Raging bull in America

Raging bull in America (23 Oct 2013)

Many stock investors have bad memory about October.  We had the Black Monday on 19 October, 1987.  This year, October is a dramatic month for US.  First, on 9 October, we had Yellen being nominated to be Fed Chief in the midst of tapering conversation.  Investors are wondering when would the Fed start to tighten up the Quantitative Easing measures.  As soon as Yellen was appointed, investors and media focus on the US federal government shutdown and the television kept showing disappointing tourists looking at closed gates of museums in Washington. The US market was holding well and was even gaining pending politicians’ decision on Debt Ceiling.  In the 11^th hour, the Senate decided to re-open government until January 2014 and lift the debt ceiling until February.  This set the US stock market on fire and Google reached USD 1,000 a share for the first time on 18 October.  Congratulations and the mighty American is USD 17 billion in debt.

There are some side effects.  The dramatic political cat fight and federal government shutdown got credit rating agencies’ attention.  Fitch Ratings has placed the US ‘AAA’ Long-term foreign and local currency Issuer Default Ratings on Rating Watch Negative.  One does not need to understand the technical jargon to figure out this is bad news.  If US government keeps lifting the Debt Ceiling like Real Madrid paying up for Gareth Bale, how on earth are they going to find enough trees to print the Dollar bills?  The USD has been falling against major currency.  Sterling is back to above 1.60 level against the Dollar.  It was at 1.617 on 18 October after spending almost 2 weeks hovering between 1.59 and 1.60. Euro was at EUR 1 for USD 1.3686 on 18 Oct which is a new high since February 2013.

While investors are switching out of USD into other currencies, a weakening USD is great for some companies who make money from all over the world.  Like all the international giants who are listed in US stock market such as Microsoft, Apple, Coca-cola, JP Morgan, McDonalds, Pifzer, etc.  In fact, that’s pretty much all the stocks in Dow Jones Industrial Index.  They are earning revenue in GBP, EUR, SGD, AUD and other currencies.  Converting these revenue to a weak USD is good cosmetic in results announcement.  Remember Japan Nikkei had an amazing run from the 4^th quarter of 2012 to the first half of this year.  During the time, JPY fell from JPY 80 to a Dollar to JPY 100 to a Dollar.  Most people would not expect US Dollar to weaken by 25% in the coming year but the Dollar could be in a weaker stance until February.  Yellen may have to hold back on tapering until February 2014, the new deadline for another round of Debt Ceiling drama.  What US needs is strong GBP growth and shutting down the government was going the opposite way.  Tapering is negative to growth.  Printing less government debt is negative for growth as the US government is living off debt.  It is hard to see Obama taking both prescriptions together.

Investors’ belief in a weakening Dollar could be adding fuel to an already very hot US stock market.  Money would go to stocks, commodities and gold in a weakening USD environment.  US Treasury at such low yield with a weak USD outlook would struggle to lure investors, hence encouraging investors to take on more risk.

On the other side of the world, China is also doing well and posted 7.8% GDP growth in the 3^rd quarter of 2013.  Some interesting local figures that are worth sharing.  Beijing residential rent has been going up in 52 consecutive months.  Apartment near the CBD area (central business district) are renting out at GBP 800 to GBP 1000 a month.  Imagine paying GBP 200-250 a week for an apartment in Canary Wharf.  In China, a senior banking job’s salary will fall into the highest tax bracket at >40%.  Professionals and top paid jobs in Beijing are probably not London scale yet but comparable to Munich.  A city with 30 million people (a lot of visitors and visiting workers) is jammed pack during peak hours.  Put on your rugby gear before getting into the underground or you can train your EQ by spending over hour in traffic.  People will be willing to pay premium to live closer to work.  The property rental price in Beijing sounds fair and is likely to have more upside.  Perhaps there is no bubble in Beijing residential property.

Rubber contracts in Xishangbanna Commodity Exchange

Rubber contracts in Xishangbanna Commodity Exchange (October 18, 2013.)

 

Xi Shang Ban Na?  It is a place in Yunnan province in China.  An Autonomous Prefecture that kind of runs its own show and sitting right next to Burma and Laos.  Driving distance to Thailand and Vietnam who are major rubber producing countries.

 

The Xishangbanna Financial Asset and Commodity Exchange is owned by Pingan, the second largest insurance company in China.  They launched a rubber contract in September.  Physical settled into “SCR WF” standard which is the same standard used in the very liquid rubber contracts listed in Shanghai Futures Exchange. 

 

Rubber maybe a lesser popular commodities for investors but it is the second most traded commodities in Shanghai Future Exchange after copper in 2012.  The volume in Shanghai is shockingly high relatively to other exchanges.  For example, on October 18, 480,000 2014 January Rubber contracts were traded which means CNY 98 billion (USD 16 billion) worth of rubber.  The most liquid rubber contract trading in TOCOM is the 2014 March contract that traded USD 57.8 million notional on Oct 18.

 

Xishangbanna Exchange could take advantage of its location being close to the producers but it is a long way to go in order to attract the speculators in Shanghai Futures Exchange.

Iron Ore futures debut in China. An alternative carry trade?

Iron Ore futures debut in Dalian Commodity Exchange (18 Oct 2013)

 

Dalian in China launched the first physical Iron Ore futures.  Making a difference to the cash settled index based contracts listed in CME, Singapore Exchange and Intercontinental Exchange.  China is the biggest user of Iron Ore and 74.6 million tons of Iron Ores were imported in September according to a Bloomberg article.

 

Market participants are observing how Dalian Commodity Exchange handles the physical settlement.  The standard is supposed to be 62% iron content but in real life, every piece of ore will have some difference in Iron content.

 

Local Iron Ore miners in China see this physical settled contract as a new way to sell their stock.  Currently, big buyers of Iron Ores like State owned Enterprises are asking for 60 – 90 days payment terms from miners.  Funding is tight in China in general as banks are not willing to lend.  Everyone remembers the liquidity squeeze in June and the coming December yearend will be very tight.  Some miners, who are keen to get liquidity, are willing to sell iron ores at a discount for cash upfront.  The discount could be as steep as 5%.  Now this is before the Dalian physical settled contract.  If the physical settlement process is smooth, there is a carry trade angle to buy physical from miners today and sell futures to hedge.  Assuming the physical goods meet the settlement standard and delivery process is tidy, there could be room for arbitrageurs.

http://www.bloomberg.com/news/2013-10-17/iron-ore-futures-debut-in-dalian-as-china-seeks-pricing-power.html

Gold goes up by 20% in 1 to 3 months?

JANET YELLEN, NOMINATION, OBAMA, BERNANKE, CHAIR, FEDERAL RESERVE, DEBT CEILING, CONGRESS, DEBT, PRESIDENT, BUDGET, ASIA: SQUAWK BOX, JAPANESE YEN / US DOLLAR FX SPOT RATE, BUSINESS NEWS
CNBC.com | Wednesday, 9 Oct 2013 | 11:06 PM ET

Amid uncertainty in the U.S. and risk aversion in global markets, gold's performance as a traditional safe-haven has proved lackluster. Yet one strategist reckons the precious metal could rally as much as 20 percent in the next one to three months.

Sean Hyman, editor of the Ultimate Wealth Report, a financial newsletter, says the reason for the bullish call is partly based on a view that under Janet Yellen the Federal Reserve is likely to maintain its hefty monetary stimulus, fueling inflation and boosting demand for gold as an inflation hedge.

U.S. President Barack Obama on Wednesday nominated Yellen, the Fed's Vice Chairman, to replace Ben Bernanke when he steps down as Fed chief in January.

"Gold is having a traditional pull-back and I think we will have another run up to the $1,500, $1,600 level in the next one or two or three months," Hyman told CNBC Asia's "Squawk Box" on Thursday.

(Read more: Obama nominates Janet Yellen to lead US Federal Reserve)

A move to $1,600 would imply a gain of almost 23 percent from current levels around $1,302 per ounce.

Gold has been stuck in a narrow range roughly between $1,280 and $1,320 since a budget impasse in Washington triggered a partial shutdown of the government on October 1. It is down about 22 percent in the year-to-date.

Safe-haven?

Uncertainty about the budget stalemate and fears about a looming deadline to raise the debt ceiling have supported gold. But the precious metal has not received the same boost as other safe-havens such as the Japanese yen, which hit a two-month peak against the dollar this week.

(Read more: As lengthy shutdown looms, why isn't gold rallying?)

"This (move in gold) is a very curious development," said Gaurav Sodhi, resources analyst at the Intelligent Investor. "If you had asked a couple of weeks ago what would happen to gold in the event of the current situation, every gold analyst would have said gold should move higher because historically that's what happens at times of economic and political uncertainty."

Simona Gambarini, associate director of research at ETF Securities, told CNBC earlier this week that the gold trade was not necessarily over and that most investors were on the sidelines waiting to see how U.S. developments pan out.

Hyman said that ultimately gold would respond to the jitters about a looming debt ceiling as well as the outlook for U.S. monetary policy.

"Yellen will have the same concepts as Bernanke. So money will continue to be printed, the economy stimulated and interest rates kept low as possible and that's going to stimulate inflation, be good for commodities and bad for the dollar," he said.

Markets, which had been braced for a scaling back of the Fed's $85 billion-a-month bond-buying program, were taken by surprise last month when the central bank opted to maintain its monetary stimulus.

(Read more: Fed battled over ending bond-buying: Minutes)

"I'm not a gold bug, I don't think every day and any day is a day to own gold, but I do feel we are now in that phase to own gold," Hyman said.

—By CNBC.Com's Dhara Ranasinghe