Those interested in the Aussie may want to read this:

Draghi Pulls the Rug from Under Aussie Banks






•Where do banks get money to loan?
•Debt deflation on the edge of Europe
•An affront to nature


By Greg Canavan in Albert Park

--Investing in a world of interventionist central bankers is fraught with danger. You never know what these clowns will come up with.

--Last night, European Central Bank boss Mario Draghi disappointed the speculators. He ‘only’ dropped the benchmark interest rate by 10 basis points (to minus 0.3%) and ‘only’ extended the €60 billion per month QE program by six months.

--Given Draghi spent the prior month talking up his fight against deflation, the market had already priced in a much stronger announcement. They left disappointed.

--The German stock market, the Dax, plunged. It fell 400 points, or 3.6%. The Dow and S&P 500 fell sharply too, with both markets down nearly 1.5%. That means the Aussie market will have a nasty day today.

--But this time, it’s the banks that will more than likely lead the market lower. (I say ‘likely’ because I’m writing this before the market has opened.) That’s because they’ve been stealth beneficiaries of Draghi’s coming QE hype.

--I’ve written to subscribers of Crisis & Opportunity about this in recent weeks. The aim was to sound a warning about the recent bank rally. I didn’t want my readers to mistake the share price rally for a sign of fundamental improvement in the sector.

--The link between European QE and Aussie banks might seem like a tenuous one. But as Europe is one of the world’s biggest savers, and therefore a creditor to debtor nations like Australia, it makes sense that the prospect of poorer returns on savings in Europe would send more capital to Australia.

--And who are Australia’s largest borrowers? The banks, of course!

--When you go to borrow money from a bank to buy a house, the bank approves the loan, but then it has to get the money from somewhere. Australia is a debtor nation, meaning we consume more than we produce. That means we have to borrow the difference from offshore.

--Banks borrow in the wholesale debt markets, and Europe is an important source of funds. So when Europe’s money becomes ‘easier’, the benefits flow on to our banks. Here’s what I wrote to subscribers on Wednesday…


‘…the ECB is giving our banks a major leg up by promising another round of QE when they meet on Friday Aussie time.

‘The important thing to watch for is the market’s reaction after the ECB announcement. It could be a ‘buy the rumour, sell the news event’. In other words, because of the strong rally on the expectation of stimulus, you may see profit taking and a sell-off at the time of the actual announcement.

‘Despite the recent strong rally, I’m still cautious on the banks. There are significant fundamental headwinds for the Aussie banking sector — the need for more capital, a slow growth economy, and a slowdown in housing investment lending…to name a few.

‘And the charts still point to the sector being in a downtrend.

‘Given the less than robust fundamentals for the sector, this makes me cautious on the ability for banks to sustain this rally.

‘The next test will come after Friday’s ECB meeting and the market’s reaction to it. The bank stock rally may run out of fizz in two days.’

--The good old ‘buy the rumour, sell the news’ trade is a reliable one. Central banks talk a big game, but they find it harder to put these words into action. That’s because they know it’s more about confidence than anything else.

--I mean, really, does anyone think that a little more QE is going to help the real economy or spur inflation? Of course it won’t. It will just create greater financial market volatility as speculators rush from one side of the boat to the other.

--So expect a bit of reality to come back into the Aussie banking sector today.

--And anyway, the last thing Australia needs is more cheap capital flowing in. It’s ruining our economy.

--Let me explain…

--In yesterday’s Daily Reckoning, I showed you how the mining sector ‘rescued’ the Aussie economy in the September quarter. A big increase in production led to ‘net exports’ providing a big boost to economic growth.

--I also explained how misleading this was, and that the headline number didn’t take into account the prices actually received for this increase in export volumes.

--Yesterday’s release of October trade figures reinforced this view. The trade deficit came in a $3.3 billion for the month. This was a 38% deterioration on the September deficit of $2.4 billion.

--Thank goodness for the mining production boom, eh?

--All those hundreds of billions of dollars of investment led to an increase in production that is…still generating massive monthly trade deficits.

--The miracle in all this is just how the Aussie dollar is holding up? The fact that it has actually increased since the late August low around US$0.69 is impressive.

--It tells you that despite our ongoing trade, current account and government budget deficits, we’re still pulling in ample money from offshore. The Financial Review has a decent explanation for what might be propping the Aussie up right now.


‘Corporate deals, driven partly by the weakness of the Australia dollar, have also helped the currency defy the relentless slump in commodity prices, according to Westpac.

‘The bank's global head of market strategy Robert Rennie said foreign interest in Australian companies, recently shown again in last week's $10.3 billion takeover of the NSW electricity grid Transgrid by a foreign-led consortium, was one of the factors offsetting the drag on the local unit by slumping iron ore and coal prices.

‘Another is a surge in demand for Australian government debt because of the securities' yield spread over returns on most other advanced countries' debt.’

--If that’s the case, this is only a short term boost. Expect the Aussie to start falling again soon.

--And it makes you wonder at what point lower interest rates might start to damage Australia. I mean, we’re only attracting offshore capital because of the healthy interest rate differential.

--If the RBA cuts rates again next year, at what point would foreigners say Aussie rates no longer entice us? It’s an interesting question to ponder for a housing addicted, debtor nation like Australia.

Regards,

Greg Canavan,
For The Daily Reckoning

Yeah

We are the terrible twin of Aus!

However, our GDP growth figures are better than Aus. How ar?

Aus CPI is approx 2.1%

http://www.rba.gov.au/inflation/measures-cpi.html

1.00 USD = 4.21000 MYR
US Dollar ↔ Malaysian Ringgit

Noler

Floating very well.....

No One Knows How Messy the Fed Increase Could Get

The greatest monetary-easing cycle in the history of the U.S. has left a mind-boggling amount of cash floating around in the economy. Banks hold $2.5 trillion in excess reserves -- money they essentially don’t know what to do with -- at the Federal Reserve.

So as the Fed prepares to raise interest rates from near zero as soon as next week, bond investors are on edge. Beyond all the "is-this-the-right-move" questions that surround every increase, there’s a logistical concern: With so much cash sloshing around, will Fed officials be able to nudge rates as high as they want? Will the new-fangled tools they’ve created to engineer the move work, or instead sow the kind of confusion that can dent the Fed’s credibility and spur a broader market selloff?

Many investors are taking no chances.
They’re piling into the safest, most liquid securities available, or those that move them as far away from the epicenter of the U.S. financial system as possible. James Camp at Eagle Asset Management is buying Treasuries and unloading debt linked to credit, such as corporate bonds. Peter Yi, director of short-term fixed income at Northern Trust Corp. is stockpiling cash. Jerome Schneider, head of short-term strategies at Pacific Investment Management Co., is diversifying into securities such as debt in foreign currencies. In a sign of the search for liquidity, U.S. money funds have cut the average maturity of their assets to the lowest since 2006.



“You just stay away from this one,” said Camp, director of fixed-income at Eagle Asset, which manages $30.6 billion in St. Petersburg, Florida. “You just let this play out. It’s OK to wait and see, and see how risk markets react. I love Treasuries here.”
In the lead-up to the Fed decision, investors are the most bullish on Treasuries since 2013, according to a JPMorgan Chase & Co. survey of clients on Monday. A rout last week that drove two-year yields to a five-year high helped lure buyers anticipating that the Fed will stick to a gradual pace of rate increases. Wall Street’s consensus is that the Fed will lift its target by a quarter-percentage point on Dec. 16, to a range of 0.25 percent to 0.5 percent.
Camp boosted Treasuries holdings by 20 percent in the last six months, most recently adding seven- to 10-year maturities. He sees government debt offering shelter in case the Fed’s tightening leads investors to shun riskier assets, such as high-yield securities, and prefers longer maturities that would be less influenced by turbulence in shorter-dated obligations.

‘Be Prudent’

Yi at Chicago-based Northern Trust, which manages $946 billion, has cash and securities maturing within five days as much as 15 percent above levels of prior years in the short-term funds he oversees. He’s focused on boosting holdings that are easy to sell in the event he faces withdrawals.
"We need to be prudent about any interest-rate exposure," said Pimco’s Schneider, who manages about $250 billion of short-term assets at the Newport Beach, California-based firm. "We’re looking for ways to diversify our liquidity risk in high-quality assets, and doing so with the view that rates are going higher."
At issue is the Fed’s balance sheet, which ballooned as it bought bonds to pump cash into the economy and support faltering growth. Policy makers need new methods to drain that money and push rates higher in an interbank lending market, known as fed funds, that has become harder to influence now that cash-heavy banks rely on it infrequently.



Some investors see the volatility around the Fed liftoff as a temporary disturbance with a limited ripple effect during the year-end period.
“Any noise that comes about related to the mechanics of the rate rise is likely to be in the very, very front-end and for a short period of time,” said Brett Wander, chief investment officer for fixed income in San Francisco at Charles Schwab Investment Management Inc., which oversees $267 billion.

Repo Outlet

Yet others are watching how the Fed handles the mechanics of the move. Camp at Eagle Asset and strategists at TD Securities say policy makers will need to more than triple the size of its daily reverse-repo program -- where they drain money from the financial system by temporarily lending out securities -- to at least $1 trillion. Expanding the program, which officials began in September 2013, would help anchor the fed funds rate. Yet the Fed may balk at the move because officials have signaled they’re wary of playing too big a role in money markets.
In previous tightening cycles, there were less reserves sloshing around in the financial system. That made it a lot easier for policy makers to hit their desired rate.

New Wrinkle

In the coming exit, the Fed hopes to keep the fed funds effective rate -- the average for money-market trades -- in a range, rather than at a specific level. The peak of the band is set by the interest rate the Fed pays banks on excess reserves, while the bottom comes from its reverse-repo rate. Presently, the IOER, as the top rate is called, is at 0.25 percent, and the RRP, as the repo facility is known, is at 0.05 percent. The effective rate, which is reported daily by the New York Fed, was 0.14 percent Wednesday.
The RRP program brings another wrinkle: For the first time in a monetary policy move, the Fed will tap an expanded pool of counterparties, including investment companies such as BlackRock Advisors LLC, Federated Investors Inc. and Fidelity Investments. It used to just deal with primary dealers, a group that currently numbers 22

“This is new territory for investors,” said Yi at Northern Trust. “We are all hoping it works, but can’t rule out a possibility that it’s not perfect. Our expectation is that it is probably going to be initially pretty sloppy.”

http://www.bloomberg.com/news/articles/201...rs-seek-shelter

However, they are probably fighting a losing corruption war in Indonesia. It is bad there!

Yeah
Good for them.

Please don't. Let Aud sink to 0.65 first.....

Raise taxes on income

Raise taxes on income

Keeping my fingers and toes X-ed!

i am guessing the Auss has more connect with the RMB than our MYR. Why?
Aussie's economy is so heavily in mining and properties bought by the Chinamen.
Once China slows(i actually think they faked their numberss since 2 years ago), Aus will spiral down to 0.60

Whereas, say what you like about our Bolihland, palm oil is not doing too shabby compared with those iron ore mines in Aus.

i hope to see AUS/MYR at 2.7 again........

Moar TAXes coming...............

http://theage.com.au/business/markets/rb...111-gm3ssa.html

The Royal Bank of Scotland (RBS) has advised clients to brace for a "cataclysmic year" and a global deflationary crisis, warning that the major stock markets could fall by a fifth and oil may reach $US16 a barrel.

The bank's credit team said markets are flashing the same stress alerts as they did before the Lehman crisis in 2008.

"Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small," it said in a client note.

Andrew Roberts, the bank's credit chief, said both global trade and loans are contracting, a nasty cocktail for corporate balance sheets and equity earnings, and uncharted waters given that debt ratios have reached record highs.

"China has set off a major correction and it is going to snowball. Equities and credit have become very dangerous, and we have hardly even begun to retrace the 'Goldilocks' love-in of the last two years," he said.

Mr Roberts expects Wall Street and European stocks to fall by 10pc to 20pc, with an even deeper slide for the FTSE-100 thanks to its high weighting of energy and commodities.

"London is vulnerable to a negative shock. All these people who are 'long' oil and mining companies thinking the dividends are safe are going to discover that they're not at all safe," he said.

Brent oil prices will continue to slide after breaking through a key technical level at $US34.40, with a "bear flag" and "Fibonacci" signals pointing to a floor of $US16.

The bank said a paralysed Opec seems incapable of responding to a deepening slowdown in Asia, the swing region for global oil demand.

Morgan Stanley has also slashed its oil forecast, warning that Brent could fall to $US20 if the US dollar keeps rising, arguing that oil is intensely leveraged to any move in the dollar and is now playing second fiddle to currency effects.

RBS forecast that yields on 10-year German Bunds would fall in time to an all-time low of 0.16pc in a flight to safety, and may break zero as deflationary forces tighten their grip.

The European Central Bank's policy rate will fall to minus 0.7pc. US Treasuries will fall to rock-bottom levels in sympathy, hammering hedge funds that have shorted US bonds in a very crowded "reflation trade".

RBS issued a dire warning for the global economy in November but events have move even faster than feared. It estimates that the US economy slowed to a growth rate of 0.5pc in the fourth quarter, and accuses the US Federal Reserve of "playing with fire" by raising rates into the teeth of the storm. "There has been severe monetary tightening in the US from the rising dollar," it said.

RBS said the epicentre of global stress is China, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a "dramatically lower" currency, a fresh leg of the rolling global drama that is likely to play out fast and furiously.

"We are deeply sceptical of the consensus that the authorities can 'buy time' by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts, and easing in fiscal policy," it said.

Mr Roberts said the tightening cycle by the Anglo-Saxon central banks is already over. There will no rate rises by the Bank of England before the downturn hits, and the next action by the Fed may be a humiliating volte-face and a rate cut.

RBS is not alone in fearing trouble. UBS issued what it called a "significant change" to its house view late last week, saying policy chaos in China had unsettled markets. It cut exposure to equities from overweight to neutral on a "six-month tactical horizon." It went underweight emerging markets.

Yet there is something strange about the latest events. Austerity is finally over in Europe and fiscal policy in the US this year will be expansionary.

China's slowdown hit bottom in June and a fitful recovery has been building, driven by extra budget spending and credit growth. While the composite PMI indicator for manufacturing and services slipped back last month, it is still higher in the summer.

The risk is that this market storms drags on long enough to hit investment, regardless of what the economic data should imply. At the end of the day, market psychology can itself become an economic 'fundamental'.

Pessimists warn that unless there is a batch of irrefutably good data from China over the next two or three months, the sell-off could become self-fulfilling and quickly metamorphose into the next global crisis.

i think EVERYone knows China faked their numbers. There is no need to fear if those GDP numbers are authentic.
i mean 6 to 7% GDP growth is not shabby to pull the carpet under the Yuan, is it? Not unless they are fake.

What's the difference?

Can't believe them anyway.

This post has been edited by prophetjul: Jan 13 2016, 02:24 PM

Like i said.,not much difference when those figures cannot be trusted.

i believe their GDP has been much lower since 2 years back.

If your money is honestly gotten, why bother to bring cash?
Just TT over

i am sure you can get a better rate with 500k purchase