Ralph Shell @ 1:27 PM, Friday June 25 2010
After a marathon legislative session Senator Chris Dodd and Congressman Barney Frank seem to have reached a compromise that will lead to the passage of the Financial Reform Legislation. Dodd and Frank were at the epicenter of the Fannie and Freddie debacle, both recipients of large donations from the quasi public company that holds mortgages. With this dubious track record, it is not very reassuring to have this pair involved with the new legislation. Even more so when Senator Dodd said; " "No one will know until this is actually in place how it works. But we
believe we've done something that has been needed for a long time."
Supposedly, part of this reform is intended to discourage banks from risky investments. JP Morgan Chase seems undaunted by the pending legislation. Currently they control Highbridge Capital Management, a $20+B hedge fund and they are in negotiations to purchase a big Brazilian Hedge Fund, Gavea Investimentos for in excess of $5B. What does JP Morgan know about this legislation? Have they bought some protection?
The early week enthusiasm, in part causes by the apparent relaxation of the yuan's peg to the dollar, gave way to some confusion about their actions, and some skepticism about the feeble recovery in the US and Europe. Equities turn down, causing a flight to safety. This enabled the US Treasury to peddle $108B of two, five, and seven notes at low rates without any problems.
In Europe, the debt market is suffering because of uncertainty. Greek 10 year notes traded as high as 10.56%, a 795 basis premium to German bunds. The Greek government is now offering for sale some Greek islands to raise money. Rumors are circulating Spain has in excess of €20B of debt maturing in July which will need to be refinanced. In France Renault SA, the second largest car manufacturer had to reduce a debt offering by 20%, citing difficult market conditions. Surprising then, the Euro has traded this well on the week, but follow the money. Since the yuan has been pegged to the USD, it has gained nicely against the euro. There are rumors the Chinese have been buying the euro this week. Have heard nothing on sales of the Greek islands.
The pending G-20 meeting in Toronto this week end promises to be more than a dull social event. There is a genuine schism within the group and it remains to seen if evidence of these differences emerge. Jeremy Warner in the Telegraph.co.uk had these comments:
" President Barack Obama, backed to some extent by Nicolas Sarkozy of France, wants economic stimulus to continue until the global recovery is unambiguously secure. In the opposite corner is Germany's Angela Merkel, now oddly aligned with Britain's new political leadership in thinking the time is right for fiscal austerity.
As it happens, the public debt trajectory is rather worse in the US than it is in Europe, yet Obama has adopted an overtly "spend until we are broke" approach in a calculated bid for growth and votes.
There are no rights and wrongs in this debate, but by implicitly criticising Germany for not doing enough to stimulate domestic demand, Mr Obama displays his usual lack of understanding of foreign affairs."
As the trading winds down this week, we note the pound is climbing back to the 1.50 level, flirting with the weekly high. Are the currency markets casting their collective vote in favor of the Tories austerity program? If so, does this conflict with dollar strength?
No charts or trades today. Have a great weekend!!!
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Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.