Stocks and Risky Currencies Fall, Gold Jumps on PBOC Rumors, Moody`s Comments
Tue, Aug 31, 3:31 PM ET, by ForexTraders.com
Yesterday's Asian session saw a lot of activity and was generally dominated by sales, but the American market seems to have found some floor on somewhat positive confidence and home sales data. The market seems to be rowing against the currents, however, because the positive nature of the releases is only on the surface. Among today's news, neither the report about better than expected industrial production rates (0.3% vs. -0.4%)in Japan in August, nor data on growth of retail sales have done much to help Japanese stocks. Nikkei was down by more than 3 percent, and most Asian stock markets registered losses, even as currencies remain strong against the USD. In U.S. better than expected home sales data for June failed to make any impact since we already possess disastrous numbers for July. Moody's warns about Chinese banksApart from uncertainty caused by Japanese inaction,pessimism about Asia was boosted today on a report by Moody's, via the Telegraph, about the unsustainability of the current lending practices in mainland China, where the government is risking future stability by supporting bank lending through debt (i.e. higher leverage). "Moody's said China Investment Corporation (CIC), the country's sovereign wealth fund, borrowed $8bn last week to recapitalise three state-owned banks, using debt rather than genuine equity to boost bank capital. The agency said that beefing up the banks by this method is "credit negative" for China as a whole: "The increases in assets and equity are artificial and without real economic substance. The increase in reported equity enables the banks to lend more and effectively leverages up the system." Weird rumors about Zhou Xiao Quan defecting leads to early Asian sell-off Testimony to the degree of nervousness that exists in the markets about China right now, Asian session saw major a sell-off upon claims that the PBOC Head, Zhou XiaoQuan, who had not been visible for a while in the media, had defected fearing punishment for large losses of about $430 billion suffered in consequence of his team's FX management strategies. China may be a strange place in many ways, but it is not North Korea. One has to look a long way back to the past, to the times of the Zhao Ziyang, for example, to find the kind of ostracism that might conceivably compel an official to leave the country. The fact that rumors like this can find credibility is nothing more than a sign of how skeptical many people have become about the multiple Chinese bubbles, but even with all the problems in the country, the head of the central bank defecting because he fears punishment is just too outlandish to be believed.
Israel says Iran may attack a Middle-East nation, Iran threatens to bomb DimonaThe problems between Iran and Israel are not new, but the intensity of rhetoric has been increasing for the past three months or so. In yet another step of escalation, an Iranian official is quoted as saying that the country will bomb Dimona Nuclear Reactor if it gets attacked, as Israeli minister Dan Meridor, in a question and answer session on Israeli radio in Farisi, expressed his fear that Iran would attack a Middle Eastern nation. What he means is probably that the Iranians will respond to American bombing of their reactors by attacking Israel, which is, in his thinking, a third party not involved in hostilities. We suspect that this type of comment reflects the desire of Israelis to leave the military attack to the US due to their frontline status, and the greater risks they would face in the face of an Iranian counterattack. That also speaks against a unilateral, pre-emptive Israeli attack on Iranian installations. It is of course difficult to reach conclusions on the basis of isolated statements such as these, but given the importance of the Gulf Area in maintaining global economic stability, traders must keep an eye on the region even if matters appear to progress (almost) smoothly at the moment. CFTC withdraws reform proposals, leaving retail forex clients free to (almost) suicide at 100:1 leverageThe CFTC had made some sensible and suitable proposals for reforming the FX market a while ago, but those proposals appear to have been withdrawn in the face intense opposition from lawyers, dealers, and some speculators. The most crucial piece of contention is maximum leverage, naturally, since it is a major cause of the frequently large losses suffered by traders, and the huge profits reaped by brokers. The CFTC had proposed a regulation capping leverage at 10:1, at just one tenth of the currently available level at 100:1 in the U.S. At the moment, in the EU and the UK even higher leverage is possible, which explains why so many brokers prefer to base their operations in European or British centers. The calculation is simple,:while returns for the trader are often disappointing, the broker makes ten times as much money from the spread at 100:1 leverage than he would at 10:1. Among other things, according to the statement at the CFTC website, the new, diluted rules will require "the registration of counterparties offering retail foreign currency contracts as either futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs), a new category of registrant. Persons who solicit orders, exercise discretionary trading authority or operate pools with respect to retail forex also will be required to register, either as introducing brokers, commodity trading advisors, commodity pool operators (as appropriate) or as associated persons of such entities. "Otherwise regulated" entities, such as United States financial institutions and SEC-registered brokers or dealers, remain able to serve as counterparties in such transactions under the oversight of their primary regulators." In other words, the CFTC is aiming to streamline regulation, and end the chaotic state of the retail forex market by establishing straightforward regulatory categories. Also, "FCMs and RFEDs are required to maintain net capital of $20 million plus 5 percent of the amount, if any, by which liabilities to retail forex customers exceed $10 million. Leverage in retail forex customer accounts will be subject to a security deposit requirement to be set by the National Futures Association within limits provided by the Commission. All retail forex counterparties and intermediaries will be required to distribute forex-specific risk disclosure statements to customers and comply with comprehensive recordkeeping and reporting requirements. " On the whole, pretty much of a disappointment, after we have seen how miserable the consequences of letting an industry regulate itself are in the subprime crisis. The CFTC is letting the NFA determine leverage limits, which means that the brokerage business will get away with whatever limit (or lack of it) serves its interests best. In sum, we note gold's powerful rally today, and, in agreement with others, anticipate the breaking of new records in the coming weeks. In other respects, we continue to expect a significant deterioration in global economic stability largely as a consequence of major upheaval in China and the rest of the Asian region. We believe that this phase of the economic downturn lasting since 2007 will reach its climax in Asia, and Europe in the next two years.
SDI Glossary: "Futures" Definition
This Article's Word Cloud:
Asian
CFTC
China
Iran
Iranian
Israel
Israeli
Moody
about
against
attack
bank
brokers
counterparties
country
data
dealers
economic
equity
even
face
forex
from
have
leverage
losses
major
many
market
more
much
other
proposals
required
retail
sales
session
since
some
stability
such
than
that
their
this
today
which
will
with
would
More articles: 1 2 3 4 5 6 next »
|
RSS