World economy talk

[Lady Bathory]

Some more thoughts on oil. Saudi Arabia will lose market share if they cut production. Other oil producers will simply benefit as they can sell at higher prices at the same time gain more customers. In other words, a Saudi production cut is a gift to other oil producers. By maintaining current levels of production, Saudi Arabia is protecting its market share at the same time squeezing its competitors. High oil prices encouraged investment in fracking. Sustained low oil prices will discourage further investment which will guarantee demand for Saudi oil in the future.

[Lady Bathory]

Global selloff today. The market is now in risk-off mode. News out of China that a regulator will no longer allow less-than-triple-A-rated bonds to be used as collateral in repo transactions caused a massive liquidation of Chinese bonds and sent the yuan and Shanghai stocks crashing. Last night's correction in U.S. equities probably started the risk-off sentiment and the China news made things worse. The yen and euro are gaining against the dollar (risk assets are sold and funding currencies are bought back).

[Monseratto]

With Brent breaking below USD 60 and WTI nearing USD 50, countries dependent on crude exports see their stock markets crash and the currencies devalue...

“Brent is back to $60 and global markets are sharply lower,” Hisham Khairy, the Dubai-based head of institutional trade at Mena Corp. Financial Services LLC, said by e-mail. “This round of selling pressure in the markets was expected” and may continue, he said.

Brent crude traded 3.6 percent lower today at $58.86, the lowest price since May 2009 on a closing basis at 12:52 p.m. in London. Governments in the GCC, which holds about a third of all proven oil reserves, need crude to average about $80 a barrel to balance their budgets, according to International Monetary Fund estimates.

Six Gulf Arab indexes including Abu Dhabi, Saudi Arabia and Dubai have fallen into a bear market since Nov. 30 as Brent heads for its worst year since 2008.

Dubai’s index declined 28 percent since the end of November and is poised for the worst month in more than six years. Emaar Properties PJSC (EMAAR), the developer of the world’s tallest tower in Dubai, plunged 10 percent, the maximum allowed in a day. It closed at 6.12 dirhams, erasing gains this year.

The Moscow stock market meantime dropped more than 17% for the day as the Ruble sank from 60 to 80 per Dollar.

Norway's Krone also sank as oil fell, dropping 5% to the Dollar, while Bloomberg's GCC index of Middle Eastern and North African stock markets also fell 5%.

[Lady Bathory]

The market remains in risk-off mode. EM bonds and equities are sold off as leverage and carry trades unwind. The yen is the strongest currency so far this week. The main focus today will be the FOMC statement. The Fed might remove the "considerable time" phrase which will signal a rate hike in Q2 2015.

[A121]

With Brent breaking below USD 60 and WTI nearing USD 50, countries dependent on crude exports see their stock markets crash and the currencies devalue...

Naglalason na naman si Russia. It might trigger another economic crisis like the one that happened in 1998.

[Lady Bathory]

The Fed removed the “considerable time” phrase and replaced it with the idea that it can be “patient.” I think the first rate hike will be in the middle next year. Still long U.S. dollar vs the yen and euro. There may be near term weakness in the dollar but i see it as buying opportunity for a longer term trade.

[Lady Bathory]

Yesterday the Swiss National Bank surprised the market by lowering its benchmark interest rate to -0.25% saying massive capital flow from Russia forced it to intervene. I think it's to prepare for sovereign QE by the ECB which will create strong demand for the franc. The SNB is preempting the ECB. The negative rate is supposed to discourage the use of the franc as a safe haven asset.

[Lady Bathory]

We start the new year with the U.S. dollar rallying across the board as the DXY rises above 91, a level not seen since before the global financial crisis. EURUSD has fallen below 1.20 in anticipation of the ECB moving towards government bond purchases. News over the weekend that Germany is prepared to let Greece leave the eurozone if a leftist opposition party wins the snap elections is also pressuring the euro.

[CVT]

We start the new year with the U.S. dollar rallying across the board as the DXY rises above 91, a level not seen since before the global financial crisis. EURUSD has fallen below 1.20 in anticipation of the ECB moving towards government bond purchases. News over the weekend that Germany is prepared to let Greece leave the eurozone if a leftist opposition party wins the snap elections is also pressuring the euro.

The US dollar is getting stronger vs. the major currencies,- Euro, Brit Pound, AusD, CanD, JapY, IndR and arguably ChiRY compared to approx a couple of years ago....

For example, AusD and CanD lost something between 15%-20% of their value vs the USD, with the JapY losing even more... A lot lost their shirts on forex...


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[Lady Bathory]

When the Fed was flooding the world with cheap dollars emerging market companies went on a borrowing spree.

Maynilad, Manila Water implement rate hike | ABS-CBN News

These companies borrowed dollars. Their debt servicing cost has risen significantly.

[Lady Bathory]

Emerging markets borrowed trillions of dollars encouraged by the Fed's zero interest rate policy and quantitative easing. Much of the debt was taken out at very low interest rates on the assumption that the Fed will continue flooding the world with cheap dollars for years to come. The Fed has stopped QE and has signalled intent to raise rates which caused the dollar to strengthen. A strengthening dollar makes dollar debt more expensive to service.

[Lady Bathory]

How low does the market think oil prices can go? Open interest in $30 put options (bets on WTI falling to $30) has risen significantly since December.

[baludoy]

if the russian economy implodes, what's the effect on our equities market?

[Lady Bathory]

Some more thoughts on oil...
Saudi Arabia used to reduce supply whenever it exceeded demand which put a floor under the price of oil. The high price floor acted as an incentive for other oil producers (specially in the U.S.) to invest and pump more oil. Despite high production cost, U.S. shale oil producers made big profits thanks to the high price floor guaranteed by Saudi Arabia. Now Saudi Arabia is refusing to cut production even as supply is exceeding demand causing prices to fall. The Saudi-guaranteed price floor is gone. Instead of a price floor we now have a price ceiling. Saudi Arabia, facing the threat of high oil prices incentivizing competitors, cannot allow prices to go high enough to encourage competition. So Saudi Arabia and other low-cost producers have to operate at full capacity to keep prices low enough to discourage competition. I think we will not see $100 oil again in a long time.

[baludoy]

i wonder how the pse would react to the swiss mess once it opens on monday

[baludoy]

i guess this answers that (the question i had prior to this post)

http://www.businessmirror.com.ph/the...teor-of-death/

[Lady Bathory]

Yesterday the SNB decided to stop defending the EURCHF 1.20 cap. They have been defending that cap since Sept. 2011. The decision caused carnage in the FX market as EURCHF fell below parity. Traders were long EURCHF thinking it is a one-way trade. It was a trade that worked for years. Many of them got killed yesterday. There was blood everywhere.

[Lady Bathory]

Someone asked me to explain why the SNB imposed the EURCHF 1.20 cap in 2011 and why they decided to abandon it now. During the height of the eurocrisis in 2011 massive outflows from the eurozone sought shelter in Switzerland driving up the value of the franc. To hold back franc appreciation the SNB drew the line at 1.20 francs per euro and printed as much francs as required to absorb all the euros coming in. Fast forward to 2014, the West imposed sanctions on Russia causing outflows to Switzerland and now the ECB is planning to print euros to buy government bonds (QE). The SNB has been buying euros by the billions resulting in an exploding balance sheet (around 500 billion euros, maybe 600, at the end of 2014) and with more euros coming they see defending the cap as unsustainable so they decided to abandon it. To discourage financial institutions from holding francs the SNB lowered interest rates to negative territory.

[Ry_Tower]

Swiss Franc appreciates! Dami daw losses nang mga brokerage at investors.

[Lady Bathory]

There are massive short positions built up in the euro and day of reckoning is near. The ECB monetary policy announcement is 4 trading days away. With QE already priced in it is now a question of size. It is widely believed that the ECB will announce a 500 billion euro bond-buying program but that would be the minimum to satisfy the market. If they shock the market with a 1 trillion euro bond-buying program the euro should collapse. If it's below 500 billion the disappointment could lead to a short squeeze.