Market Update

Another busy day in the markets today.

FedEx is down 3% pre-market as it missed expectations and provided downside guidance. The bellwether also reported that it will be laying off 1,700 workers as it consolidates its trucking operations to cut costs.

Realty Trac announced that there were 95,364 foreclosures in August, which is a +3% increase from July, and a 25% increase from August 2009. This is the 9th month in a row that foreclosures have increased on an annual basis. 2.3M homes have been repossesed since the recession began in December 2007. Another 1M homes are expected to be foreclosed on this year. The top 10 states with the highest foreclosure rates in August were: NV, FL, AZ, CA, ID, UT, GA, MI, IL, HW.

On to the much more interesting developments in the Forex markets...

Yesterday, Japanese PM Naoto Kan intervened in the currency market to stop the Yen from appreciating against the dollar. In an ironic twist, Kan ran for re-election on the basis that he would not intervene in the currency market. Once elected, the Yen started to run higher, and he was forced to intervene (on his FIRST DAY back in office! So much for those campaign promises!)

Then the NY Fed purchased a single day record $3.9B of 2014-2015 range bonds in the open market yesterday morning. Blogger Tyler Durden of Zero Hedge fame speculated that these may have even been 5 Year bonds that were only auctioned a month or so earlier, implying that the Fed's promise to never monetize our debt has been broken.

Following these two episodes, the US decides to file WTO complaints against China yesterday afternoon. The first one relating to payment processing companies (Visa/Mastercard/etc), and the other regarding steel duties. (Interesting timing here as AK Steel (AKS) yesterday reversed their guidance for 3Q from a $15 per ton operating profit to a loss of approx $20 per ton. While much is this is due to an 11day maintenance outage, the Ohio steelmaker noted higher raw material and ops costs. Perhaps related to China...?)

The WTO filings followed Congressional demands that China accelerate their Yuan reform. Geithner will testify today on China's trade and currency, and is expected to say that the U.S. isn't satisfied with the pace of yuan gains. The Yuan was pegged at 6.83 since July 08, until China dropped the peg in June of this year to much fanfare here in the US. Not surprisingly however, Geithner has now said publicly that 'Heavy intervention' has kept the Yuan undervalued. The Yen has moved a mere 1% since the June announcement, and the growing trade deficit that China has with the US suggests the need for futher action (as do currency interventions in Japan and Singapore, and distrust/frustration from smaller Asian nations who are being boxed out by China as they compete for exports.) The China/US deficit was $119B in 1H10. The total deficit in 2009, was $227B, so we are well on pace to surpass last year's figure.

Paul Krugman has said that China's currency policy has been to blame for the Yen's rise to a 15-year high against the dollar this week. His op-ed in the NY Times this past weekend also was shocking in its suggestion that the U.S. impose trade restrictions on China even if this results in their selling some of the $843.7B of U.S. Treasuries they held as of June 2010. One would think that Krugman would undertand the ramifications of the Smoot-Hawley protectionism of the 1930s and its role in worsening the Great Depression (and helping create the geopolitical atmosphere that led to WWII), but I suppose he does not.

The co-sponser of legislation letting companies seek duties on Chinese imports, OHIO Democrat (see mention of AK Steel above...Also, note that its long been said that if a CEO doesn't know his Senators on a first name basis, then he's not looking out for shareholders...) Tim Ryan said in testimony to the House Ways and Means Committee, "It's now time for our country to have the guts to stand up and take a strong stand against China's currency manipulation."

Prior to the U.S. hearings, China fixed the yuan's reference rate at a record high which allowed the Yuan to rise to its highest level since 1993 yesterday.

The Japanese are also still holding a Chinese boat that collided with two Japanese coast guard ships in disupted seas last week.

The weakened dollar has made for a stronger EUR/USD at 1.3060 this morning, which should actually hamper Europe's growth in 3Q if these conditions prove sustainable.

Meanwhile gold continues its record run with the shiny metal at $1,272 an ounce, or +5.80. This should not be surprising to anyone, for while I do not consider gold to be a proper 'investment' as one cannot accurately determine 'fair value' based on any earnings stream, people do tend to want to own the physical when the world's leading economies are in a race to devalue their currencies.