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Archive for September, 2011

Dollar Meets Support But Does That Guarantee A Rebound?

There are a lot of anxious traders out there that feel the US dollar is ready to charge higher at any moment. The technical situation with many of the dollar-based majors is the primary support for this belief; but it is important to consider the fundamental aspects of this situation.

When we set bias against the burden of catalysts and momentum, expectations for trend development ease substantially.

The first step into untangling this highly charged speculative outlook is to recognize that traders are still accustomed to the exceptional volatility that the capital and currency markets have leveraged these past few months.

The risk aversion / dollar rally move from last week (following the Fed’s decision to pursue an Operation Twist program instead of QE3) is still particularly fresh in most traders’ minds; and they are ready to jump back on the dominant trend. The problem is that the market can maintain a bias but produce little to no progress on such a move for extended periods.

For the Dow Jones FXCM Dollar Index (ticker = USDollar ), the proximity of a seven-month high just below 10,000 and a moderate retracement from highs relative to the S&P 500’s own bounce gives additional leverage to the bullish greenback argument.

However, we should recognize the benchmark stock index’s advance for what it is: a swing within a very consistent congestion pattern.

Though there have been a few instances of aggressive rallies or declines from this key sentiment index; they have lasted for a few days at most and they ultimately fall within a range between 1,225 and 1,100. If this indeed is a point of reference for capital flows; then it casts a substantial cloud of doubt over the progress the dollar made in the previous week.

Was remarkable bullish break for the greenback against the Euro, British Pound, Canadian dollar, Australian Dollar and New Zealand dollar a true trend development or merely a false breakout that was forced by strained technical levels.

There are always leading signals for the development of larger fundamental themes; but it is almost always the case that the active unfolding of these larger drivers engages the various asset classes at the same time – sign of absolute capital flows.

The dollar’s surge last week has a better grounding than the conflicting bounce in equities and speculative commodities would suggest. As we have discussed previously, the dollar is not a simple safe haven; but a currency that draws capital when there is an absolute need for liquidity.

Panic is rarely a false emotion for the markets; and it can only be held back for so long. What we are waiting therefore is a catalyst to revive the absolutism in sentiment.

The consumer confidence survey from this past session simply doesn’t hold the necessary influence. While the September reading’s may be holding near a 30-month low and the reflection on labor conditions is at its worst in 28 years; this fits into a well-known concern amongst American consumers. Nothing new.

The same will almost certainly be true of the upcoming durable goods order report in the upcoming session.

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Apple stock falls on report of iPad supply slowdown

Apple Inc shares fell as much as 3.3 per cent on Monday following an analyst report that said the company was cutting orders from suppliers of parts for its iPad tablet.

JPMorgan Chase said in the research note out of Asia that several suppliers indicated in the past two weeks that Apple lowered fourth-quarter iPad orders by 25 per cent.

“Our understanding is that this is not in preparation for a new model launch,” said Gokul Hariharan, JP Morgan’s Asia Pacific electronic manufacturing services analyst.

The move could result in slower sales for suppliers such as Hon Hai Precision Industry Co Ltd, the analyst added.

Concerns for a slowdown in iPad tablet sales come as Amazon.com is expected to unveil its own tablet device rival on Wednesday. One analyst has already described the expected device as a “game changer” that could challenge the iPad.

Apple shares fell as low as $391.30, before trading down 1.2 per cent at $399.27 on Nasdaq late Monday afternoon. Hon Hai fell NT$0.40 to NT$68.60 on the Taiwan Stock Exchange.

Apple declined to comment on the report. Hariharan noted that Mark Moskowitz, JP Morgan’s US-based Apple analyst, does not expect the supply chain adjustments to make him lower his estimates for iPad shipments.

Other analysts also said they would not be changing their iPad shipment estimates and that it would be difficult to accurately estimate shipment orders.

“The iPhone 5 launch is much more important than the iPad right now,” said BGC Partners analyst Colin Gillis. “Could the tablet market slow down? Yes, absolutely. But data from factories is notoriously unreliable, especially since Apple started diversifying their supplier base.”

BTIG analyst Walter Piecyk said he would be maintaining his forecasts of Apple selling 13 million iPads in the fourth quarter.

“I don’t see any reason to change our estimates. We expect that iPad and iPhone production is shifting to Brazil and Apple remains the market leader that it created with the iPad,” he said.

Global tablet sales are expected to explode to more than 50 million in 2011. Apple, which has sold nearly 29 million iPads so far, is expected to continue to dominate the market in the near term.

Another analyst report out of Asia over the weekend indicated that the retail outlook was that Apple remained positive on the continent with packed Apple stores in several Chinese cities.

“We anticipate continued strong earnings growth for Apple due to our checks indicating strong global demand for the iPhone and iPad,” analysts at Canaccord Genuity said.

Cameron: No change to UK debt crisis plan

The UK's FTSE 100 fell 3.6% last week, as storm clouds gathered over the UK economy

The government will not change tack in its efforts to reduce the budget deficit despite the lack of UK economic growth, the prime minister has said.

The International Monetary Fund has cut its UK growth forecast and cumulative public sector net borrowing is put at £52bn – only 7% less than a year ago.

As the eurozone crisis deepened, David Cameron insisted to ABC News that Britain was not in trouble.

But Labour leader Ed Miliband said the government needed to “change course”.

No ‘money taps’

Speaking in the US, David Cameron said the government was dealing with “a debt crisis… not a traditional cyclical recession where you just turn on the money taps”.

He said: “You have got to deal with the debts and pay for your debts as well as having a very strong growth strategy.”

Public sector net borrowing was a higher-than-expected £15.9bn in August and inflation has now risen to 4.5%

Last week the Treasury denied it was discussing how to inject up to £5bn into the economy without abandoning its deficit reduction strategy.

“We are not in trouble because we have actually shown the world we have a plan to deal with this” — David Cameron Prime Minister

Mr Cameron said there would be no changes to the government’s austerity measures.

“We have to deliver on the programme, that is vitally important to prove to the world we can pay our way and to keep our interest rates,” he said.

The Bank of England’s monetary policy committee has agreed to keep interest rates unchanged at 0.5%, which the prime minister welcomed.

“We have interest rates at the same level as Germany – down to 2%,” he said.

As the eurozone crisis worsened still this week, there was more volatility on the world’s share markets, including the UK’s.

The UK’s FTSE 100 fell 3.6% over the week, France’s Cac 40 shed 4.4% and in the US the Dow Jones dropped 6.4%, its biggest weekly fall since October 2008.

But Mr Cameron said that although other countries in the eurozone were struggling to deal with their deficits, the UK was not.

“We have a deficit sadly which is, as I say, the same size as Greece and Spain and Portugal – the ones that are in trouble.

“We are not in trouble because we have actually shown the world we have a plan to deal with this.”

Chancellor George Osborne said earlier this month: “We will stick to the deficit reduction plan we have set out. It is the rock of stability on which our economy is built.”

‘Dangerous phase’

But Mr Miliband called on David Cameron to “show some leadership” and get Britain’s economy growing again.

Speaking to Andrew Marr ahead of the Labour party conference, Mr Miliband said moves like a reduction in VAT were needed to do so: “If I was the prime minister, we would be having to make cuts.

“We would meet the plan of halving the deficit over four years.

“But there’s three ways that you meet a plan on the deficit: tax rises, which have already been done by the government, spending cuts, but growth.

“Growth is the absolute missing ingredient we have.”

Meanwhile some analysts believe that quantitative easing could re-start in the UK in November, as the Bank of England moves to inject more money into the faltering UK economy.

Leader of the Liberal Democrats and deputy prime minister Nick Clegg said this week there was a “long hard road ahead”.

But he said: “We were right to pull the economy back from the brink. It is clearer now than ever that deficit reduction was essential to protect the economy.”

The IMF has said it will take decisive action to tackle the eurozone debt crisis but Mr Osborne said allowing Greece to default on its debts was not a proposal that was put forward.

Greece has been awarded bail-outs to the tune of 219bn euros to try and stabilise its economy.

After IMF talks, Mr Osborne said: “I think there is a recognition here that the debt crisis has reached a dangerous phase.

“But we are optimistic that we have taken a step towards resolving it.”

Irish economy continues to grow

The Irish Republic has emerged from one of the deepest recessions in Europe

The Irish economy grew by 1.6% in the second quarter, official figures show.

It was the second successive quarter of GDP growth, after a revised 1.9% rise in the first three months of the year.

The figures surprised forecasters, who had expected an increase of just 0.25%. It is the first time since 2006 that the Irish economy has expanded for two quarters in a row.

Analysts said higher investment and exports had compensated for consumer demand, which remained weak.

Figures for Irish gross national product (GNP), which excludes output from foreign multinationals based in the Republic, returned to positive territory, rising by 1.1%, after showing a revised 3% decline in the first three months.

The Irish statistics office had originally issued first-quarter figures showing a 1.3% increase in GDP and a 4.3% decline in GNP.

“The overall story here is one of incremental improvement in the Irish economy,” said Ulster Bank chief economist Simon Barry.

“However, it continues to be characterised by a situation where the trading sector is looking buoyant and domestic demand continues to stay weak.”

IMF cuts UK growth forecast to 1.1% and questions pace of cuts

George Osborne and the IMF's managing director, Christine Lagarde: Osborne has been warned that continued economic underperformance would necessitate a change of policy.

George Osborne warned that slower pace of deficit reduction will have to be adopted if economy continues to struggle

The International Monetary Fund has cut its growth forecast for Britain for the third time in nine months and warned George Osborne that further underperformance would warrant a policy U-turn.

The fund said the UK continued to struggle and advised that a slower pace of deficit reduction would be necessary were the economy to continue to expand less rapidly than expected.

While sparing Osborne the embarrassment of a call for an immediate change of course, the IMF pulled no punches in criticising European policymakers for failing to sort out the eurozone’s problems. Following the credit downgrade of Italy by the ratings agency S&P, the IMF’s economic counsellor, Olivier Blanchard, urged Europe to “get its act together” and the fund issued a “call to arms” to prevent Europe’s leaders losing control of the crisis.

“There is a wide perception that policymakers are one step behind the action in markets,” said Blanchard. “It is a major source of worry.”

The IMF’s half-yearly World Economic Outlook said low borrowing costs meant Britain had the scope to cut its deficit more slowly but that it should not do so yet. Jorg Decressin, an IMF economist, said: “Policy should only be loosened if growth threatens to slow down substantially relative to what we are forecasting.”

The IMF said it was cutting its growth forecast for the UK to 1.1% this year – down from 1.5% in June, 1.7% in April and 2% at the start of the year. It also predicted a more sluggish recovery in 2012, with activity expanding by 1.6% against the 2.3% it was predicting just three months ago.

Fund economists believe that only an improvement in Britain’s trade performance will prevent the economy returning to recession this year. Domestic demand is expected to contract by 0.5%, the weakest of any country in the G7.

Ed Balls, the shadow chancellor said: “These are deeply concerning forecasts for both the UK and world economy. Our chancellor and political leaders in Europe need to wake up to the scale of the problem and finally realise that we need economic growth and more people in work to really get deficits down.”

A Treasury spokesman said: “It is welcome that the IMF have forecast that the UK will grow more strongly than Germany, France and the eurozone next year, but it is clear that the UK is not immune to what is going on in our biggest export markets, with every major economy seeing lower forecasts for growth this year and next.”

He stressed that the government had no intention of backtracking on a deficit-reduction plan that had delivered stability for the UK.The IMF cut its forecast for global growth to 4% for both 2011 and 2012 but said risks were heavily skewed to the downside. It warned that a failure to tackle Europe’s sovereign debt crisis and a continued policy impasse between Democrats and Republicans in the US could result in a double recession for the developed world, which it said was already projected to grow at an anaemic pace in 2011 and 2012.

The fund said the US Federal Reserve should “stand ready” to provide more stimulus to the world’s biggest economy through “unconventional support”, and financial markets rallied in anticipation that the central bank will signal fresh action when it concludes a two-day meeting on Wednesday.

The Fed has already provided two doses of quantitative easing, the creation of electronic money through the purchase of financial assets, and Wall Street was hopeful on Tuesday night that the recent softening of demand will lead to a third boost in the coming months.

Shares in the City rose on Tuesday, with the FTSE 100 Index closing more than 100 points higher. Shares on Wall Street were also higher in early trading.

Gas prices in Austin fell 4.5 cents in recent week

UBS ‘rogue trader’: Loss estimate raised to $2.3bn

UBS boss Oswald Gruebel told a Swiss newspaper he would not resign over the incident

UBS has raised its estimated losses due to alleged unauthorised trading to $2.3bn (£1.5bn) from an initial $2bn.

The bank also said the alleged activity by trader Kweku Adoboli was uncovered after UBS began making inquiries.

That prompted Mr Adoboli to admit the losses on Wednesday, UBS said. The trader was charged with fraud and false accounting at a London court on Friday.

The bank’s statement comes as UBS boss Oswald Gruebel insisted he would not resign over the incident.

“I’m responsible for everything that happens at the bank,” Mr Gruebel told Swiss Sunday newspaper, der Sonntag. “if you ask me whether I feel guilty, then I would say no.”

‘Fictitious’ hedges

Mr Adoboli has been remanded in custody until a committal hearing on 22 September.

According to the charges, the fraud took place between January and September this year.

The charges add that Mr Adoboli filed false accounts between October 2008 and December 2009, and from January to September 2011.

However, UBS latest statement said the losses only related to trading positions taken on in the last three months.

The 31-year-old worked for UBS’s global synthetic equities division, buying and selling exchange traded funds, which track different types of stocks or commodities such as precious metals.

Prosecutors say Mr Adoboli “dishonestly abused that position intending thereby to make a gain for yourself, causing losses to UBS or to expose UBS to risk of loss”.

The UBS statement claimed Mr Adoboli had conducted legitimate derivative transactions, giving the bank heavy exposure to various stock market indexes.

But he had then entered “fictitious” hedges against these positions into UBS’ risk management system, while in reality he had no hedge in place and was breaching the risk limits that the bank required him to work within.

Stock markets have fallen 10%-20% in the past two months on growing fears of a renewed recession in the US and a disorderly debt default by Greece.

“Following inquiries directed to him by UBS control functions that were reviewing his positions, the trader revealed his unauthorized activity on September 14, 2011,” the UBS statement said.

The bank said it was now operating within normal risk limits, implying that the unauthorised positions had been hedged or unwound.

Political pressure

BBC business editor Robert Peston reports that Mr Adoboli worked in the back office before becoming a trader, which may explain how he managed to keep his trading secret.

The Financial Services Authority (FSA), the City regulator, in conjunction with its Swiss counterpart, FINMA, has launched an investigation into why the Swiss bank did not identify the trades.

UBS said in its latest statement that it too had launched an internal inquiry.

City of London Police said in a statement that its “investigation is ongoing and officers continue to work in close collaboration with the FSA (Financial Services Authority), SFO (Serious Fraud Office) and CPS (Crown Prosecution Service).”

Mr Adoboli has taken on the law firm Kingsley Napley, which also represented Nick Leeson, the rogue trader who brought down Baring’s bank.

According to reports he is the son of a retired United Nations employee from Ghana, and that he attended school and university in Britain.

All three major ratings agencies – Moody’s, Standard & Poor’s and Fitch – are reviewing UBS’ credit rating for a possible downgrade in light of the apparent failure of the bank’s risk control systems.

‘Much riskier’

Mr Adoboli appeared before magistrates on Friday

Moody’s says it is reviewing UBS’s rating, focusing on “ongoing weaknesses” in the Swiss bank’s risk management.

It comes after UBS lost £35bn in the 2007-8 banking crisis and had to be bailed out by Swiss taxpayers.

Moody’s said that although UBS was strong enough financially to absorb the loss, it had concerns about its risk controls.

“We have continued to express concerns with regards to the ability of management to develop a robust risk culture and effective control framework,” the agency said.

“One banker described UBS’s inability to see what Mr Adoboli was doing as quite extraordinary.” — Robert Peston Business editor, BBC News

Last month the bank announced 3,500 job cuts. Of the 65,000 staff worldwide about 6,000 are in the UK, with the bulk of UBS’s investment banking operations based in London and New York.

It has been reported that the fresh losses from the investment bank will lead to a major restructuring of the business, involving thousands more job losses, which will be announced in November.

“We believe that yesterday’s event could have personnel consequences on senior management level, which in turn could lead to adjustments to UBS’ business portfolio,” said Teresa Nielsen, an analyst at the Swiss bank Vontobel.

“The exit from non-core businesses inside the investment bank could be accelerated,” she added.