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Friday, September 21, 2007

The Bond Vigilantes Are Back

No post yesterday, but I’m back today.

The euphoria of the rate cuts is slowly receding and traders are beginning to take a good hard look. The US dollar has therefore accelerated its decline. Gold continues to squeeze quietly higher and crude oil is stubbornly sticking to record highs. These developments are not at all unexpected… and the really fun stuff is only just getting started: INTEREST RATES ARE QUIETLY SNEAKING HIGHER.

The Fed cuts rates, and rates on the long end of the yield curve starts moving up. The Bond Vigilantes are back! (It is truly a pity they ever left.) On Tuesday, the day of the 50 point cut, 1- year rates actually climbed! Yesterday things accelerated with rates moving higher across the curve. The Bear Steepener is back.

European Manufacturing, Services Growth Slows (Update3): “Europe's manufacturing and service industries grew at the slowest pace in two years this month after a sudden increase in credit costs hurt banks, adding to evidence that economic growth is waning.

Royal Bank of Scotland Group Plc said today a preliminary estimate of its composite index fell to 54.5 in September from 57.4 in August. That's the lowest since September 2005 and below the 56.9 median of 15 forecasts in a Bloomberg News survey. A reading above 50 indicates growth.”

Not entirely unexpected considering the recent financial market turmoil. Factor in a flying Euro now that the Fed has sabotaged the US dollar and its hard to imagine Europe competing all that well with imports from the dollar pegged Yuan or the always weak Yen.

Merkel Backs Independent ECB; Sarkozy Seeks Rate Cut (Update2): “German Chancellor Angela Merkel said Germany would resist any attempts to influence the European Central Bank as French President Nicolas Sarkozy pressed for lower interest rates.

“We will resist any attempt to challenge the central bank's independence,” Merkel said at an event in Frankfurt last night to mark the German Bundesbank's 50th anniversary. The “slightest suspicion” that Europe is in two minds about the ECB's freedom from political interference “would threaten the euro's stability,” Merkel said.”

Let the war of words begin. One central bank for many many very DIFFERENT countries with unique economic needs will result in a mixed bag of winners and losers. But which is which?

BOE's King Blames U.K. Law for Foiling Bank Rescue (Update6): “”We're hemmed in by four pieces of legislation,'' King told a parliamentary committee in London today. “The interaction between different pieces of unconnected legislation made it almost impossible for us to act as a lender of last resort in the way that I would prefer.”

Northern Rock, whose roots date to 1850, is the U.K.'s third-biggest mortgage lender, with loans worth 17.4 billion pounds ($35 billion) as of June 30. Its shares fell 28 percent 185 pence today after the Treasury limited a guarantee it made to back deposits. The stock has fallen 85 percent since February.”

Flip flop. First a BLANKET guarantee. Then a few conditions and limits… That does not inspire confidence. I personally would have closed all my accounts long ago as this is not a risk worth taking.

“King said U.K. company takeover rules make it impossible for regulators to organize the quick sale of a failing bank. He said an EU banking law implemented in 2005 prevented covert lending to support Northern Rock, requiring authorities to announce when a loan has been made.”

Shell, Saudis to Spend $7 Billion on Texas Refinery (Update5): “Royal Dutch Shell Plc and Saudi Arabia will spend $7 billion to more than double the size of their Texas oil refinery, the biggest U.S. expansion in fuel production in three decades.

The joint venture, Motiva Enterprises LLC, will boost capacity at the Port Arthur oil refinery by 325,000 barrels a day, making it the largest in the U.S., by 2010. The facility will process 600,000 barrels a day of crude oil, Motiva said today in a statement. In April last year, the cost was estimated at more than $3 billion.”

Classic. The ‘too little too late’ approach. But hey, at least now they are finally undergoing the “biggest expansion in fuel production in three decades”. It should come online in 2010 AFTER high oil prices have chocked off economic growth… Brilliant. Just brilliant.

Fortis to Raise EU13.4 Billion to Fund ABN Purchase (Update3): “Fortis, part of a group seeking to buy ABN Amro Holding NV in the biggest banking takeover, plans to sell 13.4 billion euros ($18.8 billion) of stock to existing shareholders to help fund the acquisition.

Fortis will sell the shares for 15 euros apiece, the bank said in a statement today, or 44 percent less than yesterday's closing price of 26.63 euros in Brussels. The sale, Europe's second-largest rights offer behind France Telecom SA's 15 billion-euro offering in 2003, will begin Sept. 25.”

WOW. 44%. I guess the ‘irrational exuberance’ that fueled these deals is long gone. But it does look like this will be the preferred route of clearing these large deals that are already in the pipeline.