Ralph Shell @ 2:45 PM, Monday February 21 2011
Years ago there was a sarcastic balladeer who sang "The whole world is festering in one unhappy wound." Now forty five years have flown by since the mid sixties, but the theme still prevails. The latest shuffle in leadership seems to be occurring in Libya. Muammar Gaddafi, sons and friends have been the countries rulers for over 40 years, and Gaddafi is rumored to be availing himself of hospitality offered by Hugo Chavez in Venezuela. Gaddafi was not a friend of the West, but now some of those currently rebelling have threatened to cut off oil shipments. Brent crude is up about 3.50/barrel and West Texas crude is back up to $91.40.
Dumping some of the dictators and autocrats who have been running many of these countries, and who have enriched themselves from public funds seems like a great idea. But what is to follow? It is rumored the Egyptian ruler Hosni Mubarak has a six story mansion in the Knightsbridge section of London, plus other places in New York, Paris and Beverly Hills, California. Mubarak is also rumored to have appropriated sufficient funds to maintain these places forever.
His departure is good reason to celebrate but his departure leaves chaos. Travel and hospitality account for about 13B in annual revenues, and this has stopped. Money is needed to pay the public sector employees, and money is needed to pay for the importation of about half of the food needed for 77M Egyptians, and a broad myriad of consumer goods.
Interest rates in Egypt are soaring. The government late last week sold $187M of 91 day bills at an annual rate of 10.94%, and they intend to sell another $934M this week.
This week British Prime Minister David Cameron made a surprise visit to Egypt. He claims he is there to voice his approval of an orderly transformation to democracy after years of autocratic rule, a government that would detain dissenters without formal charges. Since the Egyptians will need loans to move forward, we wonder if PM Cameron is not acting as a rain maker for the big British banks.
There is a lot of uncertainty confronting the currency markets this week, in addition to the unsettled Mid East situation. Surveys today revealed German and French surveys about business conditions remain optimistic. Despite the robust German recovery, German Chancellor Merkel Christian Democrat Union was a loser at the polls. One of the issues that bothers the voters is the German involvement in the peripheral debt crises. Bailing out the PIIGS is a hard sell to the voters, but how much of the German recovery is because they are members of the euro, able to export much more because of this membership.
Friday's Irish elections is expected to give power to a Fine Gael-Labour coalition. Their leaders claim the EU bail out negotiated by the Fianna Fail incumbents must be re-negotiated. There were rumors some of the big borrowings from the European Central Bank over the week end were by the Irish Banks, but it is hard to believe this relates to the election. Then again if you want to change the rules, best to get as much ECB money as you can before approaching that topic.
It is hard to assimilate current reports, political trends and have a trading approach to the markets. The short side of the USD is very popular with the specs, but as long as they are willing to put more money on the line, that keeps the markets buoyant. On Friday, for example, the open interest in the euro futures was up 13k contracts, a big one day increase. Also what about the crude price? Prices at these levels act as a silent tax, and give economic recovery a big head wind. Keep prices here and the US GDP number may slip back below the 3.2% currently forecast. We are going to spend another day on the bench, trying to figure out some new trades.
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.