euros and US-dollars held in Russian accounts overseas and forcing foreign banks out of bi-lateral trade. Instead, the EU took very mild steps of imposing travel bans and asset freezes on 21 Russian officials, while the US froze the assets of just seven ranking Kremlin officials.
Archived Comments:
Cold War “Lite” - the Battle over the Russian Rouble
Upward Spiral in Russian Bond Yields Rattles Stocks in Moscow
Updated 7:18 AM, Mar-26, Wed
The Battle over the Russian Rouble, --- On March 13th, former Fed chief Alan Greenspan told CNBC in a "Squawk Box" interview that the West’s best options of blocking the Kremlin from further aggression, is to “affect their financial system significantly that it creates deterioration within Russia.” “Diplomacy is really far less important than the stock movements within Russia. In past confrontations there really wasn’t much of a stock market in Moscow,” he said. However, “The ruble has been deteriorating in a way that clearly has a major effect on the Russian economy, which you know is not doing well. If that happens, there will be a response from Russia, but only in that case,” Greenspan said. ---------------------- The Russian rouble has tumbled -20% against the US-dollar and has lost -27% of its value against the Euro compared with a year ago. A weaker rouble increases the costs of imports for Russian consumers, and in turn, fans a faster rate of inflation. The Russian consumer price index (CPI) is +6.2% higher compared with a year ago. The CPI might be even higher, except for the dampening influence of a weakening Russian economy that is barely growing at a tepid +0.3% annualized rate in February. However, a faster rate of inflation, and higher borrowing costs for Russian companies, caused by a weaker rouble, can sink the Russian economy into a recession later this year. And that’s the secret G-7 game plan, - working to weaken the Russian rouble, and exert upward pressure on Russian interest rates, in order to topple the Russian economy into a severe recession, and ultimately force the Kremlin to roll back its takeover of Crimea. ------------------------------ Moscow’s ability to defend it currency in the foreign exchange market, depends partly on the size of it foreign currency reserves. In an effort to preserve its FX-stash, on January 13th, the Russian central bank said it would cease “targeted” interventions on the currency market as part of a strategic shift towards letting the rouble float completely freely. Bank Rossi was depleting its FX reserves, in order to counter net capital outflows that had reached $62.7-billion in 2013, $54.6-billion in 2012, and $84-billion in 2011. ------------------------------------ The Russian central bank estimates that around $50-billion per year, or 2.5% of Russia’s economic output, is earned illegally in a vast underground economy, and is whisked out of the country. The dirty money enriches a small business and criminal elite at the expense of the broader citizenry, and it flourishes because the Kremlin is unwilling to do much about cracking down on corruption, making property rights more enforceable, or making courts believable through judicial reform. Of the total illegal outflow, the central bank figures 30% is linked to trade, with 70% made up of dubious, capital transfers, through a vast state money-laundering scheme. Big state enterprises in particular are involved in shifting large sums of cash abroad, and Russia’s Oligarchs use offshore centers to safeguard businesses.
Archived Comments:
Upward Spiral in Russian Bond Yields Rattles Stocks in Moscow
Kremlin depletes FX Stash to defend the Rouble
Updated 7:23 AM, Mar-26, Wed
Since the Russian military invaded Crimea on March 3rd, the Russian central bank has been forced to abandon its “flexible” approach to managing its currency, and instead, was forced to burn through a sizeable chunk of its massive FX stash, selling $22-billion to defend the rouble. Bank Rossi has also jacked-up its 1-week repo rate by +150-basis points to 7-percent, to tighten liquidity, saying the decision was aimed at preventing “risks to inflation and financial stability associated with the recently increased level of volatility in the financial markets.” The yield on Russia’s 3-month bank deposit rates has shot up even higher to 9.32% today, compared with around 7.25% at the start of the year.----------------------------- Moscow’s ability to win the battle over the Russian rouble, depends to a large extent on its ability to continue to rack-up trade surpluses, that can replenish its stock of foreign currency reserves. Russia earns a net $16-billion per month, on average through foreign trade. Russia’s trade surpluses are largely fuels by exports of industrial commodities, such as aluminum, diamonds, crude oil, natural gas, palladium, nickel, platinum, and timber. Russia is the world’s largest producer of palladium, used in the auto industry for making catalytic converters for gasoline-powered vehicles. Russia also controls 15% of the world’s platinum supply and is a big supplier of titanium, a vital metal used by the aerospace industry. ------------------------------------- From less than 50% in the mid-1990s, the share of commodities in Russian exports has grown to 70% today, with oil accounting for more than half of export income. Equaling 20% of the country’s GDP and half of its economic growth since 2000, hydrocarbons provide half of the Kremlin’s budget revenues. Alexei Kudrin, former finance minister, estimated the Kremlin’s break-even price at $117 per barrel last year. The legacy of the Russian petro-gas state is the centrality of oil and natural gas revenues, which amounted to $215-billion last year. ------------------------------------- The difficulty with enacting effective sanctions against Russia lies in Western Europe, where many nations now depend on cheap Russian natural gas to fuel their economies. Germany leads the group, purchasing 40% of its natural gas from Russia. Czechoslovakia, Finland and Ukraine, receive 100% of their natural gas from Russia. Poland receives 82% of its energy from Moscow. Thus, Putin has been credited with strengthening Russia’s economic leverage. Though Russia still has economic challenges, Europe’s dependence on Russian gas supplies gives Putin a trump card that did not exist during the post-Soviet chaos of the 1990’s. Recently, Russia’s gas champion Gazprom upped the stakes by threatening Ukraine with a repeat of the 2009 crisis over $2-billion of unpaid debts. “Russia’s bet on using the gas weapon is working,” said daily business newspaper Vedomosti. -------------------------------------------- Despite sharp criticism of Russia’s takeover of Crimea, there clearly is little appetite in Europe or the US for either a military confrontation with Moscow or meaningful economic sanctions. The risk for Russia on the currency markets is cushioned by the Kremlin’s huge war chest of forex reserves -- which stood at $492-billion on March 14th.
Archived Comments:
Kremlin depletes FX Stash to defend the Rouble

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