As we look to start a new week we can see that the conflagration and unrest which has hit North Africa and Arabia is spreading and gathering force. It has a sad backdrop because some shootings in Bahrain seem to have been followed by much larger episodes of security forces opening fire in Libya with a reported death toll over 200. However world equity markets have cruised on as if nothing is happening. The US Dow Jones equity index rose by 73 points on Friday to a new post credit crunch high of 12,391 and this morning the Chinese Shanghai Composite equity index has risen some 1.12% to 2932.More local stock markets tell quite a different tale as for example the main Tunisian index which went above 5200 in mid-January is now at 4489 and Egypt’s has been closed since the 27th of January after falling from above 7000 to 5646. Somewhere which has not yet had unrest but must be very nervous is the House of Saud, and the main Saudi Arabian equity index has fallen from around 6800 in Mid-January to 6324 now. But the theme here is that unless the unrest arrives or is geographically very near equity markets are shrugging it off.
Precious Metals rise: Silver and Gold
These two markets have plainly responded to the unrest. Leading something of a charge has been the silver price. Older readers will remember that in the 1980s the (Bunker) Hunt brothers tried to take control over the silver market and drove the price higher, indeed much higher. This old peak has now been exceeded in nominal terms by a rally which has now reached US $33.10 per ounce. This means that the temporary drop probably associated with the main futures market ( the Chicago Mercantile Exchange or CME) raising the amount of margin it requires on a given trade looks now like something of a bear trap. There are always rumours which comes with such a rally but coin sales do appear to have reached record highs and both the Austrian Mint and the Royal Canadian Mint are now rationing sales. It would appear that the fact that silver is much cheaper than gold is contributing to this rally although of course that is not a fact which has changed. Perhaps the fact that it is used more industrially is a factor as according to the Financial Times some 80% of silver demand is industrial. So another example of commodity price pressure.
Gold is also rallying albeit less strongly and has nudged briefly above US $1400 per troy ounce this morning. If the Tunisian President did depart after stealing some 1.5 tonnes of it from the Tunisian treasury he is making a fair old profit on his ill-gotten gains. I wrote back on the 3rd of February that gold was underperforming in the circumstances and in spite of its rally over the weekend I still have a little of that feeling. One way of measuring this is the Mint Ratio.
The price of an ounce of gold divided by the price of an ounce of silver.
This ratio is at its lowest level for over ten years at around 42.5. Of course if you like you can say that it is not lack of demand for gold but surging demand for silver! Either way there is something of a shift going on.
The Price of crude oil rises
Quite simply the price is rising this morning with the price for a barrel of West Texas Intermediate rising some over 2% to over US $88 and the price of a barrel of Brent crude going back above US $104. One can too and fro over which of these two benchmarks is currently being manipulated as the gap between the two is somewhat extraordinary if you look at past patterns. However if one is discussing the Middle-East then it is Brent crude which is the relevant benchmark. Again we have commodity price pressure.
China raises fuel prices and bank reserve requirements
An impact of the rising price of crude oil was seen in China as retail prices for petrol and diesel were raised today by between 4 and 5%. Regular readers will recall that China has an overheating economy and an official consumer price inflation rate which rose to 4.9% in January. Today’s move is likely to add 0.1% to this on its own.If we add in the fact that there are clear signs of other commodity price driven inflation in China many eyes will be on the February inflation figure when it is released.
China is continuing her policy of raising reserve requirements for her banks and made a new move on Friday. It is often confusing as to which banks it applies too but the new policy starts on the 24th of this month. Whilst this theory should work it is another example, in my opinion of theory not matching practice, as financial markets are very innovative and usually manage to avoid such restrictions given a little time. Something like the “Shadow banking system” which emerged in the last decade in the United States would do the trick. In reality as China is also following a policy of raising official interest-rates the waters will be so muddy it will be virtually impossible to determine the exact effect of each policy.
Two Problems for the European Central Bank
There are various roles that a central bank performs one of them is to provide liquidity to banks and financial institutions which are in trouble. It usually charges more for this than ordinary liquidity and the term “penal rate” is used. For the ECB the penal rate is 1.75% and it is called the Marginal Lending Facility. The reason why I am explaining this is that this facility which ordinarily measures between zero and 1 billion Euros rose to some 15.8 billion Euros on Wednesday. I was asked for my thoughts on this and suggested this on Friday.
There are essentially 2 possible explanations.
1. A mistake. I know it should not happen with just under 16 billion Euros but as I was discussing today we do get such Black Swan events from time to time.
2. An institution is desperate for cash and it is likely to be a bank.
For the past 2 days the emergency lending facility has risen by 15.8 billion Euros leading to a lot of speculation. As the next Main Refinancing Operation or MRO is not until the 22nd we may have to wait until then. So ironically the more serious the problem the quicker it may disappear! If it is a mistake then the money will be taken again at the MRO on the 22nd as it presumably should have been this week.
It is possible that an Irish bank is at the bottom of this as without writing an essay they have been exchanging bonds worth 17 billion Euros as a way of getting collateral usable at the ECB.Regular readers will be aware that the Irish Central Bank has been printing its own theoretical money and the problem may be linked with that. In some ways this is hopeful as we already know they are in trouble….
It has emerged over the weekend that it looks like two Irish institutions, Anglo-Irish Bank (how often is it at the bottom of problems?) and Irish Nationwide Building Society are indeed at the bottom of this as I suspected. In essence the moves are part of Ireland’s plans to wind them down. This does not answer the question of why if this is pre-planned and going so smoothly this could not simply have been announced at the time rather than leaked over the weekend.
This morning the reported amount has declined to 14.17 billion Euros which I find troubling (just to be clear today’s reported figures represent Friday’s levels). It may seem surprising that I find a drop worrying but please bear with me. My point is that if it is all under control it should exist for a while then all go should it not?
The European Central Bank and its problems with Portugal
In what was a busy week for traders at the ECB they appear to have found themselves having to support Portugal’s government bond market yet again on Friday. They seem to be developing a habit of doing this at the end of a week perhaps in an effort to conceal how much they are buying as the figures they report weekly only include settled trades up until Friday. Although such a policy is only for the short-term the truth is that this is something of a metaphor for the Euro zone’s response to the crisis which has engulfed Greece and Ireland and has Portugal on the edge.
As Portugal’s ten-year government bond yield closed at 7.57% the buying only had a rather temporary effect although of course it may have stopped the yield going even higher! It is possible that the news that Irish institutions seem to have been at the root of the rise in the emergency marginal lending facility may stop fears that Portuguese banks were responsible and help a little. The downside is that it reminds everyone that the problems of the peripheral Euro zone have not been solved and on many measures are in fact getting worse. If we look at “rescued” Ireland her ten-year government bond yield is 9.2% whereas unrescued Portugal inspite of all her difficulties has one of 7.57%.
Rather oddly a report on the BBC’s Newsnight programme on Friday told us that Portugal had not faced a crisis yet on her government bond markets! The truth is that at these levels she is insolvent but she does not know what to do next. My suggestion is to call for help from the International Monetary Fund but to ignore the European Union. The reason for this is that she can borrow much more cheaply at just over 3% from the IMF rather than at a current rate of over 6% from Europe. The European rate to solve an insolvency problem in fact virtually guarantees it.
A vote of confidence in Bank of England Governor Mervyn King?
According to Citywire the Chancellor of the Exchequer George Osborne said this at the weekend.
‘The Bank of England has credibility,’ said Osborne. ‘I have complete confidence in it.’
Personally I think that there is a missing in from that quote but if we move onto the fact that the average lifespan of a UK Premiership football manager is around 2 weeks from when they receive the (dreaded) vote of confidence from the board what does this mean? Is the Chancellor actually supporting the Governor or is he more subtly reminding us of the Governor’s failings?