What effect has the Egyptian crisis had on the US Dollar, Gold,Commodity Prices, and longer-term interest-rates?

After reviewing the latest position of the UK economy yesterday today I wish to take a wider scope. Sadly, it looks as though violence is building again in Egypt as the current regime struggles to survive the protests and there have been quite a few economic developments which have not been reported on. For example there have been developments in the foreign currency market as the US dollar has fallen over this phase. This is unusual because at a time like this it tends to have a “safe haven” status or behave like a “military” dollar. However the dollar index which is trade weighted has fallen from a recent high of 81.35 on the tenth of January to 77.13 for a fall of just over 5% in less than a month. There was a brief rally at the inception of the Egyptian crisis but the downward trend soon resumed. There was not so long ago a lot of talk about “currency wars” based on a falling dollar in the mainstream media but this recent dip has been ignored.

Japan and the Yen

For Japan which has struggled with a very strong currency this trend must be posing problems again. When she undertook her first effort at currency intervention back in mid-September I remember arguing that in this instance the Borg are in fact correct and “resistance is futile”! Actually if you look at the experience of the Swiss National Bank it is also expensive as it has lost around 7 billion Swiss Francs trying to stop the rise of the Swiss Franc. I am reminded of these facts because the Bank of Japan intervened at 83 versus the US dollar and the current price is 81.56. This is not so far away from the fifteen year high of 80.22 reached in late October 2010. Even Japan’s exporters must be finding such an exchange rate to be heavy going.

Gold: Why is it not rising?

A falling US dollar is often associated with a rising gold price. Even if this were not true disruption and unrest such as is happening in Tunisia and Egypt and may be starting in Yemen certainly is. Oh, and for those who consider it to be an inflationary hedge then recent rises in commodity prices should be supporting the gold price. In the latter stages of last year it rallied strongly from US $ 1200 per ounce to over US $1400 but there a few signs of life in it at the moment and the price is now US $1330 per ounce. In fact in January of this year it dropped by just over 6%.

So gold bugs have not had a good start to 2011 particularly if you factor in that the environment has been favourable for gold as I described above. Opinions always vary and I remember a tutor of mine at the LSE Willem Buiter arguing gold was a 6000 year bubble in an economic paper! But the lack of performance recently is noticeable I feel. A technical analyst (chartist) friend of mine told me a couple of weeks ago he felt that the gold price could set back by up to US $ 200 per ounce from the highs and so far the price action is backing that up. Only time will tell if this pattern continues.

Commodity and Oil Prices

After observing the current bi-polar nature of the main two oil benchmarks earlier this week it is kind of relief to say that they have both been strong through the Egyptian crisis. However the prices remain distinct with Brent Crude at US $102.76 per barrel and West Texas Intermediate at US $91.50. WTI has rallied by around 6% in response to the problems in North Africa and Arabia.

Commodity prices have continued their recent rises with the CRB spot index up a further 1.77 to 558.28 yesterday which is yet another recent high. If we take a look at the foodstuffs component it has now risen to 487.6. So those struggling to feed themselves in Egypt will find that the problem is getting worse as this latest surge in food prices which started in late November came from 400 on the foodstuffs index giving us a rise now of just under 22% in just over 2 months.

Longer-Term Interest Rates are rising again: Government bond prices are falling

Regular readers will be aware that I have been worried virtually since I started this blog about rises in longer-term interest-rates.It is one of the reasons I am cautious about fiscal stimulus plans as they will have a higher future price should I be correct.  For 2010 this did not really take place as other influences such as asset purchases by central banks overran fears expressed by me about the size of borrowing required across the world in future years. Of course in some places such as Ireland, Greece and Portugal it did become true and rather than a slow motion grind problems here accelerated as if someone had pressed the fast forward button. Spain and Italy have also seen noticeable rises in the interest-rate or yield on their government debt. To my mind the speed of these moves had a lot of implications for fiscal policy at this time as they resembled an object being sucked into a black-hole suggesting that it is best to keep well away as once problems occur you have virtually no time to respond. Well no time expressed in political response times!

In the latter part of 2010 and the early part of 2011 this situation has changed. If we look at the United States her ten-year bond yield closed last night at 3.49% which is more than 1% above the lows of 2010. If we look at the German equivalent it closed at 3.25% again more than 1% above its lows of 2010. For the UK I wrote about rising shorter dated gilt yields potentially affecting mortgage rates yesterday and if we look at our ten-year’s yield it has risen to a recent high of 3.75%. Should this situation persist then each country will find it more expensive to finance its debt which is an unfortunate occurence to say the least when countries are borrowing so much.Usually this sort of influence is slow but leads if sustained to quite a fundamental influence on a country’s fiscal position. It is not often referred to but the falls in long-term interest-rates over the last couple of decades have been a favourable influence on the world government’s fiscal position. Of course politician’s will have failed to point this out as they much prefer to take credit themselves!

If we return again to the maelstrom which affected Ireland Greece and Portugal one has to wonder if this situation persists whether other countries will find their solvency questioned much more quickly than in the past. As to causes of this move one of them is clearly the return of inflationary trends which particularly affects the UK as it has an existing inflation problem. In the United States the debt ceiling of US $14.3 trillion is being approached with signs of fiscal incontinence building. In the end they will raise it but this in itself poses the question of when is a ceiling not a ceiling? For Germany there is the issue of how much of her credit worthiness will end up being used helping the weaker nations in the Euro zone. The recent conclusion of Eurostat which meant that money borrowed by the rescue vehicle the EFSF should be represented in national public accounts helped proper accountancy but also foiled the plans of Euro zone politicians!

Conclusion

As you can see from today’s article a lot is going on in the background at this time. Rises in commodity prices are plainly inflationary at the first impact. However as their  influence affects other areas such as longer-term interest-rates then their impact also has deflationary impacts. Unfortunately inflation ( consistently rising prices) can come with deflation ( a fall in aggregate demand) and I have defined these because deflation is used in the media to represent many things! The gold price is not rallying when several influences say it should and the US dollar is falling again.

The European Central Bank is between a rock and a hard place

The ECB meets today and it faces a dilemma. On the one side inflationary trends have raised the Euro zone’s inflation to an above target 2.4% and on the other side are the peripheral Euro zone nations. If it responds to the inflationary trends by raising its interest-rates then the impact on the countries which it is supporting with cheap liquidity will be severe. If it does nothing it is in danger of finding itself like the Bank of England standing King Canute like in the face of inflationary trends.

I would suspect that at this time the ECB will be putting as much pressure as it can on Euro zone politicians to build a strategic solution to the Euro’s problems at this weekend’s meeting to give it some freedom of action on interest-rates. If I was on the ECB Governing Council I certainly would be doing this. The fly in that ointment is that it requires the Euro zone’s politicians to reverse their behaviour so far and perhaps to break the habits of a lifetime! There are already a lot of rumours of a deal being arranged on this subject and I reported on one on Tuesday but a bit like the boy who cried wolf this has happened before. I think the American phrase is, “Where’s the beef?”

UK Services Sector expands in January

I wondered what this report would show yesterday and here it is. The Markit services purchasing managers index for January was ” the headline index from the survey struck its highest level since last May (54.5, up from 49.7)”.  and we also saw some familiar signs of inflationary pressure “inflation showed the largest jump since the survey began in mid-1996. The input cost index rose to 65.8 from 60.5”.

So adding this to the manufacturing and construction numbers of earlier this week we can see that there is some confirmation for my view that there was a lot of hyperbole expressed around the last official report on UK economic growth. Now these are only survey results and are for 2011 not 2010 but to my mind they confirm a slowing recovery rather than a fall off the edge of a cliff! I doubt whether those prone to hyperbole will give us an apology though…

The Financial Services Authority

This year this body estimates it will cost some £500.5 million. I have expressed my views on it in the past but today I wish to open the forum to readers, do you think it does a good job? And is it good value for money?

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8 thoughts on “What effect has the Egyptian crisis had on the US Dollar, Gold,Commodity Prices, and longer-term interest-rates?

  1. I would simply like to ask the FSA “what have you done to ensure that the banking system will not have to return to the public purse for support?”.

    Personally I would be happy to pay £500m to ensure we are protected from the chaos of Canary Wharf. That said I think I could draw up an outline plan this afternoon for £500.

  2. In reviewing January trading, I conclude that the FX currency traders sold the Emerging Market currencies, CEW, short, inducing the Emerging Markets, EEM, lower.

    I am bearish stocks.

    The SPY put in an Elliott Wave 2 high of 130.74 on February 1, 2010, and then went on to fall 0.20% lower, forming a hammer at the top of an ascending wedge, to close at 130.49 on February 2, 2010.

    Ford and Johnson Controls are automotive components of the Morgan Stanley Cyclical Index, $CYC; their fall lower suggests an end to both an investment cycle and an economic cycle. The sell off in stocks that comes with a fall in the Morgan Stanley Cyclical Index is going to severe, as it represents the entrance into an Elliott Wave 3 Down.

    The Elliott Wave 3 Down is the most sweeping and powerful of all waves; it creates most of the wealth on the way up; and for all intensive purposes destroys wealth on the way down.

    In my article How and Why Short Selling Works, I write that in as much as the stock market, VT, is topping out and turning lower, one should consider investing in gold, GLD, which I recommend; or one should consider short selling. Note how the chart of gold shows that it is breaking out from a consolidation triangle. Gold in time past has been taken higher by rising commodity currencies, but now it is likely to be driven higher by falling stock values and a rising investment demand for a safe haven investment, in what is to become the age of deleveraging and the age of disinvestment, that will see competitive currency devaluations at the hands of the FX currency traders.

    And I go on to relate that Basic material stocks, IYM, have been volatile, as the market is indeed peaking, as suggested by the fall lower in automobile stocks, and the strong fall lower in transportation stocks, IYT, and as the basic material stocks are driven by Commodity Currencies, CCX.

    Airlines, FAA, turned lower with the announcement of QE 2 By Ben Bernanke; its fall lower means the market has turned lower and better prospects are available elsewhere. Note the dark cloud covering candlestick that gave a strong go ahead to sell these short. Also note how these have entered both an Elliott Wave 3 Down and an Elliott 3 of 3 Wave Down. Also note how these fell lower today as there was little buying interest in anything today after yesterday’s run-up in the market.

    Utility shares, XLU, entered an Elliott Wave 3 Down today, after having turned parabolically lower and then having bounced up. This action often precedes the markets as a whole turning lower.

    Retail, XRT, fell 2% today; its fall communicates that a overall bear market will be commencing soon.

    Agriculture commodities, JJA, rose parabolically showing three white soldiers, suggesting a fall lower; those invested in futures may want to close out and take profits and wait for another leg up. US Commodities, DJP, has a wave structure similar to Agriculture commodities, JJA.

    Ford and Johnson Controls are automotive components of the Morgan Stanley Cyclical Index, $CYC; their fall lower suggests an end to both an investment cycle and an economic cycle.

    So there you have it: both, repeat both, fundamental and technical facts that we are cresting at an Elliott Wave 2 up and about to enter an Elliott Wave 3 Down. The investor should be invested either short or in gold.

  3. A clear and concise review of today – and tomorrow and on. Briefly commenting, Egypt is in a tough bind. Whilst Mubarak has made the wisest possible choice, the timing is wrong. In view of the level of unrest and adding in your comment on food prices (and more on this can be found at http://www.fao.org/news/story/en/item/50519/icode/)
    I cannot see the Egyptian people enduring a long, hot summer without complaint (in any form). It would have been far more beneficial to bring forward elections – perhaps within the next 3 – 4 months.

    Regarding the FSA, maybe they are doing an ‘appropriate’ job although I am amazed at the cost involved. Greater authority would do no harm to their ‘end-product’ OR to be given more teeth in order to over-ride political agendas.

  4. Given their wide remit…

    The Financial Services and Markets Act 2000 (FSMA) gives us four statutory objectives:

    * market confidence – maintaining confidence in the UK financial system;
    * financial stability – contributing to the protection and enhancement of stability of the UK financial system
    * consumer protection – securing the appropriate degree of protection for consumers; and
    * the reduction of financial crime – reducing the extent to which it is possible for a regulated business to be used for a purpose connected with financial crime.
    http://www.fsa.gov.uk/Pages/About/Aims/Statutory/index.shtml

    …I suppose such a high cost is inevitable. I hadn’t realised they cost half a billion a year though. Consumer protection and financial crime reduction could swallow limitless quantities of money and still not deliver ideal results. I agree with Andy of yarm, it would be a price worth paying if they could “get it right”. But will they? (I doubt it 😦 )

  5. In regards to the FSA, it was the politicians who set the terms in nationalising the failing banks. I would argue that if a bank fails (requires the government to payout depositor guarantee funds), then that bank should be immediately bankrupted and the shareholders suffer total loss without compensation from taxpayers. The failed bank directors should lose their large pensions.

    The failed bank could be given a short grace period to try to arrange a private rescue, similar to the US chapter 11 bankruptcy laws.

    This protects the depositors and the financial system. Normal businesses are subject to bankruptcy. Why should taxpayers subsidise failing banks ?

  6. Regarding the FSA. They did nothing to prevent the massive failure of the banks. Now they are fining left, right and centre. Including some mortgage brokers who have not checked self certified mortgages! Door after horse bolted?

    As an alternative, what about the BoE? We have had crisis in the past, the difference being we didn’t get told until it was all over!

  7. The FSA’s roll could be done cheaper if we outsourced it to India, like many other admin jobs throughout the public sector, there’s no need to have them based here in the UK. Do you know how much money could be saved? But this wouldn’t happen because the toffs would be effected, like what’s just happend at Pfizer.

    The business model of “we innovate here, then ship off the labour else where–because they cannot innovate (racist?)” is not sustainable, in that once we become fully cloud (marketing boll**ks) we’ll find that the thunder and lighting will appear, followed by precipitation.

    But staying on the question of the FSA, i wouldn’t care how much it costs, especially if they where moved out of that bubble called London, and shifted up to the North.

  8. All you need to know about the FSA is that it is headed by Hector Sants, formerly an investment banker and two related facts:
    1. When he joined the FSA, he was still on the CSFB LTIP;
    2. When reinstated last year, he cut his notice period to zero so that, whenever he wanted to earn “real money”, he could leave.
    He also missed, along with the rest of the FSA, the whole banking crisis.

    Is it likely that soemone with this background and escape route back to the city will get it right?

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