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Thursday, 5 February 2009

Goldman Sachs bullish on ‘currency of last resort’ gold

Don’t get Goldman Sachs wrong, the bank still believes gold is overvalued, however, in the near term, its commodities research team is raising its gold forecast:

We believe that these elements of financial and sovereign risk will likely remain a feature of the market over the near term, after which the gold price will likely trade back closer to the fair value currency basket. As a result, we are raising our 3-month ahead gold price forecast to $1000/toz from $700/toz, our 6-month forecast to $950/toz from $785/toz, and our 12- month forecast to $825/toz from $795/toz. Clearly, if financial risks as measured by the CDS spreads remain high, gold prices could remain higher for longer, presenting upside risk to our forecasts.

How Wall Street scammed the Chinese banks

When Washington passed out hundreds of billions in bail-out funds in September 2008, it said it could worry about the cause of the meltdown later. This allowed lack of trust in the US financial system to fester.

More recently, the Obama administration turned up the rhetoric against China by saying it believed the country was “manipulating” its currency. The president also wants to see a Chinese stimulus package.

The US needs China to hold the US Treasury and agency debt it owns and, more importantly, to keep buying new US debt. So if Washington wants to ease tensions and keep its borrowing options open, it should look to Wall Street.

S&P calls for Brics break-up

Brazil, Russia, India and China – the world’s biggest emerging market economies – should not be grouped together as an asset class, Standard & Poor’s said on Wednesday.

The so-called Brics, created as an acronym by Goldman Sachs in 2001, should be not classed together because their outlooks have diverged since the financial crisis blew up in August 2007, the ratings agency said.

The outlooks of the four countries appear so disparate that it raises questions over “whether the Bric countries ever shared much in common other than scale and high portfolio inflows.”

Russian rouble

Let battle commence. The Russian central bank’s attempt to draw a line in the sand in the rouble’s step-by-step devaluation merely provided a new level for speculators to target. Russia’s currency on Wednesday came within kopecks of breaching the floor of 41 against a dollar/euro basket the bank set on January 22.

The bank indicated it would defend this level unless oil prices fell to $30 a barrel. With Urals blend still about $43, the rouble’s value looks in the right ballpark. The trouble is that currencies tend to overshoot as they decline. The non-deliverable forward market is pricing the rouble 18 per cent lower against the dollar in 12 months. And the bank cannot afford indefinitely to keep burning through its remaining $386bn foreign exchange reserves, which have been falling by $10bn a week since August. Fitch on Wednesday downgraded Russia’s credit rating to two notches above junk, in line with December’s move by Standard & Poor’s, highlighting the pressure on reserves.

Moscow abandons bail-outs for bank aid 2

Moscow abandons bail-outs for bank aid

Russia signalled a change in its policies to fight the financial crisis on Wednesday, indicating that it would switch from bailing out individual companies to supporting the economy through the banking sector.

Moscow also plans huge budget cuts in an attempt to limit its fiscal deficit – rejecting pressure to follow the US and other western countries to try to stimulate the economy with a big boost in public borrowing.

The proposals suggest that Moscow is losing hope it can stave off the crisis with public spending and is instead battening down the hatches for what might be a prolonged recession.

Few takers forecast for offers of sukuk

Even as recession tightens its grip on the world, some optimists remain. For example, Dubai’s Emaar, a developer in need of fresh financing, has said it is looking to raise $2bn in Islamic bonds, or sukuk, in 2009.

Many other companies and quasi-government entities in the Middle East and elsewhere are said to be looking at issuance. Globally, Zawya, a data provider, has registered more than 100 announced sukuk offers for this year, though some are firmer than others. But will aspiring issuers find takers?

“It is unlikely that we will see many of these sukuk materialise during this year due to the global financial turmoil and current investor appetite, coupled with low liquidity,” says Rami Falah, head of Islamic finance at BNP Paribas in Bahrain.

UAE has weapons to ease liquidity

Liquidity in the United Arab Emirates is tight and this is putting the economy under pressure. Ensuring that liquidity conditions improve should be a policy priority – and the sooner it happens, the better.

Throughout last year markets anticipated a revaluation of Gulf Co-operation Council currencies. As a result, the region received strong capital inflows, but these were largely speculative and short-term in nature. This created a problem since the bulk of these short-term deposits ended up being loaned out longer-term. The flows had a very pro-cyclical impact on the Gulf and added to the economic boom.

Now, however, the inflows have been reversed, which has led to a tightening in liquidity, just as economic growth has begun to slow.