martedì 12 marzo 2013

Mexico Cuts Interest Rate, China Talks Currency War

Mexico cut interest rates for the first time in four years Friday, launching a debate about whether the country is entering an easing cycle and about how the economy will perform in the medium term.
The central bank’s half percent rate cut leaves interest rates at 4 percent, which marks a record low for the country.  The Bank of Mexico hadbeen focusing on fighting a surge in inflation since 2009. Over the last two years, inflation has averaged 3.7 percent, a whole percentage point lower than in the two years prior to that. Meanwhile, at 4 percent, growth remained reasonably high last year, although this figure masked a slight slowdown at the end of the year, when the country’s retail sales and industrial production slowed for the first time in the post-crisis period.
This move will only heighten the concern of some economists who are already warning of a currency war.  An interest rate cut normally reduces demand for a country’s currency. In this case it can be expected that the lower relative returns now available in Mexico will weaken the Peso, as investors switched into other currencies giving relatively higher returns. 
However, if this rate cut was intended as a shot in the currency war, then it backfired. The Peso actuallystrengthened following the move, as investors apparently focused on what the cut signaled about the strength of the economy and future prospects for as-of-now deadlocked reforms, as opposed to focusing on direct interest yields in the country. Part of this counter-intuitive reaction could also have been the result of positive data in the U.S., which is the destination for around four-fifths of Mexico’s exports.
Meanwhile, in China, Commerce Minister Chen Deming told the National People’s Congress (NPC) in Beijing that he is worried about the “deliberate depreciation of major currencies” and the consequences of this for developing nations, including China.  Ignoring the negative effect that China, the world’s number 2 economy, has had (mainly on other emerging markets) through its long running currency peg and savings rates, the speech painted China entirely as a victim. 
Of course, nearly every nation sees itself (publically at least) as the “victim” of others’ currency policies, but China’s huge foreign exchange reserves (believed to total U.S. $3.3 trillion at the end of 2012) make Chen’s worries a little disingenuous.  The credibility of Chen’s claims is also undercut by China’s FebruaryExport-Import data, which estimated China’s monthly trade surplus at U.S. $15.25 billion.

Gold Futures Climb 1% on Weaker Economic Data, Dollar

Gold prices rose 1% Tuesday as a weaker dollar and weaker economic data lured investors back to the perceived safety of the yellow metal.
The most actively traded contract, for April delivery, was recently up $15.50, or 1%, at $1,593.50 a troy ounce on the Comex division of the New York Mercantile Exchange. The contract touched an intraday high of $1,597.00 a troy ounce, the highest-traded price since Feb. 28.
U.K. industrial production fell 1.2% in January from a month earlier, missing forecasts of a 0.1% increase.
The weaker-than-anticipated data was supportive of higher gold prices as it reinforced the ongoing need for loose monetary policies from the world's central banks, said traders at TD Securities. Low interest rates and a cash-flush financial system tend to draw investors looking to preserve their wealth into gold and other hard assets.
Gold futures have also benefited from investors who recently re-entered the market in search of a bargain. Some market participants believe that gold's retreat to seven-month lows was temporary, and saw this as an opportunity to buy the metal before prices resumed their upward march.
"There's very aggressive buying into dips," said Dave Meger, director of metals trading with Vision Financial Markets. "With the Fed stimulus still in place, the market feels the physical demand will pick up," he added.
A weaker dollar also supported gold prices. The greenback slipped against a trade weighted basket of currencies, with the ICE Dollar Index falling to 82.442, from 82.791 earlier.
Dollar-denominated gold futures appear cheaper to buyers using foreign currencies when the dollar weakens.

U.S. sells $490 million worth of GM stock in February

The U.S. government last month accelerated its plans to fully exit General Motors Co. by March 2014.
In a monthly report to Congress, the U.S. Treasury Department disclosed that it sold $489.9 million worth of GM shares in February.
To date, the Treasury has recovered approximately $29.8 billion of its $49.5 billion investment in GM as part of the automotive bailout through repayments, sales of stock, dividends, interest, and other income.
Treasury did not disclose how many shares it sold in February, but based on stock prices in February, the government sold at least 17.2 million shares of stock
In December, the U.S. Treasury said it intended to begin selling its remaining shares as soon as this month. Officials said the "manner, amount, and timing of the sales under the plan are dependent upon a number of factors."
The announcement included GM purchasing 200 million shares of its stock back from the government for $5.5 billion, which represented a 7.9 percent, or about $2, premium over the stock's Dec. 18 closing price.
After the repurchase, the U.S. Treasury owned approximately 300 million shares of GM stock, or approximately 19 percent of the automaker. Officials said the government would start selling the stock as early as January, when it sold $156.4 million worth of stock.
GM stock [NYSE: GM] closed Monday up 31 cents a share to $28.31.
Since the $85 billion auto bailout, which forced GM and Chrysler into a government-backed bankruptcy, the automotive industry in general has continued to drive toward pre-recession levels.
GM alone has recorded record profits, and announced investments of more than $7.3 billion in the U.S. and created or retained more than 20,000 jobs.
The government ownership of GM was the result of the auto industry bailout that began under  Bush in 2008 and which was expanded by President Barack Obama in 2009.

The U.S. Treasury initially owned nearly 61 percent of GM as part of the auto bailout, which forced the automaker and crosstown rival Chrysler through a government-backed bankruptcy.
The Obama administration completely exited Chrysler last year after recovering $11.2 billion of its $12.5 billion bailout to the Auburn Hills-based automaker.

Wall Street slips after seven-day rally, warning on Europe

Stocks sagged on Tuesday as investors paused after a seven-session string of gains and the Bundesbank's chief warned the euro zone's crisis has not ended.
On Wall Street, investors' confidence has grown in recent months, leading to a gain of more than 10 percent for the year by the Dow and nearly 9 percent by the S&P 500. Signs of improvement in the economy and the Federal Reserve's quantitative easing have helped to drive the advance.
Heading into Tuesday, both the Dow and benchmark S&P 500 index had rallied for seven consecutive sessions, with the Dow closing at another record high on Monday. The S&P is within reach of its all-time closing high of 1,565.15, set on October 9, 2007.
"It's natural to have pauses," said John Fox, co-manager of the FAM Value Fund in Cobleskill, New York.
Adding to the weakness, Jens Weidmann, head of Germany's central bank and a member of the European Central Bank's governing council, said the euro zone crisis was not over.
Pullbacks during the rally so far this year have not been too deep as investors look for a good place to buy. Market moves have also been more muted in recent days, even as stocks have ground higher.
"The individual days are not huge ... but certainly if you string a few of them together, it's a nice increase in stock prices," said Fox.
Tech shares, which have lagged the rally, pulled indexes lower as heavyweights such as Apple (AAPL.O) and Google (GOOG.O) tumbled. Apple dropped 1.7 percent to $430.57 and Google fell 1.2 percent to $824.87, while the S&P tech sector .SPLRCT lost 0.8 percent.
Offsetting the decline, the healthcare sector .SPXHC rose 0.3 percent. Traditionally considered a defensive bet, the sector has been one of the leaders of the rally so far this year, accelerating by nearly 12 percent.
In the short-term, however, healthcare appears to be overbought, suggesting investors may start to put their money elsewhere. Based on the relative strength index, healthcare has been overbought since the beginning of the month.
The Dow Jones industrial average .DJI slipped 14.16 points, or 0.10 percent, to 14,433.13. The Standard & Poor's 500 Index .SPX fell 5.53 points, or 0.36 percent, to 1,550.69. The Nasdaq Composite Index .IXIC lost 18.66 points, or 0.57 percent, to 3,234.22.
Merck (MRK.N) shares gained 2.8 percent to $44.89 to help curb declines on both the Dow and S&P after the pharmaceutical company said an outside board had allowed it to continue a trial assessing its Vytorin cholesterol treatment.
Yum Brands Inc (YUM.N) rose 2.1 percent to $69.25 after the parent company of the KFC restaurant chain reported an unexpected rise in February sales in China.

German Central Bank Doubles Reserves

Germany’s central bank said Tuesday that it nearly doubled the reserves it holds to cover possible losses, in a not-so-subtle expression of its uneasiness with emergency measures the European Central Bank has taken to combat the euro crisis.

The Bundesbank said it raised its risk provisions, money it sets aside to cover losses such as a default on euro zone bond holdings, to 14.4 billion euros, or $18.7 billion, from 7.7 billion euros a year earlier. The bank’s profit for the year, which it transfers to the German government, was little changed, rising to 664 million euros from 643 million euros.

Jens Weidmann, the Bundesbank president, said the increase in loss reserves “takes appropriate account of the risks on the Bundesbank’s balance sheet.”
But the decision to set aside further billions may also be interpreted as a verdict by Mr. Weidmann on the European Central Bank’s measures he has long criticized, such as purchases of Italian and Greek government bonds to try to keep those countries’ borrowing costs under control.
Mr. Weidmann, a member of the European bank’s governing council, has played the role of Cassandra as Mario Draghi, the  bank’s president, has led a vast expansion of the central bank’s powers.
Fears the euro zone will crumble have receded since Mr. Draghi promised last year to buy bonds of troubled euro zone countries to contain their borrowing costs. But Mr. Weidmann has often complained that the E.C.B. has gone too far, endangering its independence from political leaders and its mandate to guard price stability above all else.
On Tuesday Mr. Weidmann repeated his contention that the best solution to the euro zone crisis is for countries to get government spending under control and improve the performance of their economies. He said that relative calm on financial markets was due not only to bank policy, but also to progress by political leaders.
“The reduction of tension on financial markets should by no means lead to neglect of the necessary structural reforms,” Mr. Weidmann said in a statement.
The Bundesbank decision to bolster its reserves may also reinforce fears among Germans that their money is at risk because of European bank policies designed to keep the euro zone from falling apart. The Bundesbank is one of Germany’s most respected institutions, widely regarded as a bulwark against less prudent members of the euro zone.
Since 2010 the E.C.B. has acquired bonds from troubled euro zone countries valued at 209 billion euros, with Italian government bonds accounting for nearly half of that amount. In an attempt to encourage lending to businesses and consumers, the E.C.B. has also vastly expanded the collateral that commercial banks can post in return for cheap central bank loans.
The 17 national central banks in the euro zone, which carry out much of the work involved in running a currency union, would share the losses if a country were to default on its bonds or if collateral posted by a bank were to lose value.
Among Germans, there is widespread fear that Germany would bear much more than its share of the cost if the euro zone fell apart. The Bundesbank acts as the clearinghouse for large transactions in the currency zone, and other central banks have what amount to large overdrafts.
At a press conference to present the Bundesbank’s annual results, Mr. Weidmann repeated warnings that France was slipping behind because of its failure to make economic reforms. But he acknowledged that E.C.B. policies had not yet led to an increase in inflation.
“In the short term, we in the euro area have, if anything, declining inflation risks,” he said. Mr. Weidmann also said the German economy was in good shape.
The Bundesbank, like other central banks in the euro zone, continues to do much of the day-to-day work of the euro zone, including making sure there is enough money in circulation, storing gold reserves and acting as go-between for large payments between commercial banks.
Its activities generate interest income, which totaled 11 billon euros last year, up from 8.6 billion euros in 2011. The Bundesbank’s profit, however, has plunged 90 percent since the financial crisis began in 2008, as the bank set aside ever larger sums to cover risk.

U.S. Stocks Ease Back

Stocks slipped into negative territory as investors found little reason to keep buying after mixed news on the small-business sector and a weak reading from the U.K. factory sector.
The Dow Jones Industrial Average declined eight points, or 0.1%, to 14439 in midday trading, putting in jeopardy a seven-session streak of gains. A lower finish for the blue chips would be the index's first decline since breaking its 2007 all-time high a week ago.
The Standard & Poor's 500-stock index fell five points, or 0.3%, to 1551. The technology-oriented Nasdaq Composite Index lost 17 points, or 0.5%, to 3226.
A measure of market anxiety remained near multiyear lows. The Chicago Board Options Exchange's Volatility Index, which uses stock-index option prices to measure expectations for near-term price swings, rose 7.8% from Monday's six-year low.
On the economic front, the National Federation of Independent Business said its small-business optimism index for February rose and topped expectations. But the federation's reading on expected business conditions remained deep in recession territory, and business owners reporting declining sales far outnumbered those saying sales increased.
The Stoxx Europe 600 rose 0.1%, as the British statistics were offset by an upbeat outlook for the German economy. Manufacturing output in the U.K. fell 1.5% in January, much worse than expectations for slight growth. Meanwhile, Germany's Economy Ministry said the economy was on the verge of recovery.
Asian markets were broadly lower, led by a 1% decline in the Shanghai Composite, the index's fourth-straight loss, after China's central bank signaled it would drain more liquidity from the financial system. Japan's Nikkei Stock Average erased early gains to close down 0.3% and snap an eight-session winning streak.
April crude-oil futures added 0.9% to $92.90 a barrel, while March gold futures tacked on 0.8% to $1,592 a troy ounce. The dollar gained against the euro and fell versus the yen. Yields on benchmark 10-year Treasury bonds fell to 2.018% as demand rose.
Diamond Foods fell. The seller of Emerald snack nuts, Kettle chips and Pop Secret popcorn reported fiscal second-quarter earnings and revenue fell short of analysts' estimates, amid a sharp drop in sales of nuts.