TALK FROM THE TRENCHES: DEJA VU ALL OVER AGAIN IN US TSYS
12:43 EDT 07/13
marketnews.com
By Isobel Kennedy
NEW YORK (MktNews) - Is it deja vu all over again? U.S. Treasuries are rallying again Tuesday on flight to quality buying. Renewed concerns about defaults, rating downgrades and political upheaval in Latin America caused the two-year note and the bond to rally to 5.51% and 5.91%, respectively, which are six-week lows.
Adding fuel to the fire is speculation that Argentina's debt swap program may be in trouble. Last week, Argentina's government said it would swap $500 Mln to $1.5 Bln of local bonds (Bocons) for new debt maturing in 2003. The bond swap was to begin tomorrow. But there is talk the swap is now in question and a meeting is planned for later this evening between government officials and local bankers to see what can be done.
Analysts are also talking about Brazil hopes to raise $15.5 billion this year through privatization sales. But Monday, Brazil announced it might cancel some major privatizations sales because of lack of investor interest. Official forecasts now have revenues from the sales as low as $7.3 Bln.
But sources point out that any fallout from Latam turmoil is likely to have less affect in the U.S this go around. U.S. money managers and hedge funds have reduced their exposure to emerging market credits since the Russian devaluation last August.
Note this fact: The peak in U.S. bank exposure to foreign investing was in September 1998 at $768.4 billion. This number was down to $710.1 billion as of February 1999. Biggest drop was -$33 Bln in Latin America, followed by -$18 Bln in Asia, mostly due to drop with Japan.
None the less, at the lows Tuesday morning, Brazilian stocks were off about 3% on spillover from Argentina. Brazilian "C" bonds also seem to indicate there are problems. Earlier Tuesday they traded at 16.30%, breaking out of their recent range of 15-16% and to their highest yield since March 17.
Japan's current foreign exchange policy of maintaining the value of the yen against the dollar around current levels will stay in place for a few more months until there are firmer signs of economic recovery, a ranking Japanese government official told Market News. "Once we can observe a more steady recovery in the coming months, there's little case to stick to that type of thinking (keeping the yen at current levels)," he said. Meantime, Japan's strong Q1 GDP will almost certainly be revised downwards, but it is unlikely there will be any change in the large jump in consumption that was recorded. He also said work is now underway for a further additional supplementary budget, probably for release in September. Direct tax breaks are "one option" he said, adding, however, there will be no change to the 5% consumption tax.
Meantime, reported comments by Peoples Bank of China Governor Dai Xianglong that the exchange rate of the renminbi is determined by the market brought a possible yuan devaluation back to the forefront.
And U.S. credit rating agency Duff and Phelps, in a research report Tuesday, forecasted a devaluation of China's yuan within six months.
At any rate, many market players are shrugging off this Latam flight to quality. They are saying the source of strength is "grasping at the last straw." The rally will be short lived due to the lack of retail support, they say, and the fact that professionals will look to book profits ahead of this week's PPI, CPI and retail sales. One seasoned salesman says, "hit the bid, make a friend, and get a check".
Or as one strategist says, "The current market rally may be a bear trap. Do not be misled. The global healing process is well underway...global contagion was arrested long ago and they threw away the key." --Kim Rellahan, Matthew Saltmarsh, Rob Ramos and Joe Plocek contributed to this article. |
