Monthly Archives: August 2015

27-Aug (FoxBusiness) — China’s devaluation of its yuan currency should not be made a scapegoat for the recent global stock market rout, a senior Chinese central bank official told Reuters on Thursday.

Instead, Yao Yudong, head of the bank’s Research Institute of Finance and Banking, said concerns over a possible U.S. interest rate rise this year may have fueled capital flight out of emerging markets.

He said the U.S. Federal Reserve should delay any rate hike to give fragile emerging market economies time to prepare.

“China’s exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming U.S. Federal Reserve monetary policy move,” Yao said.

“We were wronged.”

…”So we hope the Federal Reserve could further delay its interest rate rise, giving emerging markets ample time to prepare. The Fed should not only consider the U.S. economy, but should also consider the global economy which is very fragile,” he said in an exclusive interview.

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by Michael J. Kosares

Wall Street Journal/Ese Dheriene and Biman Mukherji/8-25-2015

“In recent years, China has come to shape the very way in which commodities are bought and sold, traditionally the preserve of financial centers such as London and New York. Late last month, the price of gold fell sharply, to a five-year low, within minutes of Asian markets opening. That came after almost five metric tons of gold—close to $200 million of the metal—was sold on the Shanghai Gold Exchange, according to ANZ Bank. The trade was seen by market participants as a key moment reflecting how China had moved Asian commodity markets away from just following the overnight pattern of U.S. and European trading.”

MK note:  The premise of this article is that China will continue to play a key role in shaping commodities’ markets in the years to come, despite the current slowdown, based on its sheer scale.   If you follow this blog, you already know of the infrastructure China is putting in place to influence the gold trade and insert itself as a third gold trading center along with London and New York. We should note that the five tonne trade cited above came after the price had dropped.  Keep in mind that Shanghai is a physical market exchange. In other words, someone in China took advantage of the price drop to force the market into a delivery of five metric tonnes of the metal.  You might recall too that there have been reports in the background of Goldman Sachs and HSBC looking to purchase significant amounts of physical metal for delivery around the time of the five tonne trade.  Are the two events related?  They very well might be.  And this might be the very first signs of China flexing its muscle in the gold market in the way we outlined in this News & Views Special Report titled, The Shanghai stock crash and China gold demand.

Quoting that Special Report:

In addition, an institution wishing to bet against gold would be forced to do so by delivering the physical metal itself in kilo bar form (the standard trading unit) upon settlement – an expensive and cumbersome process likely to further discourage excessive speculation or attempts at price manipulation. Gold Forecaster’s Julian Phillips, who has analyzed activity in the gold market for a number of years, points out that the seminal changes taking place in the gold market centering around Shanghai “will allow Chinese banks to participate in the gold market on a global basis.” It will be a market, he says, “that is not distorted by the banks, their proprietary trading, or control of the gold distribution system globally. China will hold these reins.”

Gold as a wealth building asset – East and West

In short, the physical flow of metal – its purchase and sale in real terms – will govern pricing in Shanghai, not leveraged paper trades, as is the case in the West. This emphasis on physical pricing in Shanghai, particularly when the new Shanghai Fix comes into play later this year, could signal the birth of a whole new gold market unlike anything we have experienced since the United States detached the dollar from gold in 1971.

At the moment, there is a strong, steady flow of gold through the London-Zurich-Hong Kong-Shanghai pipeline. Should the supply slow, prices in yuan terms could receive a strong jolt. Don’t forget too that the newly structured London fix now includes one Chinese bank with perhaps two others soon to be accepted as members, the situation Julian Phillips touches upon above. These banks will be on the constant lookout for arbitrage opportunities that could be purchased and shipped to their home country. Competition, as they say, is good for the soul, and in this case, it could be curative.

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China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan, according to people familiar with the matter.

Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan, said two of the people, who asked not to be identified because the move wasn’t publicly announced. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago, according to different people familiar with the matter.

China revived its equity purchases after the government’s absence from the market earlier this week contributed to the biggest two-day selloff since 1996. Under a new exchange-rate regime announced Aug. 11, the central bank relies on intervention to manage the yuan instead of its daily fixing. China’s surprise policy shifts have jolted markets worldwide as investors struggle to gauge their impact on the world’s second-largest economy.

“The Chinese are not being very consistent in their communication to the markets,” said Andrew Sullivan, head of sales trading at Haitong International Securities Group Ltd. in Hong Kong. Investors are “frustrated by the flip flop.”

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27-Aug (Bloomberg) — China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.

Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales, said another person. They didn’t reveal the size of the disposals.

The People’s Bank of China has been offloading dollars and buying yuan to support the exchange rate, a policy that’s contributed to a $315 billion drop in its foreign-exchange reserves over the last 12 months. The $3.65 trillion stockpile will fall by some $40 billion a month in the remainder of 2015 because of the intervention, according to the median estimate in a Bloomberg survey.

China selling Treasuries is “not a surprise, but possibly something which people haven’t fully priced in,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “It would change the outlook on Treasuries quite a bit if you started to price in a fairly large liquidation of their reserves over the next six months or so as they manage the yuan to whatever level they have in mind.”

…“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. “China has a direct impact on global markets through U.S. rates.”

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27-Aug (MarketWatch) — Kansas City Fed President Esther George says the market turmoil “complicates” any decision to raise rates, but she repeated her long-held call for normalization. George, who is considered a hawk, said the market swings may have been impacted by the central bank’s moves. “I think [Fed policy] has an influence on it,” said George in an interview with CNBC. She doesn’t have a vote this year.

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PG View: George also said market volatility and disinflationary pressures are likely to persist for some time.

26-Aug (Reuters) — An interest rate hike next month seems less appropriate given the threat posed to the U.S. economy by recent global market turmoil, an influential Federal Reserve official said on Wednesday.

In the clearest indication yet that fears of a Chinese economic slowdown could influence U.S. monetary policy, New York Fed President William Dudley said the prospect of a September rate hike “seems less compelling” than it was only weeks ago.

Dudley, a dovish policymaker and close ally of Fed Chair Janet Yellen, however left the door open to raising rates for the first time in nearly a decade when the U.S. central bank holds a policy meeting Sept. 16-17.

The global selloff, brought on by weak Chinese economic data, threatens to crimp global growth and create financial conditions unsuitable for a initial policy tightening in the United States, he said.

“At this moment, the decision to begin the normalization process at the September FOMC meeting seems less compelling to me than it was a few weeks ago,” Dudley told reporters at the New York Fed, of the policy-making Federal Open Market Committee.

…Asked about the possibility of another round of stimulative bond-buying, Dudley said the U.S. central bank is “a long way from” that. He added that the market turmoil “is not a U.S. problem” and was sparked by “developments abroad.”

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PG View: Rest easy everyone, it’s not our problem.

If you’re disinclined to believe such pablum, diversify your investments with some physical gold.

King World News/8-25-2015

“After yesterday’s carnage in global stock markets, the Godfather of newsletter writers, 91-year-old legend Richard Russell, warned people to stay out of the stock market. He also discussed the Fed, gold, silver and the possibility of hyperinflation.”

MK note:  Those who have read my writings over the years know of my respect for Richard Russell.  I have always appreciated his direct commentary and down-to-earth analysis drawn from many years experience analyzing markets.  As for the final outcome, I find it interesting that his concerns about eventual hyperinflation echo those of another long-term analyst of note, James Sinclair – even as the economies of the world flirt with disinflationary disaster.  Though I am not in concert with him on the Great Reset and the gold price forecasted, I find this interview of Sinclair with former ABC News and CNN business reporter Greg Hunter at least interesting and worth watching with respect to the causes and effects of the present situation in the financial markets.  Sinclair doesn’t quote his sources but he passes along an interesting piece of advice he received with respect to gold:  “You probably will not want to sell gold’s next rally.”  Some of you might be aware of Sinclair’s long term ties to important, old-money Wall Street families.  As I say, worth watching. . . . .

Fiscal Times/Anthony Mirhaydari/8-24-2015

“A recent working paper by the vice president of the St. Louis Federal Reserve Bank finds that after six years of quantitative easing that swelled the Fed’s balance sheet to $4.5 trillion, ‘casual evidence suggests that QE has been ineffective in increasing inflation’ and only seems to have boosted stock prices.

Complaints once in the realm of conspiracy theorists wearing tin foil hats are now being embraced by the Wall Street establishment. In a note to clients, Deutsche Bank analysts warned that ‘the fragility of this artificially manipulated financial system was exposed’ and that ‘the only thing preventing another financial crisis has been extraordinary central bank liquidity and general interventions from the global authorities.'”

MK note: For those who like to look a bit deeper, here’s the link to the St. Louis Fed paper referenced above.  The point of all this is that QE post-2008 worked to save the financial institutions (at least some of them), but it didn’t work to save the economy.  Thus, if the economy couldn’t be saved by QE previously, why would anyone believe that it could work to save the economy now.  Thus, the “troubling truth” is that the Fed might be out of ammunition, an event causing a loss of faith on Wall Street and Main Street both. In some ways, that makes this breakdown closer to a 1929-style event (with the evident strong disinflationary bias in the economy) than 2008. Troubling indeed. . . . .

Fiscal Times/Anthony Mirhaydari/8-24-2015

“Policymakers responded to the financial crisis with easy monetary policy and low interest rates. The critics — including us — argued against ‘solving a debt crisis with more debt.’ Put differently, we said that QE was necessary, but not sufficient for a recovery. We are now coming to the moment of reckoning: central bankers look naked, and markets have nothing else to believe in.”  Alberto Gallo, head of credit research, Royal Bank of Scotland

How Washington will try to rig the stock market/John Crudele/ New York Post/8-24-2015

“One of these mornings — or overnight — some mysterious buyer will suddenly start purchasing an abnormal amount of Standard & Poor’s 500 stock index futures. So we get down to direct intervention — just like China did. Only Washington, with Wall Street as its co-conspirator, won’t be as sloppy as Beijing was. That’ll get the stock market moving higher and everyone will pretend that the buyers are just ordinary people who suddenly think Wall Street is oversold.”

MK note:  In this cogent piece written two days ago, the New York Post’s John Crudele accurately predicted events and provided a pretty good summary on the true forces at work.  He is not happy about the cozy relationship between Wall Street and Washington nor the coverage at our favorite stock-hyping cable channel (which he says “tens of thousands” have already abandoned).  This piece will confirm what a lot of you are already thinking. . . . .

26-Aug (Reuters) – Gold slipped one percent on Wednesday as the dollar gained and European shares recouped some of their losses, while investors closely monitored China’s efforts to support its economy.

Sentiment in the more industrial precious metals also deteriorated on worries about global growth. Silver fell nearly 3 percent to $14.26, its lowest since August 2009 and palladium, mainly used in emissions control systems for cars, trucks and other vehicles, touched a five-year low.

Spot gold was down 0.9 percent to $1,129.91 an ounce by 1212 GMT, on track for a third day of losses. The decline added to a 1.2 percent fall on Tuesday, its steepest since July 20, made as global stock markets rebounded.

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Link to options expiration calendar

MK note:  For those of you new to the gold scene, the gold price has been known in the past to take a dump on options expiration dates – in fact in some circles it is an anticipated event. Those who underwrite gold “calls” benefit from every $5 decline in the metals’ price. No one knows for certain if these recurring expiry takedowns are a coincidence, chance events or engineered anomalies, though a good many over the years have speculated that the latter is the case.  In the past, gold has often, but not always, recovered quickly from the onslaught. Given what else is on the table these days, one wonders how many of the big players will take advantage of this dump to stock up on physical.

By the way, today is also options expiration day for silver.

26-Aug (Bloomberg) — The European Central Bank is ready to expand or extend its bond-buying program if needed as a slump in commodity prices and risks to global economic growth threaten its inflation goal, said Executive Board member Peter Praet.

“Recent developments in the world economy and in commodity markets have increased the downside risk of achieving the sustainable inflation path toward 2 percent,” Praet told reporters in Mannheim, Germany. “There should be no ambiguity on the willingness and ability of the Governing Council to act if needed.”

The euro weakened after the comments, which echo remarks by ECB Vice President Vitor Constancio on Tuesday and come just a week before the Governing Council will hold its next policy meeting. Inflation in the euro area was just 0.2 percent in July, and the slowdown in China’s economy, renewed slump in oil prices and stock-market turmoil could add downward pressure.

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PG View: These comments tanked the euro, buoying the dollar in the process. That in turn has weighed on gold.