Ed’s Daily Notes for December 20th   Leave a comment

Bloomberg: China’s Money Rates Climb, Stocks Slide as Cash Crunch Deepens

China’s money-market rates surged and stocks dropped for a ninth day, the longest losing streak in 19 years, as targeted fund injections by the central bank failed to alleviate the worst cash crunch since June.

The seven-day repurchase rate, a gauge of liquidity in the financial system, increased 100 basis points to a six-month high of 7.60 percent in Shanghai, according to a daily fixing by the National Interbank Funding Center. It jumped 328 basis points this week, the most since January 2011. Transactions were recorded at rates ranging from 3.8 percent to 10 percent as of 4:17 p.m. local time, with a weighted average of 8.22 percent. The Shanghai Composite Index (SHCOMP) of shares slid 2 percent.

The People’s Bank of China conducted short-term liquidity operations recently, it said on its microblog yesterday, without giving details of the recipients, amount or rate charged for the financing. The monetary authority injected 200 billion yuan ($33 billion), online financial news provider Netease reported, citing a person it didn’t identify. Calls to the PBOC’s press office went unanswered.

There’s a difference between doing “reverse repos at a regular open-market operation on Thursday mornings, or if you do behind-the-scenes SLOs,” said Pin Ru Tan, an interest-rate strategist at HSBC Holdings Plc in Hong Kong. “Market participants have to be able to see it and know the quantity and tenor of liquidity assistance in order to be reassured. If they do not, it is natural to remain cautious.”

One interesting side effect:

Chinese regulators said initial public offerings, which have been suspended since October 2012, would resume in January. Fifty companies may complete IPO procedures next month, the China Securities Journal reported.

Overall, this is a situation to watch. If the Chinese yuan fails due to liquidity, this could boost the dollar’s value.

Bloomberg: European Union Stripped of AAA Credit Rating at S&P

The European Union lost its top credit rating from Standard & Poor’s, which cited the deteriorating creditworthiness of the bloc’s 28 member nations.

S&P cut its long-term rating on the EU to AA+, with a stable outlook, from AAA and maintained its short-term rating at A-1+. The downgrade came after S&P last month lowered its AAA rating on the Netherlands.

…On the EU, S&P said that “downward pressure could build” if the creditworthiness of highly rated EU countries “was to deteriorate beyond our current expectations,” if future budget negotiations are “more protracted and acrimonious,” if member states apply to leave the EU, “or if its financial parameters markedly deteriorate,” according to an e-mailed statement.

S&P: The Tautological Company…

Bloomberg: Senate Delays Until Jan. 6 Yellen Fed Confirmation Vote

A final confirmation vote by the U.S. Senate on Janet Yellen to be chairman of the Federal Reserve will be delayed until Jan. 6, avoiding a weekend session to consider her nomination.

I don’t see any political roadblocks to Yellen’s nomination.

Speaking of the Fed:

Bloomberg: Fed Seen Tapering QE in $10 Billion Steps in Next Seven Meetings

The Federal Reserve is likely to reduce its bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said.

The median forecast in a Bloomberg survey of 41 economists matches the $10 billion reduction announced yesterday as the Fed began to unwind the unprecedented stimulus that has defined Ben S. Bernanke’s chairmanship.

The Federal Open Market Committee said in a statement it will slow buying “in further measured steps at future meetings” if the economy improves as forecast. The Fed may taper its buying by about $10 billion per gathering, Bernanke said at a press conference in Washington.

“We’re going to take further modest steps subsequently, so that would be the general range,” Bernanke said. “We could stop purchases if the economy disappoints, we could pick them up somewhat if the economy is stronger.”

I think Ben meant the opposite of what he just said. Regardless, this looks like the plan. I am reminded of Dwight Eisenhower’s statement:

In preparing for battle, I have always found that plans are useless but planning is indispensable.

War, like economics, is at the mercy of individual actions. We will see if the Fed’s plan stands up after the economic battle commences.

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Posted December 20, 2013 by edmcgon in Economy, Federal Reserve, News, Politics

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