Page 3 of
5 CREDIT BUBBLE
BULLETIN More
than one step
backwards Commentary and market
watch by Doug Noland
International reserve
assets (excluding gold) - as accumulated by
Bloomberg’s Alex Tanzi - were up $1.377 TN y-o-y,
or 25.9%, to a record $6.693 TN.
April 30
- Bloomberg (Maria Levitov): "Russia’s foreign
currency and gold reserves, the world’s third
largest, posted this year’s biggest weekly gain on
a surge of capital inflows, the central bank said.
The value of reserves increased by $10.7 billion
to a record $529.5 billion …"
Global
Credit Market Dislocation Watch May 2 -
Bloomberg (Scott Lanman): "The Federal Reserve
expanded its cash-loan auctions for banks by 50%
to $75 billion
each after higher
borrowing costs blunted the impact of the
four-month-old program. The Fed also increased its
currency-swap arrangement with the European
Central Bank by two-thirds to $50 billion and
doubled the amount with the Swiss National Bank to
$12 billion … In a third move, the Fed will accept
other AAA rated asset-backed securities as
collateral for Treasury loans through another
program."
April 30 - Financial Times
(David Oakley and Michael Mackenzie): "Bond
issuance by banks reached its third-highest
monthly level ever in April as the banks took
advantage of improving credit conditions … A total
of $303bn was raised globally by banks in April, a
record for the month and the third-highest month
of all time, according to Dealogic. The data
provider added that dollar issuance of bonds in
April was $142bn, while euro issuance totalled
$119bn."
May 1 - Bloomberg (Jody Shenn):
"Top-rated securities backed by subprime or
home-equity loans last month returned more than US
Treasuries for the first time since December … The
debt returned 0.42 percentage points more than
government notes on average, according to Lehman
Brothers … data. Agency mortgage bonds guaranteed
by government-chartered Fannie Mae and Freddie Mac
or federal agency Ginnie Mae outperformed
Treasuries by 0.95 percentage point, the most in
at least 20 years."
May 1 - Bloomberg
(Shelley Smith): "Banks and companies in Europe
seized on lower borrowing costs to sell 94.2
billion euros ($147 billion) of bonds in April in
the busiest month on record. Sales jumped from
44.1 billion euros in March and 50.6 billion euros
in April 2007 … Deutsche Bank AG, UBS AG and
JPMorgan Chase & Co. led 78.5 billion euros of
bonds, more than 75% of the total."
April
29 - Financial Times (Michael Mackenzie): "After a
banner run, global bond markets have run into a
brick wall during April. The sharp rise in bond
yields suggests that central bank efforts to quell
the financial crisis appear to have worked.
Safe-haven buying of government debt and the sale
of global stocks and riskier fixed-income
securities peaked in mid-March when Bear Stearns
almost collapsed."
May 2 - Financial Times
(James Mackintosh): "Traders making some of the
safest bets on the planet - on tiny price moves in
ultra- secure US government debt - were hammered
in March as hedge funds scrambled to sell assets
to cover losses in other markets. EMF Financial
Products, a New York hedge fund, lost almost $100m
of its $406m last month after it plunged 23.2%...
although it has rebounded sharply this month … The
problems for Treasuries and other government bond
traders appear to have their roots in a crisis in
part of the Japanese government bond (JGB) market,
amplified by leverage and the crisis at Bear
Stearns … ‘When a heavily leveraged fund is
deleveraging, everyone else will feel the
effects,’ says Nigel Blanshard, a partner at
London fund of hedge funds Culross … The scale of
borrowing on Treasuries is eye-popping: EMF, for
example, started the year with leverage of 37
times its then assets of $294m, almost $11bn, not
unusual for a Treasuries book. By the end of March
it had reduced this to 25 times assets …"
April 30 - Financial Times (Ralph Atkins,
Paul J Davies and Gillian Tett): "There is a
growing conundrum at the heart of European money
markets that is puzzling bankers, analysts and
policymakers alike: the rates at which banks lend
money to each other continue to creep ever higher.
That is not supposed to be happening. The US
Federal Reserve-led bail-out of Bear Stearns
alleviated the worst fears of systemic risks,
while regular and generous injections of liquidity
by central banks on both sides of the Atlantic
should have eased funding pressures. However, the
problems remain and some interbank rates are
approaching the highs of mid-December, a time when
fears over counterparty credit risk coupled with
the looming year-end pushed rates above levels
seen when the liquidity crisis first hit in August
and September of last year."
April 30 -
Financial Times (John Reed): "In normal times,
investors can count on carmakers’ credit arms as a
steady source of earnings that help to shield them
from economic slowdowns and the riskier business
of making and selling cars. As the credit crunch
deepens, the tables are turning. Problems at
carmakers’ financing divisions are hitting their
bottom lines even as many report record sales
volumes around the world. Last week BMW … said
sliding residual values for its cars in the US had
prompted it to take a $369m charge … Ford Motor
reported an 88% drop in earnings from its credit
division … With hundreds of thousands of vehicles
coming off lease in the US over the coming year,
they could have a significant impact for
carmakers, which typically earn about 20-40% of
their operating profits from financial services."
April 29 - Bloomberg (Aaron Kirchfeld):
"Deutsche Bank AG, Germany’s biggest bank,
reported its first quarterly loss in five years
after writing down the value of loans for
leveraged buyouts and asset- backed securities by
$4.2 billion."
April 29 - Bloomberg (David
Mildenberg): "GMAC LLC, the auto and home lender
that General Motors Corp. sold to a private equity
group, posted a $589 million loss in the first
quarter and said it may not make a profit until
next year."
Currency Watch May 2
- Bloomberg (Torrey Clark): "Russia, the world’s
second-largest oil supplier, produced the least
amount of crude in 18 months in April as aging
fields and rising costs threaten the country with
the first annual decline in oil output in a
decade. Production dropped to 9.72 million barrels
a day, 0.8 percent less than in April last year
and only slightly higher than in October 2006 …"
May 1 - Bloomberg (Fiona MacDonald and
Matthew Brown): "Gulf states are considering
dropping their pegs to the dollar after the US
currency’s decline stoked inflation across the
region, Kuwaiti Finance Minister Mustafa
al-Shimali said. ‘Yes, there are some’ Gulf
Cooperation Council states considering dropping
their pegs to the dollar, which has fallen 13%
against the euro in the last 12 months, al-Shimali
said …"
April 30 - Bloomberg (Ron Harui):
"Emerging markets led a 40% gain in currency
trading to $175 trillion last year … according to
a Euromoney survey. Transaction volume in
currencies increased 117% in Asia, 254% in central
and eastern Europe, 42% in the Middle East and
145% in Latin America in 2007 …"
May 2 -
Bloomberg (Paul Tighe): "Millions of Afghans face
shortages of basic foods because they can’t afford
gains of as much as 100% in the cost of wheat, the
United Nations said. ‘For the poorer segments of
society, who spend up to 70% of their meager
income on food, these food price rises put the
basic necessities simply out of their reach,’
Anthony Banbury, the regional director for Asia of
the World Food Program, said …"
The dollar
index rallied 1.0%, ending the week at 73.50. For
the week on the upside, the Brazilian real
increased 2.4% and the Mexican peso 0.1%. On the
downside, the Swiss franc declined 2.2%, the
Swedish krona 1.5%, the Euro 1.5%, the Danish
krone 1.5%, the South Korean won 1.4%, the
Japanese yen 1.2%, and the British pound 1.0%.
Commodities Watch April 28 -
Bloomberg (Jeff Wilson): "As farmers confront
mounting costs and riots erupt from Haiti to Egypt
over food, Garry Niemeyer is paying the price for
Wall Street’s speculation in grain markets.
Commodity-index funds control a record 4.51
billion bushels of corn, wheat and soybeans
through Chicago Board of Trade futures, equal to
half the amount held in US silos on March 1. The
holdings jumped 29% in the past year … Niemeyer,
who farms 2,200 acres in Auburn, Illinois, won’t
use futures to protect the value of the crop he
will harvest in October …he says the contracts are
too costly and risky … ‘It’s the best of times for
somebody speculating on grain prices, but it’s not
the best of times for farmers,’ said Niemeyer …
‘The demand for futures exceeds the demand for
cash grains.’"
April 29 - Financial Times
(Chris Flood): "Steel prices have almost doubled
in the past year as steelmakers have passed on big
increases in the costs of iron ore and coking coal
to consumers. The jump threatens to create fresh
problems for manufacturers and stoke inflationary
pressures in emerging markets where demand is
high, driven by urbanisation in China and
infrastructure spending elsewhere in Asia and in
the Middle East … Prices for steel billet, used to
make reinforcing rods in construction and a
benchmark for the industry, have surged this month
to $900 a tonne, almost double in the past year …
Key input costs have surged, with iron ore prices
up 71%, and coking coal shooting up 240%."
April 30 - Bloomberg (Dale Crofts and
Stewart Bailey): "US steel-sheet prices rose in
April … Hot-rolled steel sheet, the benchmark
product used in cars and appliances, climbed to an
average $850 a ton in April … Prices have gained
47% since January."
April 30 - Financial
Times (Daniel Pimlott): "Tyson, the largest
producer of beef, pork and chicken in the US,
yesterday reported
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