China Slowly Backing Away from U.S. Treasuries

Front and center this morning, we saw quite the rally in risk assets yesterday, all day, and all night! It was like the sea parted, the stars aligned, and the karma began to flow… The global economic recoveries came back into the thoughts of traders and investors, and the fears of Greece waned… It was as if none of the “sky is falling” theatrics had gone on the past month!

Before we think that the green light is now shining brightly on risk assets, let’s take a step back, and think for just a minute that maybe, just maybe, the sellers got fatigued… And that they will return for more selling once they catch their collective breaths. The thing I think about here, is that the selling probably did go too far, too fast, and just like when we tracked the currencies higher, there’s a need for a breather before resuming the trend trade.

But then, I think about Reserve Bank of Australia (RBA) Governor Stevens talking hawkishly about higher interest rates for Australia. I think about the news yesterday that Canadian manufacturing sales surged 1.6% in December, and that the European Union (EU) is doing everything in its power to keep from allowing a line to form outside its door for handouts… The EU gave Greece 1 month to make progress on cutting their deficit… And, the markets seemed to be OK with that!

I mentioned to Don and Tim, here on the trading desk, yesterday that I didn’t understand selling into weakness. Just doesn’t make sense… But shoot, Rudy, that’s what a ton of people did yesterday. I said to them, “If you are a true contrarian, then you are a buyer of euros today.” That was before the euro (EUR) took off on a 1.5-cent gain yesterday!

OK… We need to get to some statements by Fed Head Hoenig… You may recall that Hoenig was the lone wolf dissenter at the last FOMC (Federal Open Market Committee) meeting, when he voted to raise interest rates, instead of leaving them at all-time lows. Well, yesterday Mr. Hoenig was speaking, and had quite a few damaging things to say… (At least in my opinion!) Let’s go to the tape!

Here are snippets of the Hoenig quotes… “HOENIG SAYS US RISKS ‘NEXT CRISIS’ OVER FISCAL IMBALANCE… FED’S HOENIG SAYS US DEBT THREATENS CENTRAL BANK’S OBJECTIVES: ACTING NOW TO CUT DEBT MOST RESPONSIBLE COURSE…. IF FISCAL DEBT GOES UNADDRESSED, CURRENCY WEAKENS… US GOV’T MUST ADJUST SPENDING, TAX PROGRAMS… WOULD BE MISTAKE TO DO NOTHING ABOUT MOUNTING DEB… PRIVATE INDEBTEDNESS ADDS TO ECONOMIC PROSPECT CONCERNS…”

Well… Maybe we can hold out hope that one Fed Head “gets it!”

Yesterday, I told you about what I believe is going on in the shadows of US Treasury auctions… And today, I’ll tell you one of the reasons there are Chinese Fire Drills going on every time there’s an auction… Did you know that China has now been a net seller of some $45 billion of US Treasuries over the last five months?

Alan Ruskin, chief international strategist with RBS Securities Inc., said that was “a long enough period to hint strongly at a trend.”

He went on to write… “Much of China’s selling has been in short-dated Treasury bills, but China has not indicated that instead it will buy longer maturity US government notes and bonds. That is the bad news for the US dollar and the Treasury market.”

Yes… That’s very true, folks… But it will take time to work its way through, and in the meantime, grandma is holding off the Indians… The dollar rally seems to be in place still, as I’m watching the euro lose about 1/4-cent since I came in this morning.

I wonder if people just didn’t take the report a couple of months ago from the Chinese think tank that China may scale back purchases of US debt on concern that the dollar will decline.

So… Have you been following the stories coming out of Greece, about how Goldman Sachs helped Greece hide the extent of its deficit from the European Union, with derivatives… I find this to be akin to allowing a person to keep deficit spending, by giving him a second mortgage on his house! And hey! Greece is what they consider to be “big boys”… Supposedly able to understand what they were doing.

But, now there are reports that these derivatives were not disclosed to bond buyers of Greek bonds, who should have been made aware of the reality of Greece’s finances…

I’m shaking my head in disgust here, folks, because since the tech bubble popped we have had one scandal after another in the markets.

A reader asked me yesterday, “What’s up with Swiss francs? The loonie is now stronger than francs?” Well… I thought to myself, self, you should talk about this in the Pfennig! So… Here it is! The Swiss franc has run into a buzz saw operated by the Swiss National Bank (SNB), who is foolish enough to believe that weakening/debasing your currency is a good idea! You see, as I’ve reported here in the Pfennig, the SNB has been intervening, by selling francs to weaken the currency in an attempt to allow inflation to enter their economy.

Foolish, very foolish… Hey SNB, did your mother ever tell you to not play with matches?

Hmmm… I was reading last night about what’s being labeled as the “Volcker Rule”. It is the call to end proprietary trading by banks… The thought here is that if this goes through, it could cut back on US investment abroad, and that could boost the dollar… For, if the banks aren’t buying foreign assets for their own accounts, then who will be there to take up the slack?

Could this be retaliation, or more probable, replacement of the loss of investment in the US by foreign central banks? Could be…

There is a ton-o-data in the data cupboard today, although most of it would be considered “2nd tier”… But the run-down is: Housing Starts and Building Permits for January, The Monthly Budget Statement, and two of my faves… Industrial Production and Capacity Utilization. We were supposed to see the color of the FOMC meeting minutes yesterday afternoon, but that was moved to today… Apparently, the white out on the comments hadn’t dried yet! HA!

Then there was this… A report in The Wall Street Journal over the weekend about the BRIC countries (Brazil, Russia, India, and China) turned into a love fest for Brazil. Here is a snippet of the article… “Brazil, Russia, India and China have come through the financial crisis in good shape, but their prospects seem to be diverging. Brazil’s ability to obtain essential commodities domestically makes its economy more sustainable than that of China, said Mark Mobius, an emerging-market fund manager. Credit Suisse reported that domestic spending accounts for about 60% of Brazil’s economy, making it less dependent on exports compared with China, where consumption is 35%.”

So… It sounds like the BRIC countries are doing well, with Brazil outperforming them all, which would have been my guess before any way! Brazil is back to work this morning after celebrating Carnival the past two days… It will be interesting to see the adjustment (to catch up) in the currency…if there is one…

And, the price of oil has really taken off in the past week! It’s trading with a $77 handle this morning, after just one week ago trading with a $71 handle! WOW! And UGH! No wonder the Canadian dollar/loonie (CAD) is outperforming the Swiss franc! Oil is at $77 and gold is back above $1,100… It’s all-good for the loonie!

To recap… The risk assets rally that began yesterday carried on all day and overnight, although the euro has given up about 1/4-cent this morning. The EU has given Greece 1-month to deal with their deficits. Fed Head Hoenig had some interesting comments yesterday, and the latest reports show China is slowly backing away from US Treasuries… Is it a trend? I think it is!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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