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Archive for August, 2007
Aug. 21 (Bloomberg) — The yen fell against the euro and the dollar, heading for the first three-day slide in seven weeks, as gains in stock markets encouraged investors to resume buying higher-yielding assets funded by loans in Japan.
The yen is reversing the biggest weekly gain since March as an equity rally in the U.S. and Europe eased concern a global rout that erased more than $5.5 trillion of market value will resume. Japan’s currency also declined on speculation the Bank of Japan will keep its benchmark rate at 0.5 percent, the lowest among major economies, encouraging investors to borrow yen to invest overseas, known as a carry trade.
“The Bank of Japan will skip a rate hike this week and interest-rate differentials will widen,” said Yuuki Sakurai, general manager of financial and investment planning in Tokyo at Fukoku Mutual Life Insurance Co., which oversees the equivalent of $41.5 billion in assets. “This gives momentum to the yen carry trade.”
The yen fell to 155.02 per euro at 12:30 p.m. in Tokyo from as high as 154.34 and 154.94 late in New York yesterday. It also dropped to 115.10 against the dollar from as strong as 114.61 and 114.88 yesterday. Japan’s currency may fall to 115.50 per dollar and 157 a euro today, Sakurai said.
Australia’s dollar, a favorite of the carry trade, recouped a loss of as much as 1.2 percent to trade at 92.55 yen. New Zealand’s dollar, another favorite because of its 8.25 percent interest rate, rose for a third day, to 80.37 yen from 80.27 yen.
Still Looking Overseas
Japan’s Nikkei 225 Stock Average added 1.5 percent and the Morgan Stanley Capital International Asia-Pacific Index of regional shares gained 1.7 percent. The Dow Jones Industrial Average added 0.3 percent yesterday and the Standard & Poor’s 500 Index recouped a 1 percent loss to close little changed.
Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson will meet with Senate Banking Committee Chairman Christopher Dodd today to discuss responses to “ongoing turmoil” in the markets.
Dodd plans to discuss recent market volatility, the broader implications for the economy and additional steps policy makers can take to stabilize the situation and help homeowners, his office said yesterday. The closed-door meeting Dodd requested will be held in his Senate office in Washington at 10 a.m. and the senator will hold a news conference afterward.
“Gains in stocks are weighing on the yen,” said Takuma Kurosawa, global markets treasurer at HSBC Bank in Tokyo. “Some people are still looking for the chance to buy overseas assets and put on carry trades. This shows that the initial wave of the subprime crisis may have subsided.” The yen may fall to 115.50 against the dollar today, he said.
Rising Volatility
Losses in the yen may be limited by speculation rising volatility will increase the risk of re-entering carry trades.
“Many investors are still looking for the yen to gain,” said Hiroshi Yoshida, foreign exchange trader at Shinkin Central Bank in Tokyo. “Low volatility is essential for yen carry trades. Implied volatilities are still relatively high, so it isn’t that easy to re-enter these trades.”
The yen may rise to 114.20 per dollar and 153 against the euro today, Yoshida said.
Volatility on one-month dollar-yen options rose to 15.00 percent from 14.50 percent. Higher volatility discourages carry trades as it implies the bets will be exposed to greater exchange-rate fluctuations.
ECB Rates
Any gains in the euro may be curbed by speculation a German report today will show investor confidence fell for a third month in August, suggesting growth in Europe’s largest economy may have peaked.
Europe’s single currency may fall as the ZEW Center for European Economic Research’s index of investor and analyst expectations declined to a seven-month low of minus 1.5 after equity markets tumbled, according to the median of 36 forecasts in a Bloomberg News survey. Traders pared bets the European Central Bank will raise interest rates from 4 percent by year-end.
“Amid concern over lower global stock prices and instability in the financial market, it should be very difficult for the ECB to raise rates,” said Masaki Fukui, a senior economist and currency analyst at Mizuho Corporate Bank Ltd. in Tokyo. “Worsening business sentiment will make it even more difficult,” pushing down the euro to $1.3350 per dollar in one week, from $1.3476.
Investors cut wagers the ECB will lift borrowing costs, futures trading shows. The implied yield on the December contract has fallen 15 basis points in the past week to 4.25 percent. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.
The dollar fell after the Federal Reserve cut the discount rate by 50 percent to 5.75 percent and said that downside risks are on the rise. The euro rose as high as 1.3550 versus the dollar, while the sterling pared its earlier loss and climbed back to above 1.98 level against the dollar.
The Fed said in the statement that it is ¡°prepared to act as needed to mitigate the adverse effects on the economy arising from disruptions in financial markets.¡± The dollar rallied after the Fed cut window rates to increase liquidity in the market. The Dow Jones Industrial Average opened 300 points higher under the stimulus of the Fed¡¯s action.
Stocks pared half of its earlier gains as investors took a cautious stance and took profits before a US consumer sentiment report. The University of Michigan consumer sentiment fell from 90.4 in 83.3 in August, below the estimate of 88. The dollar edged down slightly after the below-the-expectation data.
August 15, Chicago - National Futures Association (NFA) has permanently barred Forward Forex, Inc. (Forward Forex), a Futures Commission Merchant and Forex Dealer Member located in Hollywood, Florida, from NFA membership. The Decision, issued by NFA’s Business Conduct Committee, is based on a Complaint filed in June 2007 and a settlement offer submitted by Forward Forex.
The Complaint charged that Forward Forex made misleading and deceptive sales solicitations to the public, used misleading and deceptive promotional material and failed to supervise its employees and solicitors. Additionally, the Complaint charged that Forward Forex failed to maintain required books and records.
NFA is the premier independent provider of innovative and efficient regulatory programs that safeguard the integrity of the derivatives markets.
Source: www.nfa.futures.org
Aug. 17 (Bloomberg) — Stock market investors are starting to price in a global economic slowdown as a financial crisis triggered by U.S. subprime mortgage losses deepens, according to Barclays Capital.
Equity markets are tumbling around the world this week, sending benchmark indexes in Europe and Asia to the lowest levels in months. U.S. stocks fell for most of yesterday before a late rally in banks and securities firms helped restore about $369 billion to the Standard & Poor’s 500 Index and $105 billion to the Dow Jones Industrial Average.
Fund managers and analysts are urging the Federal Reserve to cut interest rates soon to ease the worsening credit crunch caused by losses in the U.S. housing loan market. Countrywide Financial Corp., the biggest U.S. mortgage lender, had to tap an $11.5 billion bank line yesterday. Australia’s Rams Home Loans Group Ltd. failed to refinance A$6.17 billion ($4.8 billion) of short-term U.S. loans, forcing it to seek emergency funding.
Equity markets “are progressively discounting the demise of the heavily levered lenders, whilst starting to assume that there will be a negative impact on the global economic cycle,” London-based Tim Bond, head of asset allocation at Barclays Capital, said in a research note yesterday. “The equity markets appear to be expecting a much worse outcome for credit than the credit markets themselves are discounting.”
Financial stocks in the U.S. and Europe have fallen to almost the same level or below the lowest in the past 15 years relative to earnings, according to the report by the investment banking unit of Barclays Plc, the third-biggest U.K. lender.
Stocks Tumble
Standard & Poor’s 500 Financials Index has lost 8.3 percent since July. Asian stocks tumbled today, with Toyota Motor Corp. poised for its biggest loss in almost four years, after the yen rose to a one-year high as investors fled high-yielding, higher- risk assets on speculation a credit crunch will damp global economic growth.
“If the recent phase of apparent stability in the CDS market is an illusion borne of low liquidity, then the stock market’s attitude towards financial stocks becomes more understandable,” Bond wrote in the report.
Contracts on the CDX North America Investment-Grade Index, a benchmark for the cost of protecting investment-grade bonds, fell 2.5 basis points to 78 basis points after rising as high as 89 basis points earlier yesterday, according to Deutsche Bank AG. The LCDX index, which allows investors to bet on the U.S. leveraged loan market and rises as confidence improves, rose 0.4 to 94.3 after falling earlier yesterday to as low as 93.25, according to Goldman, Sachs & Co.
Seeking Buyers
In the U.S., mortgage rates for prime borrowers have risen by about 40 basis points compared with May. There is between $1 trillion and $1.5 trillion in mortgage debt seeking buyers and maybe the same amount in asset-backed commercial paper, along with $300 billion of leveraged buyout debt, Bond said.
“In this cycle, it is mostly the lenders, not the borrowers, who are excessively leveraged,” Bond said. As more lenders are forced to go out of business under the weight of subprime-related losses, “fewer lenders, particularly few lenders with apparently unlimited potential leverage ratios, imply less competition to lend and hence a higher overall price for credit.”
Spreads Widen
The spread, or extra yield, of BB rated debt in the U.S. over government debt, widened by an average 84 basis points from 229 basis points at the beginning of July, according to Calyon’s head of Asia credit research Dilip Parameswaran. Before the Asian financial crisis in 1997, the bonds traded at 150 basis points over U.S. Treasuries.
In the five major credit events worldwide since the devaluation of the Mexican peso in 1994, the spread rose between 54 and 224 basis points, he said.
The Fed will cut interest rates significantly after a series of cash injections into the money markets this month had limited effect, Credit Suisse Group said.
The rout in the financial markets is threatening to reverse the outflow of Japanese savings that has been supporting global economic growth, including the capital inflows into China, and it may even be too late to prevent a full unwinding of the carry trade, Credit Suisse analysts led by London-based Jonathan Wilmot wrote in a research report on Aug. 15.
“This is the fundamental source of savings underpinning the global circulation of capital, and the high level of global liquidity, risk appetite and ultimately, economic growth,” Wilmot said.
Taken from Bloomberg.com
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