Well, at least from Russia, which publicly can’t seem to stop itself from smacking down the dollar at every opportunity

From Alphaville:

"Another illogical Russian smackdown for US treasuries Posted by Izabella Kaminska on Jun 10 14:40.

Next week, Russia hosts a meeting between the leaders of Brazil, India and China in the Russian city of Yekaterinburg, at which it is widely expected the dollar’s dominant role will be hotly contested. The world should therefore be standing by for many a dollar-critical comment in the lead-up to the meeting from some of the aforementioned parties.

Well, at least from Russia, which publicly can’t seem to stop itself from smacking down the dollar at every opportunity. As Bloomberg reports on Wednesday:

June 10 (Bloomberg) — Russia’s central bank may switch some of its reserves from U.S. Treasuries to International Monetary Fund bonds, the bank’s first deputy chairman, Alexei Ulyukayev, said in Moscow today. His comments were confirmed by a bank official who declined to be named, citing bank policy. Finance Minister Alexei Kudrin said last month that Russia planned to buy $10 billion of IMF bonds using money from its foreign reserves.

IMF bonds are of course still in the making, but they are definitely on their way as this WSJ story explains. As the story also points out it was always well expected that Russia would be snapping up a fair share of these special-drawing-right priced securities. The news today is that their $10bn expected purchase might, however, come at the expense of Russia’s own US Treasury holdings.

That’s all very well Russia, but surely you’ve considered the fact that talking down the dollar publicly doesn’t serve your best interests until you actually have adequately diversified? It’s certainly a questionable communications strategy, at the very least.

In fact, we wonder if the other dollar-holding BRIC countries would rather if Russia just zip it completely for the time being.

As Simon Derrick at BNY Mellon points out on Wednesday, China is clearly employing a more tactical approach as a form of damage control to compensate for Russia’s loose mouth: It must noted, however, that there also appears to have been a persistently anti-USD sentiment behind many of Russia’s statements. Whilst it is certainly understandable why Russia might take this approach, this has also served to undermine the value of the USD reserves of both itself and others. Indeed, it is easy to see the comments from China’s Vice Foreign Minister He Yafei that “nobody is talking about dumping the USD” as a fairly direct attempt to offset the impact of recent Russian statements. The essence of which is China saying to Russia: “Please, just stop talking !” “No-one would notice us dumping our dollars if you’d just shut up.”

As Derrick goes on:
As we have highlighted elsewhere, we believe that China has decided that it is self-defeating for them to make comments that serve to undermine the value of the USD (we note the recent comments stressing the “partnership” they are in with the US). Following on from this, we suspect that they may also make this argument to their Russian opposite numbers next week. As a result, we would not be surprised to see a shift in tone from Russia in its comments on the USD following the summit next week.

So there you have it. If Russia suddenly quietens down on the dollar bashing, don’t necessarily take that as a reversal of its anti-dollar policy. China’s strategy, meanwhile, is clearly to keep the world guessing; being fully supportive on face value,while snickering at the dollar in the background.

Related links:
China’s fake recovery redux, or who’s laughing now? - FT Alphaville
Quote du jour, Chinese snickers - FT Alphaville
China to US: We hate you - FT Alphaville
Quote du jour, China’s fake recovery edition - FT Alphaville
China’s fake recovery - FT Alphaville
A commodity anchor, or oil as money - FT Alphaville

This entry was posted by Izabella Kaminska on Wednesday, June 10th, 2009 at 14:40 and is filed under Capital markets, Commodities. Tagged with BRIC, china, IMF, russia, special drawing rights, usd."

Me:

Don the libertarian Democrat Jun 10 20:35

I'll answer to Kamilla if that makes everyone happy. The story was pure hype. All it really said was that, having purchased a bunch of US Bonds during the Flight To Safety, when these bonds mature, Russia considering buying riskier, higher yielding assets. They've also pledged to but some IMF Bonds, should they show up. This is not portentous of anything. Does anyone believe, or even want, the Flight To Safety to continue on indefinitely?

borrowing heavily to finance massive stimulus and financial bailouts have raised doubts about their ability to repay their debt

TO BE NOTED: From Alphaville:

"Time to pull back liquidity? Posted by Izabella Kaminska on Jun 10 19:16.

Wednesday has so far proved to be another inflation focused day.

Among the latest indicators of tearaway borrowing costs in the near future was a jump in mortgage rates to their highest since last November, a fact that has now begun depressing refinancing activity. The Mortgage Bankers Association’s index of mortgage applications, for example, fell 7.2 per cent w/w in the week ending June 5, marking the third consecutive weekly decline. Meanwhile, as Barcap stated:

The average rate on the 30-year conforming mortgage (as measured by the MBA) jumped 32bp to 5.57%, also the highest since November. Mortgage rates have jumped more than 100bp from the trough of 4.62% at the end of April. The index of purchase applications inched up 1.1%, leaving the four-week moving average up 0.5%.

Then there were policymaker comments: the most hawkish came from Richmond Fed President Jeffrey Lacker urging the Fed not to expand its asset purchases in response to rising bond yields. As Reuters reported:

“Right now, I don’t see a reason to increase it,” Richmond Federal Reserve President Jeffrey Lacker told reporters, referring to the U.S. central bank’s pledge to buy up to $300 billion of longer-term Treasuries by the autumn. “In fact, if anything, if yields are rising because of stronger growth that would cut against the case for increasing purchases,” he said after speaking to the North Carolina Senate Appropriations Committee.

Arthur Laffer, he of the Laffer curve, meanwhile presented the following scary graphic in a WSJ journal article:

Commenting on the above he wrote:

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

That currency-in-circulation statistic by the way, was also corroborated by Fed’s own monetary base graphics released on Wednesday and reproduced below:

And if all that wasn’t scary enough on the inflation front, Reuters now reports the US government had to offer a much higher than expected yield on its long-dated bond sales on Wednesday just to attract sales:

NEW YORK, June 10 (Reuters) - The U.S. government on Wednesday paid a much higher-than-expected yield to sell longer-dated notes to attract investors who have grown wary of its burgeoning debt load. The U.S. Treasury added $19 billion to a prior 10-year note issue, originally sold in May, at a high yield of 3.99 percent, the highest since August 2008. The added yield incentive pulled reluctant participants from the sidelines, making this strongest bid 10-year auction since September 2007. This is the first auction of long-dated federal debt since questions over the U.S. government’s credit-worthiness arose in the wake of a credit rating downgrade of Britain by Standard & Poor’s. The United States and Britain are conducting similar policies to revive economic growth, but their tactic of borrowing heavily to finance massive stimulus and financial bailouts have raised doubts about their ability to repay their debt.

Laffer’s conclusion by the way ties with that of Lacker’s: Forget additional Fed asset purchases. What is needed now is the reemergence of an inflation not deflation focused committee that is ready to drain liquidity from the system. As he writes:

Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion. Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves. Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.

Otherwise, behold; tick-tock the inflation clock.

Related links:
Fed releases new balance-sheet data - FT Alphaville
Federal Reserve System Monthly Report on Credit and Liquidity Programs and the Balance Sheet - Fed
Fed Would Be Shut Down If It Were Audited, Expert Says - CNBC

This entry was posted by Izabella Kaminska on Wednesday, June 10th, 2009 at 19:16 and is filed under Capital markets, People. Tagged with Arthur Laffer, federal reserve, infineon, jeffrey lacker, Treasuries."

Me:

Don the libertarian Democrat Jun 10 20:22

So, let's see, now we have higher interest on some bonds because:
1) The govt wants to sell a lot of bonds, and so they have to offer higher interest rates to attract enough buyers
2) People are seeing or predicting inflation ahead, for whatever reason, and so want a higher rate of interest
3) The money supply, as you've laid out in the graph by Laffer, means that inflation is a mechanistic foregone conclusion, and, until the money supply goes down, the govt will have to pay higher interest on bonds
Anything else? Maybe:
4) Investors are seeking higher interest because they can get

Don the libertarian Democrat Jun 10 22:22

Here's McTeer on that graph, I believe:

"People keep talking and writing about the explosion of the money supply and the coming inflationary tsunami. Let me point out once again that the M1 and M2 measures of the money supply spiked but have since come back down. There is no explosion of the money supply.

I

The monetary base (currency outstanding plus bank reserves) has exploded, and it's graph is indeed startling-startling that is until you realize that excess bank reserves on deposit at the Fed is the reason. We learned to pay attention to the monetary base because it provided the raw material (reserves) from which the banking system can create new money by lending and investing. Because of the money expansion multiplier, the monetary base has been referred to historically as "high powered money."

http://taxesandbudget-blog.ncpa.org/the-feds-balance-sheet-and-excess-bank-reserves/

I could be wrong on all this, but McTeer's post makes more sense to me. Maybe I'm misreading Laffer's graph.

And presently, I don’t believe the reason that rates are backing up has to do with a lack of confidence in the Federal Reserve

From Alphaville:

"Treasuries out of line with interest rate expectations Posted by Izabella Kaminska on Jun 09 19:27.

The curious case of rising Treasury bond yields continues to attract various theories and explanations in the market. The latest doing the rounds is that it may have nothing to do with rising interest rate expectations at all. Rather, it is more about the yield curve becoming the function of an exceptional rate of supply, as well as some unusual market dynamics stemming simply from, well, unusual times.

Barclays Capital points out the Fed would otherwise have to raise rates to as much as 5.5 per cent by the end of next year to meet current market expectations based on the two-year yield. They suggest this is somewhat unrealistic given ongoing rising unemployment and negative pressures on the economy.

Among those backing the over-supply theory on Tuesday was also Dallas Federal Reserve president Richard Fisher. He told Fox Business news (our emphasis):
Long-term, as Milton Friedman said, sustainable inflation is a monetary phenomenon so we are going to have to be careful as an institution — the Federal Reserve — to make sure that we pull things back in, at the right time…And presently, I don’t believe the reason that rates are backing up has to do with a lack of confidence in the Federal Reserve. I think it has to do largely with a very simple phenomenon, supply and demand. There’s an enormous need for the Treasury to borrow. You mentioned the numbers earlier. Today about $35 billion will be financed through operations, $65 billion this week as you mentioned. Probably a trillion over this remainder of this fiscal year and under these circumstances, rates are indeed backing up as you mentioned in the Treasury sector, particularly at the longer end of the yield curve. I don’t think it’s unusual. I don’t think it’s wrong. I don’t think it’s odd. It’s just happening.”

In agreement too were primary treasury dealers. According to a Bloomberg survey, 15 of the 16 US government security dealers said policy makers would likely keep the target for overnight loans between banks in a range of zero to 0.25 percent this year. Bloomberg quoted one of the dealers as saying:

“The market seems wrong on this one,” said Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at UBS AG, one of the dealers. UBS predicts that the Fed will remain on hold until June 2010. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.”

Nevertheless, some still remain sceptical that massive supply alone can by enough of an explanation to justify the bond-yield conundrum. David Rosenberg of Gluskin Sheff writing on Tuesday was among those seeing some genuine inflationary forces at play. As he wrote:

The question is what is driving yields higher and what will cause the run-up to stop? Well, much is being made of supply and massive Treasury issuance, and to be sure, this has accounted for some of the yield backup but not nearly all of it — after all, Aussie bond yields has soared more than 100bps despite the country’s fiscal prudence. Clearly, the ‘green shoots’ from the data has been a factor forcing real rates higher. The doubling in oil prices and the rise in other commodity prices has generated some increase in inflation expectations, and the 40%+ move in equity prices and sustained spread narrowing in the corporate bond market has triggered a flight out of safe-havens (like Treasuries), and part of the move has been technical in nature owing to convexity-selling in the mortgage market with refinancings plummeting since early April. But, he added, those forces could easily be reversed by the end of the year:

Where we think the greatest potential will be is in inflation expectations — they should reverse course in coming months. Three different articles in today’s Wall Street Journal (WSJ) lead us to that conclusion: • More Firms Cut Pay to Save Jobs (page A4) • To Sustain iPhone, Apple Halves Prices (B1) • In Recession Specials, Small Firms Revise Pricing (B5)

The sudden flattening of the curve experienced in the last two sessions, meanwhile, did see something of a reversal on Tuesday. But, according to Barcap, that doesn’t necessarily mean the market should be counting on more steepening in the near-term.

As they explain, the continued unwinding of “steepener” trades on profit-taking, could very easily push front-end yields higher once again:

But while yields on traditional bond securities stay elevated, overnight rates in the Treasury repo market appear to be heading lower. Dow Jones reported on Monday that two-year treasury issues are now also so sought after that like just like 10-year securities they have begun trading at negative rates. As the wire report stated:

1601 GMT [Dow Jones] There’s still a severe shortage of 10-year Treasurys in overnight repo. And now the two-year’s also quoted negative, at -0.05%, though not as deeply as the -2.65% rate on the benchmark, according to GovPx. A negative rate means borrowers are paying an additional premium to get their hands on the security. All other issues trading close to 0.30% general collateral.

Related links:
Treasury sell-off goes short - FT Alphaville
“The adjustment in the US Treasuries market is THE story in financial markets” - FT Alphaville
US Treasuries selling off, benchmark yield curve hits record wide - FT Alphaville

This entry was posted by Izabella Kaminska on Tuesday, June 9th, 2009 at 19:27 and is filed under Capital markets. Tagged with Deflation, inflation, repo market, Treasuries."

Me:

Don the libertarian Democrat Jun 9 20:57

What you're saying then, is that, for example, when people buy 2 year bonds from the govt, some people are buying because:
1) They think that the interest rate of the bond reflects the interest rate expected for the next two years:
"interest rate expectations"
2) There aren't enough 2 year buyers for the govts needs, so it has to raise the price by paying a higher interest rate:
"an exceptional rate of supply"
So, one group is holding out for higher interest because they know that the govt needs to pay them more right now, while the other group is holding out because they don't want to buy a bond at a yield below inflation going forward.
But shouldn't there be more demand if investors were certain that inflation was going to be below these yields? And shouldn't inflation hawks want a rate safely above the expected rate of inflation? Couldn't this then just be an equilibrium between the two? Or what am I missing? Everything?

We refer, of course, to the adjustments in the US Treasury curve, the sell-off in which until now was mainly confined to longer-term maturities.

From Alphaville:

"Treasury sell-off goes short Posted by Izabella Kaminska on Jun 08 20:21.

New developments on Monday in THE story in financial markets.

We refer, of course, to the adjustments in the US Treasury curve, the sell-off in which until now was mainly confined to longer-term maturities.

On Monday, however, it was the turn of the front-end of the curve to suffer a significant spike in yields as investors priced in growing chances of a Federal Reserve interest-rate increase by the year’s end as they became more inflationary in mindset.

As Dow Jones reported (our emphasis):

NEW YORK (Dow Jones)–Investors continued to shed shorter-maturity Treasurys Monday on a growing view that policymakers could tighten interest rates sooner than expected given less dire data. The two- and three-year notes bore the brunt of the selloff Monday, building on a sharp price drop Friday. That move was sparked by a much less dire than expected May employment report, which boosted beliefs the Fed could raise its key rate sooner to stem inflation given economic data of late that has surprised to the upside. The two-year yield is now about 40 basis points higher than it was just a week ago. Bond prices move inversely to yields.

Over at the Zero Hedge blog, Tyler Durden, provides the following analysis:

The chart below demonstrates the 1 year forward level on the 1 Year treasury. Someone really just went all in on Bernanke’s bluff. 2Y/1Y flatteners anyone? Wait, what’s that? Every prop desk had a steepener on and was highly levered into it? Basis trade blow up deja vu anyone? Wait for opportunistic hedge funds to be ramping into the flattener and killing who knows how many props on the wrong side of the trade.

We guess that means there could be quite a clean-up operation come Tuesday.

Related links:
“The adjustment in the US Treasuries market is THE story in financial markets” - FT Alphaville
Bond market closing levels - FT Alphaville
US Treasuries selling off, benchmark yield curve hits record wide - FT Alphaville

This entry was posted by Izabella Kaminska on Monday, June 8th, 2009 at 20:21 and is filed under Capital markets. Tagged with inflation, Treasuries."

Me:

Don the libertarian Democrat Jun 8 22:56

"Someone really just went all in on Bernanke’s bluff."

Does this mean that investors thought that the Fed was going to raise interest rates significantly on short term bonds in the near future? I read him saying this:

"Right now, because of the weakness in economic conditions here and around the world, inflation has been running less than that, and our best forecast is that inflation will remain quite low for some time."

curve implies traders have a strong incentive now to take profits on stored tanker cargoes and release them into the greater energy market

TO BE NOTED: From Alphaville:

"The big floating storage debate Posted by Izabella Kaminska on Jun 05 19:10.

The issue of floating storage is causing a spirited debate within the energy trading community.

You see, time-spreads are improving — in energy speak that means the curve is flattening, and the contango is abating. On a theoretical level that implies it is no longer economical to store crude oil for the purpose of profiting from the ‘contango trade‘. This is especially so for crude being held in more expensive floating storage.

Simply speaking, the curve implies traders have a strong incentive now to take profits on stored tanker cargoes and release them into the greater energy market.

And yes, the incentive is definitely there. The only problem is, executing that incentive, even in a rising price environment, isn’t as easy as it sounds.

Nevertheless, it appears traders are attempting to take profits. A recent report from Dow Jones suggests the number of crude carriers chartered for oil storage has been dropping. As the report states (our emphasis):

LONDON -(Dow Jones)- June 4, 2009-The number of supertankers used to store crude oil worldwide dropped last month after a rally in crude oil prices lured barrels onshore, shipping data suggested Thursday. A total of 34 very large crude carriers were in use for storage purposes at the end of May, down from 53 a month earlier, according to preliminary data from shipbroker Simpson Spence & Young Ltd.

The number of very large crude carriers - which typically hold about 2 million barrels of crude each - employed in U.S. Gulf of Mexico crude oil storage dropped to 16 from 24 over that period, said analysts at SSY, the world’s largest independent shipbroking group.

U.S. government data Wednesday revealed an 868,000 barrel a day rise in crude imports boosted U.S. onshore inventories last week. The climb was partly attributed to crude being brought ashore as traders sought to cash in on a rally that has seen prices rise to seven month highs near $70 a barrel this week.

A narrowing contango structure in crude oil futures during May also likely contributed to the release of crude from floating storage. A wide contango - a structure where near-term contracts are priced cheaper than those further into the future - offers potential profits from buying crude at current prices and selling it at a future, higher price. With global crude storage levels reported to have stood in excess of 100 million barrels at their height earlier this year, current prices and a change in the oil futures curve could bring even more crude back onto the market in the coming weeks.

But as they also caution:
However, with freight rates still at historic lows - and spreads between monthly contracts starting to widen again - it remains to be seen how long any destocking will persist. “I think it will take quite a while [to clear the overhang of floating storage] and if the contango fluctuates it could increase again before it decreases substantially - cheaper charter rates obviously help,” said Simon Chattrabhuti, head of tanker research at ICAP Shipping in London. He estimated 33 very large crude carriers are currently being used worldwide for floating storage purposes.

At FT Alphaville we’ve heard from industry sources that as much as 135m barrels of stored petroleum products are being stored at sea over the current cycle. To compare, the current crude inventory stock in the US amounts to some 364m barrels. That’s a lot of floating oil to cash in on.

Here’s a chart showing comparatively just how much inventory oil there is in the US.

Fundamentally speaking, it’s still hard to understand how there is enough demand on the physical side to make that floating oil easy to sell. Just imagine how hard it would be to sell a 30 per cent stake in a FTSE 100 company without moving the market, and that doesn’t even involve demurring charges, capacity and spec issues.

As Harry Tchilingruian, senior oil analyst at BNP Paribas, points out:

SSY estimate that the daily cost for a 12 month time charter of a 300 Dwt VLCC is currently USD 41,500, down from USD 50,000 at the end of March. Assuming about 2.2 mb per 300kt VLCC, a back of the envelope arithmetic, if all the VLCCs were 300 kt ships, would imply that over 48 mb of crude oil is sitting on the water beside US shores. Add that amount to onshore industry crude stocks of 366 mb and that is a lot of crude.

So dumping the oil into the front-end would presumably have the effect of pushing prices lower. However, this is not happening. Yet, all evidence points to VLCCs and crude carriers being emptied.

A floating Catch-22?
There are two explanations here. Traders might just be transferring charters into smaller vessels to capitalise on lower rates. The other is that prices have completely broken away from the fundamentals — which in the physical market seems an oddity.

But there is yet one other thing to consider. As prices rage higher alongside inflation hedging and new fund inflows, the fear of escalating prices is undoubtedly set to attract the hedging community back into the market at a significant rate: the airlines, the power companies and all those exposed to high oil prices. These players will seek to hedge exposure at the back end, something that should put renewed upward pressure on long-dated futures; something that may end up seeing the contango revert, once again seeing storage dynamics become economical.

But if there really is a glut on the market, one would expect it to reveal itself in the US cash crude differentials (the difference between the paper market price and the physical). Again, no symptoms here of any glut. Differentials are strong on a historical basis, as can be seen from the story below:
HOUSTON, June 4 (Reuters) - Key U.S. cash crude differentials gained as futures rebounded sharply and calendar spreads waffled back and forth Thursday, traders said. Light Louisiana Sweet sold for $1.90 a barrel over West Texas Intermediate, up 15 cents.

Mars sour gained 5 cents to $1.65 under WTI. “Spreads moved in 10 cents and out 7 or 8 and then back in again,” a broker said. A stronger front-month WTI future contract versus back months usually weakens cash crudes. A weaker front-month usually strengthens them.

Both happened Thursday. A trader said grades also benefited from crack spreads being on the upswing above $13 a barrel. On futures markets, July WTI gained $2.69 to $68.81. July Brent rose $2.83 to $68.71. The front-month WTI spread ended 9 cents narrower at -88 cents. WTI’s advantage over Brent also was diminishing, ending at +10 cents Thursday.

Stronger Brent tends to support cash crude differentials. Among other cash grades, Bonito light sour traded up 30 cents at +10 cents. Heavy Louisiana Sweet lost 25 cents to sell for +70 cents. West Texas Sour changed hands for -$1.55, stronger by 15 cents. WTI at Midland sold for -50 cents, up 5 cents. Poseidon sour shed 5 cents to -$1.70. On the West Coast, Alaskan North Slope crude last sold Wednesday for August delivery at 35 cents under WTI. The last July deal was done Monday at 25 cents under. Buyers raised posted prices for California crude by $2.70 a barrel.

According to energy analyst Morgan Downey, author of industry must-read “Oil 101“, there is only really one market where floating storage still makes sense and that is distillates. Reports suggest this practice is indeed gathering pace across the industry, which in itself is historically unusual due to the complications and costs involved.

Nevertheless, one can presume there is so much of an overhang in distillates it currently makes sense while tanker rates are low.

But that is largely another story, and doesn’t help to explain the crude scenario.

Import alert
With regard to crude, there are two last points to consider. First, it is possible there is so much crude in floating storage traders are caught in somewhat of a catch-22. If they try to dump their oil in one go on fears of backwardation reverting into the market ( making their positions very unprofitable), the move could have a depressing effect on the front-end of the curve. This would, needless to say, potentially resuscitate the contango encouraging traders to restock their floating storage once again. In short, whatever crude was disposed of this month, it may very well be in the process of being restocked.

We will only know for sure next month. What we do know in the meantime is that DOE data on Wednesday showed a large increase in US imports for the first time in a month last week. If you assume constant Opec production rates (a tall order we know, but please do presume), then a lot of that crude would obviously have had to come from floating volumes. What’s more, the unexpected nature of the build itself supports the notion traders felt incentivised to destock.

As Olivier Jakob at Petromatrix points out:

According to SSY, at the end of May there were 34 VLCC used as crude floating storage compared to 53 a month ago. That is a stockdraw of about 38 myn bbls, including a draw of 16 myn bbls in the stocks afloat in the US Gulf. During the same period crude oil onshore in the US have been reduced by 10 myn bbls (including a 6 myn bbls draw in Padd3).

Hence the sharp reduction in offshore stocks has not even been able to prevent a reduction in onshore stocks and this then means that the real import flows are much lower than the face-value number shown in the DOE.

Of course, unless US refinery utilisation continues to go up this week, those constant Opec volumes may have to be taken up elsewhere.

What this might imply is that floating storage is essentially being churned through the system, the floating phenomenon itself resulting from a need for a buffer to compensate for oversupply during the lower demand period of the crisis. In that case — as we are not out of the catch-22 scenario described above just yet — some level of restocking should be expected in the weeks to come.

However, it is also entirely possible the world is simply becoming used to a new norm in forward-cover periods as it adjusts to protect itself from upcoming supply shocks.

This could be an attempt to echo the EU’s own inventory guidelines which aim for at least 90 days of forward cover, versus the OECD average of 60. In that case it doesn’t matter how much extra inventory there is out there, we’re setting a new paradigm and the price of oil can happily disregard the current inventory builds, especially while tanker rates are cheap.

Related links:
‘Demand is in the toilet’ - FT Alphaville
Distillate hangover - FT Alphaville

This entry was posted by Izabella Kaminska on Friday, June 5th, 2009 at 19:10 and is filed under Capital markets, Commodities. Tagged with distillates, floating storage, oil, WTI."

the chief impact of QE will come through the equity market

From Alphaville:

"The ‘QE’ stockmarket effect Posted by Izabella Kaminska on May 07 13:00.

On paper, the Fed and Bank of England initiated quantitative easing policies to try and keep long-term yields down and to boost the level of aggregate banking sector reserves so as to encourage bank lending. So far, QE appears to be having variable success in achieving these two objectives.

As Stephen Lewis at Monument Securities writes on Thursday, in the UK the 10-year benchmark yield has now risen above the level where it stood when QE was announced. On the banking sector reserves front, meanwhile, there isn’t really enough monetary data for the period since QE began to judge.

But, as Lewis also points out, QE may be having another, perhaps less expected, but nonetheless still very welcome effect - on equities. As he explains (our emphasis):
Possibly, the chief impact of QE will come through the equity market. If ‘other financial institutions’ see their bank deposits increasing, they may be inclined to commit some of these funds to equity investment.

Since QE was initiated, the UK equity market has enjoyed a sharp rally. The Federal Reserve’s purchases of Treasuries may be having a similar effect on US equities. If equity prices are rising, and equity finance is becoming cheaper for companies, this would be a welcome result for UK policymakers. The MPC’s question regarding what happens to capital market values when QE ceases might still be pertinent. However, it might properly relate to equity prices rather than to gilt yields.

Related links:
BoE expands QE - FT Alphaville
The return of the yield? - FT Alphaville
US Treasuries, not treasured by Fed, or Gross - FT Alphaville

This entry was posted by Izabella Kaminska on Thursday, May 7th, 2009 at 13:00 and is filed under Capital markets. Tagged with boe, Equities, Fed, gilts, quantitative easing, Yields."

Me:

Don the libertarian Democrat May 7 15:38

From Brendan Brown in the FT:

http://blogs.ft.com/economistsforum/2008/11/the-case-for-negative-interest-rates-now/#more-259

"The central bank and government, by devising a system in which such negativity can express itself, can give a big fillip to the recovery process.

The most direct channel for this fillip most likely passes through the equity market.

Pervasive negative risk-free rates across the advanced economies would underpin equity market levels.

Investors faced with certain substantial nominal loss on risk-free holdings would bid up the price of equity which could offer rich risk premiums even at a presently feebly level of prospective earnings.

And it is equity market developments which hold the key to the economic recovery."

And Martin Wolf's reply:

"Martin Wolf: This is ingenious and would, no doubt, permit negative real interest rates. But I would prefer it if vigorous action were taken by the monetary authorities to sustain inflation, before deflation set it, in which case we would never need negative nominal interest rates in order to obtain negative real rates.

If it is already too late for this, I agree that this scheme would make it possible for the authorities to impose negative real short rates. Another justification for negative real rates is that it would reduce the danger of debt deflation - the rising real level of debt as the price level falls. It would be wildly unpopular, of course, among politically powerful savers. It would have to be pointed out that this loss is offset by the rising real value of nominal claims.

But would it work in the way Brendan suggests? I am not sure. Equity markets might rise a little. But I very much doubt whether companies would start to issue equity in order to invest in a substantial way, in the midst of a deep recession. The underlying logic is Hayekian. I have never been convinced of this theory of the credit cycle.

So is there an alternative? Yes. The central bank can lend directly to the government, which can spend on investment and public consumption or make transfers to consumers to spend. If real interest rates were negative, this would be even cheaper for the government. That would certainly add to the effectiveness of such a policy, in any case."

From my perspective, Brown is correct, as Negative Interest Rates would be a disincentive to buy bonds, and an incentive to buy stocks for the longer term. QE that leads to very low interests rates now and higher interest rates in the future, as is happening now, should have the same effect. Why? You should invest in stocks when bond yields are low, and switch when bond yields are high. There are good reasons for the current rise in stock prices, although I have no idea if it is too much and too fast.