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Sunday, July 21, 2013

Your forexlive.com ENewsletter

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Goldman Sachs aluminum scandal could roil financials and commodity prices this week

Posted: 20 Jul 2013 07:29 PM PDT

Federal Reserve may force financials out of the commodity business, ending the commodity super-cycle

 

First of all, read the New York Times story. It’s an outrage.

The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers' aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.

This industrial dance has been choreographed by Goldman to exploit pricing regulations set up by an overseas commodities exchange, an investigation by The New York Times has found. The back–and-forth lengthens the storage time. And that adds many millions a year to the coffers of Goldman, which owns the warehouses and charges rent to store the metal.

Normally, I only care about what some thing like this means for the markets (and I’ll get to that) but since it’s the weekend and markets are closed I’ll afford myself an opportunity to be disgusted by this story.  The two central characters in this story are Goldman Sachs and the exchanges, you couldn’t pick two businesses that pretend to worship at the alter of Austrian economics more than those two. Goldman represents the pinnacle of financial speculation — the so-called efficient allocation of capital. Exchanges represent openness, efficiency and fairness.

I don’t have any problem with what Goldman stands for but this is the exact opposite. It’s deliberately wasting energy, creating inefficiency and exploiting it. This is the exact thing type of thing people at Goldman accuse government bureaucracies of, but this is even worse because it was done on purpose with the singular aim of driving up costs for everyone to enrich a select few.

Will there be any consequences?

It’s easy to be cynical because Wall Street has torched consumers so many times an escaped with only fines, or less. Moreover, nothing described here was illegal. But Goldman is an easy target and this time I think, Congress and the regulators will take action.

First of all, this story will stay on the front page this week because Congress is holding hearings this week on allowing financial firms to own warehouses, pipelines and other commodity-related assets. Second, late on Friday — perhaps because they got wind of this story — the Fed made a one line announcement saying it’s “reviewing” the 2003 decision that allowed banks to operate in commodity markets.

“The Federal Reserve regularly monitors the commodity activities of supervised firms and is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies,” the surprise statement said.

The announcement came directly out of left field; the New York Times story frequently mentions that the Fed was/is happy with the decision.

The Fed appears to have no plans to require the banks to sell their storage facilities and other commodity infrastructure assets, according to people briefed on the issue.

There are also signs of panic from Goldman in the NYT story.

In filings with the S.E.C., Goldman has said it plans by early next year to store copper in the same Detroit-area warehouses where it now stockpiles aluminum. On Saturday, however, Michael DuVally, a Goldman spokesman, said the company had decided not to participate in the copper venture, though it had not disclosed that publicly. He declined to elaborate.

What will it mean for markets?

This could be a game-changer in the commodities market. This story is limited to aluminum but financials are now deeply involved in all aspects of the commodity market. The Glencore-Xtrata merger, completed only in May, was criticized as simply a scheme to exploit warehousing and supply capacity. In other words, nobody knows how deep the rabbit hole goes and if regulators get serious, traders will dump commodities and ask questions later.

Events have already been put into motion that mean the commodity super-cycle is ending but this could be one of those flashpoint events that marks a watershed. If prices have been artificially inflated, companies like Australia’s BHP Billiton have benefited tremendously. If commodity prices fall and shares of BHP drop, this could be a bad week for the Australian dollar.

If it creates broader uncertainties in the financials, it could lead to a ‘risk off’ environment. Oil could be another victim, the Brent-WTI spread was due to supply bottlenecks but now there will be questions if it was due to natural forces or something more sinister. Maybe the rapid collapse of the spread was from nefarious traders rushing to the exits?

In short, these revelations and the swift reaction point to a rough time ahead for commodities and it could spill beyond that to financials and risk trades. Steer clear of AUD and favor USD and JPY.

Reuters: Advanced G20 countries apart over debt goals after 2016

Posted: 20 Jul 2013 06:47 PM PDT

From Reuters:

Advanced G20 economies will consider numerical targets for public debt reduction after 2016 to boost investor confidence, a senior G20 official told Reuters on Saturday.

More details

Bank of Canada Poloz: Fed communication on tapering carefully calibrated and communicated, as called for by the G20

Posted: 20 Jul 2013 06:44 PM PDT

Also:

  • inevitable that there will be a degree of market volatility when monetary policy changes are announced
  • the talk of economic weakness at the G20 does not make him more inclined to keep rates low for longer

BOJ Governor Kuroda: Japan’s economy is moving in line with the BOJ scenario since introduction of QE in April

Posted: 20 Jul 2013 06:41 PM PDT

Japan’s finance minister Aso: Japan to strive to craft a credible mid-term fiscal plan by the G20 summit in September

Posted: 20 Jul 2013 06:39 PM PDT

Also:

  • Wants to realise the sales tax hike in April 2014 as planned

And, from an unnamed Japan Ministry of Finance official:

  • Says volatility in China market is stabilizing, China’s intentions are gaining understanding

 

Bundesbank’s Weidmann: Time for Europe’s exit from expansive monetary policy has not yet come

Posted: 20 Jul 2013 06:35 PM PDT

  • U.S. Federal Reserve is not putting a brake on expansive policy, just easing off the accelerator
  • Expects strong German economic growth in Q2, easing to moderate in Q3
  • Exit from expansive monetary policy linked with risks of international impact

 

German finance minister Schaeuble: Japan must complement its policies with a credible fiscal strategy

Posted: 20 Jul 2013 06:30 PM PDT

Comments reported via Reuters from the G20 meeting

Comments from Russian finance minister Siluanov: ECB and US said low interest rates to continue

Posted: 20 Jul 2013 06:26 PM PDT

Russian finance minister Siluanov:

  • ECB and US officials said low interest rate policies to continue, but question how long quantitative easing will continue
  • No in depth discussion of China’s decision on interest rate reforms

ADDED: More here G20 soft pedals on debt consolidation in favour of growth – Russia

Japan upper house election today (July 21)

Posted: 20 Jul 2013 06:15 PM PDT

I did a preview on Friday here: Japan upper house election this weekend – what to watch for

While the election outcome will be important this weekend, Nomura notes four other factors of influence not to lose sight of:

  • The persistent trade deficit
  • Higher inflation expectations
  • Higher yields in the US (and elsewhere, too)
  • And, finally the last two weeks of data are showing that portfolio outflows are finally happening

Nomura is looking for more yen weakness

 

G20 communique text

Posted: 20 Jul 2013 06:07 PM PDT

Reuters have the  key extracts from the communique issued after the G20 meeting of finance ministers.

I don’t see anything in it of much significance for markets on Monday morning.

A view from the boundary

Posted: 20 Jul 2013 02:24 AM PDT

Before I head back up to Lords for Day 3 of the 2nd Test  in the Ashes cricket series I just thought I'd pop by and give a quick view from the boundary , or in my case the Pavilion, for all you fellow enthusiasts.

Australia's total of 128 was their lowest at Lords since 1968 and came about by a comedy of batting and decision errors. This still remains a good track but will deteriorate naturally, hence  England's choice not to enforce the follow-on. That and the fact that with three sell out crowds still to come one can't help but feel the ECB wouldn't be wanting to make many refunds on tickets for days lost due to an early finish. Cynical old me!

With three wickets, well deserved by Siddle, before the close of play yesterday and the weather turning decidedly cloudier this morning it promises to be an interesting day’s play but one that's unlikely to change the outcome.

These matches have proved to contain many twists and turns but it would need another day of suicidal batting by England to give the Aussies any glimmer of hope of saving the game.

Either way it's been a thoroughly entertaining two days so far even if Test matches are rapidly becoming five day ( or less) T20s.It's not been a game for the purists once again but you daren't  make too many journeys to the bar for fear of missing any of the action. Fortunately in my case there's a bar on every level of the Pavilion with at least one TV in each. Just one of the perks of being a member! Here's a pic taken from one of my viewing spots on the top balcony, and beer to the left and right…

Lords Ashes 2013 FL

England should grind out enough runs to set the Aussies an impossible task ( as if it wasn’t already ) and go 2-0 up in the series, but there's a few twists left for sure.

Time to head out once more. Yep, I know,it's a tough job but someone's got to do it!

Have a great weekend everyone. I’ll try and put a couple of market-related posts up tomorrow, cricket permitting of course, and I hope the last two days have been kind to your P&L.


at 5:04 PM

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