Friday, 14 September 2012

New rules add to basis-risk fears

By Michelle Price
Regulatory rules will force buyside firms to make a trade-off between the cost of continuing to buy hedges in the over-the-counter markets and the additional risk incurred by using imperfect hedges in the listed futures market, analysts and buyside firms have warned.
Speaking at an industry conference hosted by Worldwide Business Research, Will Rhode, principal, director of fixed income research at Tabb Group, said: "Regulation is making its presence felt. The industry response will be product innovation, but this raises the issue of basis risk."
Basis risk measures the possibility that hedges do not always move in an equal and opposite direction to the underlying asset. When a variance occurs in how the prices move, the underlying risk may no longer be offset and a bank or buyside firm's books can be exposed to potential losses.
Buyside firms and pension funds require highly customised OTC contracts to hedge their investments and liabilities. Although proxy-hedges can be found in the cheaper, listed derivatives markets, the standardised nature of these instruments means that they are unlikely to fully cover the underlying exposure, potentially increasing basis risk.
New rules outlined under Dodd-Frank in the US, the European Market Infrastructure Regulation, and additional capital rules, however, are set to dramatically increase the cost of trading OTC derivatives by requiring buyside firms to post liquid collateral against all OTC transactions.
Terence Nahar, investment director, investment solutions team, Scottish Widows Investment Partnership, said that firms will be forced to make a trade-off between the cost of continuing to buy hedges in the OTC markets, and the additional basis risk incurred by using imperfect hedges in the listed futures market.
He said: "Clearly, the futures market at the moment doesn't offer the product range that these types of [pension fund] institutions need to hedge out their liabilities. A lot of the exposures that these funds have go way beyond the 10-year point, they can go out to 50 or 60 years. There is a need for instruments that go that far out on the curve and those products aren't available on exchange, so a lot of basis risk is introduced if institutions were to go down the exchange-traded route to hedge those liabilities. Whether they do will depend on the trade-off of the costs savings versus the basis risk."
Juan Landazabal, head of trading, fixed income, Fidelity Worldwide Investment, said: "There will be some innovation and some swap instruments may end up looking more like futures than swaps, but it will boil down to what you are trying to achieve and the costs of that. As a fund manager we don't have too much in the way of pension-type liabilities, but if you are trying to match that specific type of liability there might not be the depth in the futures market and hence it may still be preferable to use the swap market, despite the additional costs."
Susan Hudson, chief administrative officer, UBS Global Asset Management, said: "The instruments used to offset risk could potentially be too costly [in future]. There are a lot of costs in the overall workflow that aren't well understood yet, and until we get into live situation we're not going to fully understand all the implications for the front office."
Rhode said: "Ultimately, the buyside will go to its service provider who will offer a menu of choices, and some of those choices will require margin costs but match the risk completely, and others will be cheaper but incur a degree of basis risk that the service provider will calculate. It will come down to product selection."

Fed to launch QE3 by buying mortgage securities $40 billion of new securities to be bought each month

By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) — The Federal Reserve, worried that improvement in the unemployment rate has stalled, announced a third round of bond purchases on Thursday in an effort to bring down long-term interest rates and spur economic growth.
The Fed said it would buy mortgage-backed securities at a pace of $40 billion per month.
THE FED
Reuters


The Federal Open Market Committee, which ended a two-day meeting on Thursday, said it was concerned that, without the action, “economic growth might not be strong enough to generate sustained improvement in labor-market conditions.”Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and preferred to omit the description of the time period over which exceptionally low levels for the federal funds rate are likely to be warranted.”
“A weak job market should concern every American,” Fed Chairman Ben Bernanke said at his press conference.
In addition to bond purchases, the Fed said it intends to keep the benchmark short-term interest rate, known as the federal funds rate, at nearly zero until mid-2015. The prior guidance on the first rate increase had been late 2014. The guidance now extends well beyond end of Bernanke’s term in early 2014, although he could be appointed to another term by whoever is president. The central bank has kept the federal funds rate at nearly zero since December 2008.
The Fed said it would keep low rates in place for a “considerable time,” even after the economic recovery strengthens.
“Even after the economy starts to recover more quickly, even after the unemployment rate begins to move down more sizably, we are not going to rush to tighten policy. We are going to give it time to make sure the recovery is well established,” Bernanke commented.
“The Fed is being aggressive,” said Avery Shenfeld, chief economist for CIBC in Toronto. “They are taking action because every quarter that goes by, they haven’t gotten the growth that they forecast will one day come.”
U.S. stocks DJIA +1.55%  spiked after the Fed statement was released. The U.S. dollar turned up and 10-year Treasury prices turned down. 

Reuters
Federal Reserve Chairman Ben Bernanke
The committee’s vote was 11 to 1. Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissented, as he has at every meeting this year. The Fed took the aggressive action out of a growing concern for the economic outlook, especially the anemic labor market.
A key element of the Fed’s statement was that the central bank will keep buying until more jobs are created, possibly at a faster rate.
“If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the FOMC said.
Bernanke added that the Fed’s asset purchases would not last until the labor market was back to full employment: “We’re just trying to get the economy to move in the right direction, make sure that we don’t stagnate at high levels of unemployment.”
“They are saying that they will not pause until their work is done,” CIBC’s Shenfeld said.
Despite holding interest rates at zero for more than three and a half years, and the central bank buying $2.3 trillion in assets, the unemployment rate has been stuck above 8% since early 2009. There are 12.5 million unemployed workers.
Economists and even Fed officials disagree on whether further asset purchases will have any lasting effect on the economy. 
Shenfeld of CIBC compared the Fed move to a placebo. “They are saying, ‘Take these two bond-buying programs and you will feel better in the morning,’ ” he said. “The reality is that the weapons they have are not particularly powerful, but they might as well be used.”
Fed hawks are worried that core consumer-price inflation is running at a 2.1% rate over the past 12 months despite the weak economy. In response, Bernanke said the Fed was ready to combat any inflation outbreak. “The Fed has both the tools and the will to act at the appropriate time to avoid any emerging threat to price stability,” he remarked.
He addressed the continued concern that savers are being hurt by the Fed’s drive to push down rates. Bernanke noted the Fed was aware that savers were hurt by the low rates, but said everyone would ultimately benefit if the economy picked up steam as a result of the purchases.
The Fed chairman also said the “broad center” of the Fed supported the move to QE3, and that he was not concerned with opposition to the program from inside or outside the Fed.
“Some people think it is more effective than others. There is going to be disagreement. I do think it has enough force to help nudge the economy in the right direction,” he added.
Economists expect sluggish growth for the last six months of the year. The European sovereign-debt and banking crises are holding the economy back.
There is also mounting concern over a stalemate over U.S. fiscal policy. Deep spending cuts and higher taxes will take effect Jan. 1 unless the Republican and Democrats in Congress agree to change current law.
 

Household incomes sink to '95 level

The income of the typical U.S. family has fallen to levels last seen in 1995. (Photo: Reuters)
St. Louis Fed President James Bullard said in an interview with MarketWatch late last month that the end dates of the first two rounds of asset purchases damaged their effectiveness.
Republicans have been opposed to the Fed’s asset purchases as government intervention in the economy. On Wednesday, vice presidential candidate Paul Ryan said he thought they would do “more harm than good.”
President Barack Obama generally has not commented on Fed policy.
Bernanke said that prior rounds of quantitative easing had worked and could continue to be effective. “Overall … a balanced reading of the evidence supports the conclusion that central-bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.” The costs of the program also “appeared manageable.”
The first two rounds of asset purchases may have increased private payroll employment by more than 2 million jobs, according to the Fed chief.
Since the recession ended in June 2010, the economy has added a total of 2.8 million private sector and government jobs.
In its statement, the FOMC said that the economy is growing at a moderate pace. Business spending appeared to have slowed. Housing was showing further signs of improvement but from a depressed level.
The FOMC said that inflation “has been subdued,” even though some key commodities have increased recently.
The Fed said that strains in global financial markets continue to pose significant downside risks to the outlook.
The central bank will continue its Operation Twist plan to replace short-term securities on its balance sheet with long-term bonds. It will also maintain its existing policy of reinvesting principal payments in MBS.
The actions will together increase the Fed’s holding of longer-term securities by about $85 billion each month through the end of the year, the Fed added.
The purchases “should put downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative,” the Fed said.
The next decision will come in December when it must decide whether to continue the purchases at the $40 billion per-month pace or ramp them up as the Twist program ends.
Asked to define what the specific conditions would be that would cause the Fed to stop, Bernanke replied: “Ongoing, sustained improvement in the labor market.”
“It is not a specific number we have in mind. But, you see the last six months? That isn’t it,” he said.
 

From Marketwatch and it was collected by Greg Robb is a senior reporter for MarketWatch in Washington.

Wednesday, 5 September 2012

Clinton defends Obama in forceful speech Democratic convention speakers rip Romney; Clinton rocks house

HARLOTTE, N.C. (MarketWatch) — Bill Clinton laid out a vision of shared prosperity and responsibility in the prime-time slot at the Democratic National Convention on Wednesday night, drawing a sharp contrast between President Obama and Republican challenger Mitt Romney.
Clinton took the podium and delivered a rousing endorsement of Obama that also harked back to the era of growth Clinton presided over during his eight years in the White House. 

Reuters
Former President Bill Clinton addresses delegates during the second session of the Democratic National Convention in Charlotte, North Carolina, September 5, 2012.
“If you want a winner-take-all, you’re-on-your-own society, you should support the Republican ticket,” Clinton told a cheering crowd at the Time Warner Cable Arena.
“If you want a future of shared prosperity, where the middle class is growing and poverty is declining...you should vote for Barack Obama.” 
At the end of the speech, Obama went on stage to congratulate a man with whom he’s had a rocky relationship.
Clinton and others on Wednesday used a double-barreled election-season strategy of burnishing Obama’s agenda and tearing down Romney’s. At the heart of the Democrats’ appeals were what they call investments in education, infrastructure and health care — which Republicans rip as budget-busting Washington spending.
DEMOCRATIC 2012 convention
Elizabeth Warren, a consumer advocate locked in a tight Senate race in Massachusetts, gave a stinging indictment of Romney with a populist speech before Clinton’s. 
“Mitt Romney wants to give billions in breaks to big corporations — but he and Paul Ryan would pulverize financial reform, voucher-ize Medicare and vaporize Obamacare,” Warren said. 
Democrats were hoping that the popular Clinton will give Obama a boost in what is an ultra-tight race with Romney. But there were some risks associated with bringing up Clinton’s record as Obama seeks a second term.
U.S. gross domestic product averaged 3.7% in the eight years that Clinton was president. For Obama’s presidency, it has averaged 2%, according to Haver Analytics-compiled data. Neither GDP figure includes each president’s first, partial quarter in office.
Obama has consistently argued that he inherited a deeply wounded economy but that the country has made progress under his leadership. Clinton echoed that theme as he spoke in the nationally televised address.
“Are we better off than we were when [Obama] took office, with an economy in free fall, losing 750,000 jobs a month? The answer is yes,” Clinton said.
Romney’s campaign has used Clinton’s record to bash Obama, most recently on Wednesday afternoon.
“When it comes to the state of the economy, President Obama just can’t match President Clinton,” Romney spokeswoman Amanda Henneberg said.

Thursday, 30 August 2012

How to trade the Fed: buy the dollar if no QE3





How to trade the Fed: buy the dollar if no

QE3
With Federal Reserve Chairman Ben Bernanke’s speech on Friday in Jackson Hole clearly taking the spotlight this week, here’s one opinion on how to trade the dollar going to into the speech, expected at 10 a.m. Eastern time Friday.
“With Jackson Hole, the scope of the Fed to announce any major quantitative easing program is pretty much off the radar now,” said Christopher Vecchio, a currency analyst at DailyFX.  “If they’re going to announce anything, it’s probably going to be related to the housing sector.
“If we see Bernanke on the sidelines, we could see some bullish dollar dxyaction.”
“At the end of major Fed meetings when there was hope for QE, the dollar gained. We think it will be a similar situation here, so we’re looking for the dollar to outperform the euro  and Japanese yen .

Half of Americans die with almost no money

SAN FRANCISCO (MarketWatch)—Almost half of U.S. retirees die with savings of $10,000 or less, but that grim finding doesn’t fully describe the variability and uncertainty that characterize retirement in America, according to a recent study.
While some retirees struggle profoundly, living at or below the poverty line, others enjoy wealth and health—in fact, the two are strongly linked—while still others have little in savings but enjoy a decent income, according to the report, based on a survey that tracked retirees from 1993 through 2008.


While 46% of retirees have just $10,000 in savings when they die, “That doesn’t mean their standard of living is very low—they might have a relatively generous pension plan, most of them will have Social Security,” said James Poterba, professor of economics at M.I.T., president of the National Bureau of Economic Research, and a co-author of the study.
But the findings “suggest something about the financial resiliency of these households,” Poterba added. “They may not have much capacity to absorb a shock, such as an out-of-pocket medical expenditure. They don’t have very much in the way of liquid assets they can access.” 
When net worth is measured—including savings, home equity, the value of Social Security and pension benefits, and more—retirees’ financial picture around the time of death looks less bleak. Single people had average assets of about $142,000, those whose spouse had died previously had average assets of $253,000, and couples where the surveyed retiree had died but the other spouse was still living had average assets of $692,000, according to the study.
“You can’t generalize that the elderly are not doing very well financially or that the elderly are doing fine. There is a lot of variation within the group,” Poterba said. “There is a clear group of households that have relatively low income and also have low financial assets. At the other end is a group that has financial assets that are more than sufficient to accommodate any shocks.”
Policy makers and financial advisers, take note. “One-size-fits-all solutions are unlikely to really capture the flavor of what’s here,” Poterba said.

Incomes in flux

Another worrisome finding: The degree to which some retirees face a steep drop in income. While single people and married couples saw their retirement income remain fairly steady, on average, that was not the case for retirees whose spouse had died.
Their income dropped almost 75% between 1993 and the last year of being surveyed. The study doesn’t explain why that happens, though Poterba hazarded a guess that it might be related to a drop in pension benefits when the first spouse dies.

Get married

If you want the best retirement outcome possible, get rich. If that fails, consider getting married, staying married—and doing your best to die before your spouse does. That last is not entirely serious, but the general take-away is that being married pays off in retirement.
For example, remember that 46% of retirees who have just $10,000 in savings when they die? That jumps to 57% for people who are single throughout the course of the survey.
Married couples are likelier to have home equity, too. Overall, in the last year before death, 57% of single-person households and 50% of surviving spouses had no housing wealth when they died. But retirees who died before their spouse did? Just 20% lacked home equity, the study said.
“The group who does the best in terms of average level of financial assets are those who are married when we first see them, remain married when the first person dies, and we’re looking at the first spouse to die. They tend to have higher income levels,” Poterba said. “Single individuals on average have lower levels of retirement income as well as lower financial assets.”
But perhaps the study’s most striking finding was a “strong and consistent” relationship between wealth and survival. If you’re rich, you’re much likelier to live longer.
“The relationship between wealth when first observed and subsequent mortality is striking,” the study said.

FUTURE OF OIL

Oil


3:15 a.m. Today - By Barbara Kollmeyer
Crude oil prices are up around 8% for the month of August so far.
1:47 a.m. Today - By Virginia Harrison
Oil futures extend losses, matching falls across commodity and equity markets on the eve of a highly-awaited meeting of central bankers. Oil for October delivery  dropped 56 cents, or 0.6%, to $95.49 during Asian trading hours.
12:01 a.m. Today - MarketWatch.com
It would seem to be a logical conclusion to me that, d rill baby drill, favors the oil drillers and oil service companies. I am already seeing oil drillers and oil service companies make significant moves up the ladder of my stock ranking system.
11:57 p.m. Aug. 29, 2012 - MarketWatch
SAO PAULO--Petroleo Brasileiro (PBR, PETR4.BR), Brazil's state-controlled oil company, said Wednesday that July crude oil and natural gas output slipped 1.12% from the previous month due in part to planned stoppages for maintenance. Total crude oil and natural gas production was 2.554 million barrels of oil equivalent, or BOE, in July, compared with 2.583 million BOE a day in June.
Petrobras July oil, gas output falls vs June
7:00 p.m. Aug. 29, 2012 - MarketWatch
SAO PAULO--Petroleo Brasileiro (PBR, PETR4.BR), Brazil's state-controlled oil company, said Wednesday that July crude oil and natural gas output slipped 1.12% from the previous month due in part to planned stoppages for maintenance. Total crude oil and natural gas production was 2.554 million barrels of oil equivalent, or BOE, in July, compared with 2.583 million BOE a day in June.
Valero helps lead a broad oil-sector retreat
6:27 p.m. Aug. 29, 2012 - By Myra P. Saefong
Among oil producers with facilities in the Gulf, shares of Chevron Corp.  fell 0.5%, Exxon Mobil Corp.  lost 0.2% and Royal Dutch Shell fell 0.6 Taking a look at the broader energy market, the NYSE Arca Oil Index slipped by 0.5% at 1,231 points and the Philadelphia Oil Service Sector Index  lost 1% at 223 points.
Petrobras: Presalt oil discovery rate nearly 80%
5:20 p.m. Aug. 29, 2012 - MarketWatch
Petrobras is currently experiencing problems with operational efficiency at its Campos Basin oil fields, Mr. Molinari said. The Campos fields, which include the major Espardarte and Marlim fields, are at present producing a total of 430,000 barrels per day of oil.
Stocks rise; Fed sees gradual expansion
5:08 p.m. Aug. 29, 2012 - By Kate Gibson
Crude moves Oil prices fell as Hurricane Isaac did not do any significant damage to production in the Gulf Coast and data showed that inventories unexpectedly climbed last week.
5:03 p.m. Aug. 29, 2012 - By Carla Mozee
Brazilian stocks fall Wednesday, led by a drop in shares of OGX Petroleo e Gas after the oil driller announces a change in its executive lineup. Brazilian stocks fall Wednesday, led by a drop in shares of OGX Petroleo e Gas after the oil driller announces a change in its executive lineup.
As Isaac’s strength ebbs, rescue efforts rise
4:44 p.m. Aug. 29, 2012 - By Taylor Thomas
Shutting-in is a procedure which halts production to prevent oil spills during severe weather. The BSEE also said that 505 out of 596 manned oil platforms in the Gulf had been evacuated due to Isaac, in addition to 50 out of 76 oil rigs.
Oil ends lower on surprise supply increase
3:39 p.m. Aug. 29, 2012 - By Claudia Assis
Oil has ended lower for four out of the past five sessions. In its latest report Wednesday, the Bureau of Safety and Environmental Enforcement estimated that nearly 95% of daily oil production and almost 72% of natural gas output in the Gulf has been shut in, or undergone a procedure that closes underwater-pipeline valves to prevent oil spills during severe weather.
U.S. ups estimates on Gulf oil, natgas shut-ins
3:08 p.m. Aug. 29, 2012 - By Taylor Thomas
Shutting-in is a procedure which closes underwater pipeline valves in order to prevent oil spills during severe weather. The BSEE also said that 505 out of 596 manned oil platforms in the Gulf had been evacuated due to Isaac, in addition to 50 out of 76 oil rigs.
Oil ends lower on inventories rise
2:48 p.m. Aug. 29, 2012 - By Claudia Assis
Gasoline and heating oil also ended lower, with natural gas bucking the trend to end higher ahead of its own inventories report due Thursday.
Oil futures end 0.9% lower at $95.49 a barrel
2:34 p.m. Aug. 29, 2012
Oil futures end 0.9% lower at $95.49 a barrel
Oil driller OGX replaces exploration director
12:53 p.m. Aug. 29, 2012 - MarketWatch
SAO PAULO--Private Brazilian oil driller OGX Petroleo e Gas Participacoes SA (OGXP3.BR, OGXPY) said Wednesday it has promoted Paulo de Tarso Martins Guimaraes to the position of director for exploration.. SAO PAULO--Private Brazilian oil driller OGX Petroleo e Gas Participacoes SA (OGXP3.BR, OGXPY) said Wednesday it has promoted Paulo de Tarso Martins Guimaraes to the position of director for exploration.

Bullishness rising faster than gold

Bullishness rising faster than gold

"Commentary: Contrarians in recent days have become cautious"

By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) — Gold, finally, is taking off!
That’s undeniably good news for beleaguered gold bugs, who have been patiently waiting for months now for bullion to mount a rally that lasts more than a couple of days and adds more than a few bucks to gold’s price.