Chillin' out till it needs to be funded
US 10 Y yields climb to 2.61%, Euro dumped to 1.30 levels
Though banks and financials were looking forward to a rising yield scenario even as short terms will stay close to 0(0.25%) till 2015 they have bled quit e profusely in June on the bond funds and the sell off in fixed income investments is going to add to the liquidity crunch as collaterals have shrunk in just four week by as much as 50% and yields are up 62.5% from April lows. investors apart banks also seem to have tried to be at the short end of the yield curve initially and the sudden move thence would have nullified any gains they might expect from the rising yields. Interest rates on mortgages may afford banks some extra profits in Q2 itself, Wells Fargo and BofA positing $4 bln and $2 bln plus in gains recently from the 100 basis point move in interest rates, but banks would be hard pressed to explain the losses as well.
The fed reports that overall profit has reduced by nearly $18 B from April to half in the unrealised gains in the available for Sale Bonds account, made possible either by selling off of the positions kept AFS or by the mere cuts in price since the move began around the same time
Europe and Asia
European data was pretty mixed as the German Ifo survey kept proving current expectations false while upgrading future outlook scores. China’s banks in the mean time survived a tumultous week as inter bank rates hit double digits on overnight before settling down near 6% without much help from the PBOC China’s stock markets fell more than 5% today even as Japan seemed to have had the worst of it till last week. Markets in India continued to fall unevenly though not much outflow was recorded from equities till Friday or one suspects even today as global traders try to come ahead of the worst of the liquidity squeeze when the Fed does exit . The return of bad volatility as prices drop sharply as usual lagged almost 4 weeks in India despite the Asian tragedy rolled out in April to break the Yen’s fall.
As of now the threat is from a global dampening recovery turning into a recession in most markets even before excess liquidity is removed as commodity markets continue to rule at record lows and most recoveries have been stalled by lack of investment. Unless real demand pull up can restore a semblance of stability to global trade and consumption, one is looking at a bleak scenario for forecasts made not just for 2013 but 2014 as well.
China expands the Renminbi markets to London
UK became the first G3 /G7 component in the OECD world to sign a bilateral 3 year Renminbi swap facility ensuring that along with 20 other countries all Chinese trade with UK will also be conducted in the Chinese currency. Other important trading partners in Renminbi include Australia, Japan , India and Korea
The unabated credit boom already flagged by PBOC in the meantime continued at high inter bank overnight rates even as the broader economy saw M2 jump from 12% to 15% this month
Don’t buy bonds yet, yields may go up to 4%
Last Friday ( last trading day of the Futures and options for June 22) saw a confirmation that the trend reversal would continue thus any further buying by the central Bank could mostly be ignored in the rush. Also rising yields without any demand may preclude much benefits for banks with retail ortfolios and it would be even tougher for corporate treasuries soucing funds to lend out where lending rates n the inteer bank market may also not evenly rise in response and commercial loan demand is likely to be hit severely
In Asia, the Aussie is also hurtling towards expected 85 cent leves to the Dollar in complete contrast and consumption is unlikely to stabilise as apart from a dependence on imported goods getting expensive, China and other exporters do not expect to increase demand schedules from their suppliers despite record mining output. Crude Oil and Gold fell 4% and 7% last week and Oil at least has still not seen fresh demand that could stop it at these levels. As yen probably gets ready to restart another move down because of the immediate benefits to exporters and probably still flailing domestic demand, The euro might again become the currency of choice if the USD does respond to these pressures
Deals happen despite stock market angst
Tenet signed up for Vanguard heath for $4.3 Bln paying a 70% premium for the new territories. US Banks could still follow into new acquisitions but most of the deal pipeline for the Deal structures from Dell’s going private offers to Sony’s 20% going public transactions is a left over from Q1 as deal structuring becomes key in the challenge of depleting cash and probably unavailable credit contrary to the FEd’s expectations. Vodafone beat a bid from US’ Liberty Media (Liberty Global) for a $10 B purchase of Kabel Deutscheland probably to the consternation of T Mobile who had earlier failed to get a hold in the US markets