JGBs + Moody + Bloomberg

Abe Doomsday Risk Prompts Moody’s Warning on JGBs: Japan Credit

By Finbarr Flynn and Monami Yui - Jan 30, 2014

 

Moody’s Investors Service says Japan’s biggest banks need to cut bond holdings and boost loans to protect their balance sheets from potential losses should Prime Minister Shinzo Abe’s stimulus spur yield surges.


Sumitomo Mitsui, Japan’s second-biggest bank by market value, cut Japanese government bond holdings by 56 percent, or 11.5 trillion yen, at its main lending unit in the nine months to December, as domestic loans rose 4.3 percent last year.

The BOJ, which has driven 10-year yields down to 0.62 percent, estimated in October that a one-percentage-point increase in JGB yields would cause the biggest banks to incur 2.9 trillion yen in unrealized capital losses.

“Banks need to rebalance their portfolios away from JGBs,” Graeme Knowd, a Tokyo-based associate managing director at Moody’s who overseas financial institutions, said in a phone interview. “If it turns out that Abenomics hasn’t worked and only ended up leaving Japan with a bigger pile of debt,” a “doomsday scenario for JGBs” isn’t “a zero probability scenario,” he said.

‘Encouraging Signs’

“It is certainly not our main scenario,” Knowd said. Moody’s said in its Global Macro Outlook in November that “there have been further encouraging signs that the more aggressive monetary stance adopted by the Bank of Japan is having a positive impact.”

me -------japans-widow-maker-bond-trade 

China’s Gold Imports Hit Record

Gold Flows East as Bars Recast for Chinese Defying Slump ........Bloomberg

Gold’s biggest slump in three decades has been a boon for MKS (Switzerland) SA’s PAMP refinery near the Italian border in Castel San Pietro, whose bullion sales to China surged to a record as demand rose for coins, bars and jewelry.

As prices plunged 28 percent in 2013, investors dumped a record 869.1 metric tons from gold-backed funds traded mostly in the U.S. and Europe. Much of that metal is ending up in Asia, where companies such as The Brink’s (BCO) Co., UBS AG and Deutsche Bank AG are opening new vaults.
China’s expanding wealth has made the country the world’s largest buyer, surpassing India, as imports reached an all-time high.

Gold shipments to China from Hong Kong rose to a record in 2013 as bullion’s slump attracted buyers in the world’s second-largest economy.

Purchases that climbed by 51 percent in December before the Lunar New Year holiday starting Jan. 31 took net imports for the year to 1,108.8 metric tons, a 33 percent gain from 2012, according to calculations by Bloomberg News based on data from the Hong Kong Census and Statistics Department. The net figure deducts flows from China into Hong Kong.

Early Warning Signs That We Are Approaching A Global Economic Meltdown

Have you been paying attention to what has been happening in Argentina, Venezuela, Brazil, Ukraine, Turkey and China?  If you are like most Americans, you have not been.  Most Americans don’t seem to really care too much about what is happening in the rest of the world, but they should.  In major cities all over the globe right now, there is looting, violence, shortages of basic supplies, and runs on the banks.  We are not at a “global crisis” stage yet, but things are getting worse with each passing day.  For a while, I have felt that 2014 would turn out to be a major “turning point” for the global economy, and so far that is exactly what it is turning out to be.  The following are 20 early warning signs that we are rapidly approaching a global economic meltdown…

#1 The looting, violence and economic chaos that is happening in Argentina right now is a perfect example of what can happen when you print too much money…

 

 

For Dominga Kanaza, it wasn’t just the soaring inflation or the weeklong blackouts or even the looting that frayed her nerves.

It was all of them combined.

At one point last month, the 37-year-old shop owner refused to open the metal shutters protecting her corner grocery in downtown Buenos Aires more than a few inches — just enough to sell soda to passersby on a sweltering summer day.

Due to local currency controls, the black market is the only way for many Argentines to get their hands on dollars as confidence in Latin America’s No. 3 economy falls and inflation soars. Given the country’s history of repeated financial crises, Argentines like to save in dollars.
According to private analysts, consumer prices rose more than 25 percent in 2013, although discredited official data clocks inflation at less than half that.
Unorthodox policies, from currency controls meant to stop capital flight to heavy stimulus spending unencumbered by inflation targeting, have made Argentina a no-go zone for all but the most risk-hungry investors.

   Earlier this week, the BBC reported that the government has restricted online shopping in an attempt to bolster its foreign reserves. Argentinians now have to “sign a declaration and produce it at a customs office, where the packages have to be collected,” for any item purchased on an international website (such as Amazon).

#2 The value of the Argentine Peso is absolutely collapsing.

#3 Widespread shortages, looting and accelerating inflation are also causing huge problems in Venezuela…

Economic mismanagement in Venezuela has reached such a level that it risks inciting a violent popular reaction. Venezuela is experiencing declining export revenues, accelerating inflation and widespread shortages of basic consumer goods. At the same time, the Maduro administration has foreclosed peaceful options for Venezuelans to bring about a change in its current policies.
President Maduro, who came to power in a highly-contested election last April, has reacted to the economic crisis with interventionist and increasingly authoritarian measures. His recent orders to slash prices of goods sold in private businesses resulted in episodes of looting, which suggests a latent potential for violence. He has put the armed forces on the street to enforce his economic decrees, exposing them to popular discontent.

#4 In a stunning decision, the Venezuelan government has just announced that it has devalued the Bolivar by more than 40 percent.

#5 Brazilian stocks declined sharply on Thursday.  There is a tremendous amount of concern that the economic meltdown that is happening in Argentina is going to spill over into Brazil.

#6 Ukraine is rapidly coming apart at the seams…

 

 

A tense ceasefire was announced in Kiev on the fifth day of violence, with radical protesters and riot police holding their position. Opposition leaders are negotiating with the government, but doubts remain that they will be able to stop the rioters.

#7 It appears that a bank run has begun in China…

 

 

As China’s CNR reports, depositors in some of Yancheng City’s largest farmers’ co-operative mutual fund societies (“banks”) have been unable to withdraw “hundreds of millions” in deposits in the last few weeks. “Everyone wants to borrow and no one wants to save,” warned one ‘salesperson’, “and loan repayments are difficult to recover.” There is “no money” and the doors are locked.

#8 Art Cashin of UBS is warning that credit markets in China “may be broken“.  For much more on this, please see my recent article entitled “The $23 Trillion Credit Bubble In China Is Starting To Collapse – Global Financial Crisis Next?“

#9 News that China’s manufacturing sector is contracting shook up financial markets on Thursday…

 

 

Wall Street was rattled by a key reading on China’s manufacturing which dropped below the key 50 level in January, according to HSBC. A reading below 50 on the HSBC flash manufacturing PMI suggests economic contraction.

#10 Japanese stocks experienced their biggest drop in 7 months on Thursday.

#11 The value of the Turkish Lira is absolutely collapsing.

#12 The unemployment rate in France has risen for 9 quarters in a row and recently soared to a new 16 year high.

#13 In Italy, the unemployment rate has soared to a brand new all-time record high of 12.7 percent.

#14 The unemployment rate in Spain is sitting at an all-time record high of 26.7 percent.

#15 This year, the Baltic Dry Index experienced the largest two week post-holiday decline that we have ever seen.

#16 Chipmaker Intel recently announced that it plans to eliminate 5,000 jobs over the coming year.

#17 CNBC is reporting that U.S. retailers just experienced “the worst holiday season since 2008“.

#18 A recent CNBC article stated that U.S. consumers should expect a “tsunami” of store closings in the retail industry…

George Soros on China

If George Soros' prediction happens to be correct we may well see a repeat of 2008 financial crisis soon. However, the source country in question this time would not be US but China. Nonetheless, the reasons could well be the same - emergence of complex structured products and excessive leverage.

It is a known fact that credit boom in China is fuelled by shadow banks. In fact, as per Moody's estimate China's shadow banking debt market was roughly 55% of the nation's economic output at the end of 2013. The problem with shadow debt is that it is created by financial institutions outside the regulatory framework. In other words, it is non-bank debt. Similar to bank debt even shadow debt can be structured into a complex investment product. Since the risk in shadow debt repayment is high the return is also high. This attracts investors. However, higher risk means that probability of default is high. And if default happens it can shake investor's faith in such products resulting into basket selling. Very recently one such Chinese investment trust which issued structured products on shadow debt had to be wound up. This has sent ripples across the Chinese market. If a few other instances like these occur, China may witness a wave of defaults. And this can have cascading effects similar to the 2008 crisis.

Gold Mint Runs Overtime in Race to Meet World Coin Demand.......Bloomberg

Gold Mint Runs Overtime in Race to Meet World Coin Demand

Austria’s mint is running 24 hours a day to meet orders for gold coins, joining counterparts from the U.S. to the U.K. to Australia in reporting accelerating demand boosted by the bear market in bullion.

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand.

Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012.

Prices rebounded 7.2 percent since reaching a 34-month low in June as physical buying rose. The Shanghai Gold Exchange, China’s largest bullion bourse, delivered 2,197 metric tons to customers in 2013, compared with 1,139 tons in 2012, it said Jan. 15.

The Asian country topped India as the world’s top buyer last year as demand probably reached a record, the World Gold Council estimates.

The U.K.’s Royal Mint, which traces its history back more than 1,000 years, ran out of 2014 Sovereign gold coins because of “exceptional demand,” it said in a statement on Jan. 8.

Sales by the Perth Mint, which also has workers producing coins in three shifts a day, will probably beat last year’s record, Ron Currie, the marketing director, said Jan. 20.

The U.S. Mint, the world’s largest, sold 89,500 ounces so far this month.
The Austrian mint that makes Philharmonic coins, saw sales jump 36 percent last year and expects “good business” for the next couple of months,

“The market is very busy,” Lang said. “We can’t meet the demand, even if we work overtime.”

Abenomics Spurs Gold Sales in Japan as Inflation Hedge.....Bloomberg

Gold sales by Japan’s biggest bullion retailer surged 63 percent to a five-year high as prices slumped and investors sought refuge from Prime Minister ShinzoAbe’s campaign to stoke inflation and weaken the yen.

“Gold has been very attractive to individual investors as a hedge against inflation,” said Kazuhiko Saito, chief analyst at commodities broker Fujitomi Co. in Tokyo. “Investors became concerned as Abenomics weakened the yen.” 

me........Japanese buying just like China

Argentine Peso Leads Emerging-Market Currency Rout as Lira Sinks ......Bloomberg

Argentina devalued the peso, allowing it to plunge the most in 12 years, and Turkey’s lira tumbled to a record as the emerging-market currency selloff deepened amid slowing growth and rising social tension.