Roll losses swallow up commodity inflows
Total assets under management in commodity-tracking indices and exchange-traded products (ETPs) have stalled over the last nine months, as roll losses swallow up fresh money inflows.
There has been little change in total money committed to index-like investments or its distribution between long and short positions, according to the latest quarterly figures released by the U.S. Commodity Futures Trading Commission (CFTC) yesterday, which show positions as of 30 June 2010.
The data is based on a special call sent to all known index operators and firms offering futures and options-based exchange-traded products. It is the most comprehensive measure of total funds under management in the passive sector, but excludes physically backed ETPs such as the popular SPDR Gold Trust .
Investors had a total of almost $264 billion in commodity indices and ETPs at the end of Q2 2010, down from the $271 billion at the end of Q1, but little changed from the $263 billion reported at the end of 2009.
Investments were split in a ratio of 4.11:1 with $212 billion worth of long futures and options positions and $52 billion worth of shorts. The ratio was slightly more bullish than at end-March (3.95:1) but essentially identical to the ratio reported at the end of 2009 (4.12:1).
In energy, the long/short ratio climbed from 3.88 to 4.37, the most bullish since 2008. But the jump was due to profit-taking by shorts after a profitable period characterised by declining spot prices and a pronounced contango structure in futures markets. On a net basis, there were no new long positions. Investors’ long exposure fell reflecting roll losses. Commodity futures markets have reached equilibrium. Fresh money is still flowing in (evidenced by the fact assets under management have remained steady despite roll losses associated with the contango structure). But inflows have been offset by the contango structure, ensuring little upward pressure on prices.
Much greater switching in the proportion of funds allocated to individual commodities indicates that the investment focus is switching away from indices with fixed weightings towards dynamically re-weighted products or single-commodity indices and ETPs that enable a more active and tactical approach to take advantage of particular trends or futures market structures.
California tilts towards cap and refund
– John Kemp is a Reuters columnist. The views expressed are his own —
California is set to auction all or almost all allowances under its emissions trading programme, and rebate up to 75 percent of the proceeds to households through a lump sum payment or reductions in income and sales taxes. The proposals, contained in a draft recommendation from the Economic and Allocation Advisory Committee (EAAC) to the California Air Resources Board (CARB), are in sharp contrast to the proposed federal programme, stalled in Congress, which would give away most permits to utilities and other energy intensive industries. Since California’s proposed programme is one of the most advanced, and would be the largest and most comprehensive in the country, with links to other states through the Western Climate Initiative (WCI), the decision gives significant impetus to proponents of the cap and refund approach, now emerging as a credible alternative in Congress. ADVISORY COMMITTEE MANDATE
California’s Global Warming Solutions Act 2006 (AB 32) requires the state to reduce its greenhouse gas emissions back to 1990 levels by 2020. CARB has developed a “Scoping Plan” detailing how the state will achieve this using a mix of direct regulations and an over-arching cap and trade programme. In May 2009, CARB established an Advisory Committee, consisting of technical experts, to make recommendations on two key elements: (a) how to put allowances into circulation (via auctions, free distributions, or some combination of the two); and (b) how to allocate free allowances or the revenues from permit auctions.
In making recommendations, the Advisory Committee must take account of various statutory objectives, among them to “ensure no disproportionate impact on low-income communities” and design the regulations “in a manner that is equitable, seeks to minimise costs and maximise the total benefits to California”. The draft recommendations therefore carry weight as an expert opinion of which system best meets both equity and efficiency criteria.
ALLOCATING PERMITS BY AUCTION
The Committee reviewed a range of auction designs (single or multiple rounds, uniform or discriminating price) as well as mechanisms for free distributions (fixed allocations based on historical emissions, or allocations updated in line with changes in relative output).
Households face power-pricing revolution
– John Kemp is a Reuters columnist. The views expressed are his own —
Households in the United States and the United Kingdom are about to experience a revolution in the way they pay for electricity.
Over the next decade, almost all homes will be fitted with “smart meters” recording the time as well as the quantity of electricity used. Most customers will face some form of dynamic pricing that relates the price they pay for each kilowatt hour (kWh) to the actual cost of generating it.
Smart meters and dynamic pricing are critical to using the generation and transmission system more efficiently while accommodating a growing share of renewables (wind, solar) on the grid without sacrificing reliability. VARIABLE DEMAND
Power cannot be stored, and the amount demanded by customers (“load”) is highly variable, so system operators hold large amounts of generating capacity in reserve to cope with demand peaks or outages when generating units become unavailable.
Many generating units must be built and maintained even though they may only be used for a few hundred hours each year. The greater the variability in load the more idle capacity has to be maintained. In general, usage is higher during the day than at night, and higher in summer than winter, owing to increased airconditioning demand.
The problem will get worse over the next decade as the share of generation from renewables such as wind and solar, which cannot be scheduled in advance, increases. Even more back-up capacity will need to be held in reserve in case renewable power is not available at peak times.
I think it is fairer to use smart metering–energy customers will pay for what they use and will be able to adjust consumption accordingly. If the cost of the smart thermostat is prohibitively expensive for some households, perhaps it should be subsidized. As for the suggestion above that customers pay the same rate, are you suggesting a fixed cost regardless of consumption? If so, that makes no sense whatsoever: Should all driver’s pay a flat fee for gasoline, regardless of how much they drive?
Yes, I think this will require some supervision of the power companies–as somebody commented earlier, utilities may be an “honesty-challenged sector.” But, the premise for smart metering makes perfect sense: charge customers the marginal cost their energy usage. If you use lots of power, yes, you will pay more; if you make an effort to conserve, you’ll pay less.
China can outgrow overcapacity, at least for now
– Wei Gu is a Reuters columnist. The opinions expressed are her own —
China watchers are worried that excessive lending leads to massive overcapacity. However, the risk of Beijing pressing too hard on the brake is even greater. At least for now, China should be able to growing its way out of its bad debt problems.
Banking regulator Liu Mingkang recently told a conference that China’s banks should lend out 6-7 trillion yuan next year, equivalent to about one fifth of China’s annual output. Some think that is too much. However, these fears are overdone. Indeed, if new lending falls below 10 trillion yuan, bad debts will soar, private investment will be crowded out and the economic recovery may be derailed.
Since the stock of loans has been enlarged by this year’s explosive credit growth, the regulator’s target represents a 15 percent increase in China’s loan base. This is in line with past trends, but marks a sharp slowdown from this year’s 30 percent growth in total loans.
Just to keep funding current ongoing projects, the economy would need 8.3 trillion yuan in new loans in 2010, according to Nomura estimates. So the current goal implies that here would be no money left for new projects, and some current projects will not receive funding.
Setting the credit growth target too low will make it hard for new borrowers, because banks naturally want to keep funding current projects. That puts private sector borrowers, who are expected to invest more next year following strong government investment this year, at a disadvantage.
What’s more, if the banks sense the government might tighten lending targets next year, they are likely to lend as much as possible at the start of the year. This will increase the volatility of credit.
Wei Gu focuses her attention on new capacity, while the concern of most analysts is on the old capacity that is now obsolete, and growing more inefficient every day. China needs to develop new plant and equipment, naturally, just to remain competitive in the global market. However, many believe an equally pressing need is to close and consolidate obsolete buildings and companies. In my view, companies could strongly benefit from providing workers with a year’s income as a severance package, to prevent protests when the companies close down. That kind of investment would show a high return, since clearing the obsolete, inefficient capacity off the map of China is a very intense priority.
Yukos returns to haunt Russia
– Jason Bush is a Reuters columnist. The views expressed are his own —
Former Yukos shareholders are set to sue Russia for up to $100 billion in damages after an international court ruled in their favour. Successful claims against a sovereign state are rare. But the case is embarrassing for Russia. If successful it could even lead to the confiscation of Russian assets.
The biggest problem for the former shareholders of the bankrupt oil group was proving that international courts had jurisdiction in the matter. But they have found an ingenious way to make their case, suing Russia under the Energy Charter Treaty, which protects investors in Russia’s energy sector. Russia signed this treaty, but never ratified it, creating ambiguity over whether it is actually binding.
The answer, according to yesterday’s ruling by the Permanent Court of Arbitration in The Hague, is that it is. That’s extremely worrying for Russia. The legal justifications for its actions against Yukos have long met with widespread scepticism abroad.
The core shareholders’ stake was worth an estimated $25 billion at the time Yukos was dismantled, but the litigants are asking for a multiple of that amount to reflect Yukos’s estimated capitalisation today and interest.
Former Yukos shareholders have already fought successfully in European courts. In April, a Dutch court awarded $389 million in damages to a Yukos affiliate. And in 2007, the Swiss high court ruled that the Yukos case was “political”, rejecting Russia’s request to freeze Yukos assets.
True, there’s little chance of the Russian government actually recognizing any damages claims. The Yukos shareholders have therefore spoken of seizing Russian assets abroad, such as Gazprom’s gas and Aeroflot planes.
Fed audit push gives impetus to gold rally
(James Saft is a Reuters columnist. The opinions expressed are his own)
Auditing the Federal Reserve may or may not be a good idea, but one thing seems pretty sure: just discussing it seriously will tend to drive the price of gold higher.
The U.S. House of Representatives Financial Services Committee last week voted to approve an amendment that would bring about an audit of the Fed, its monetary policy and lending programs, since when gold has gone its merry way higher, hitting an all-time high of $1,174 per ounce on Monday.
The amendment, a provision to a broader financial services reform bill that is still under consideration, was co-sponsored by Republican Representative Ron Paul, author of the book “End the Fed,” and the man least likely to be found chairing a panel at Jackson Hole or Davos.
The Fed, understandably, hates the idea, saying it will compromise its hard-won independence, the administration loathes it, and really it will almost certainly never become effective in a recognizable form.
Even so, and even interpreting the vote as a populist cry of the heart against Washington and Wall Street, the fact that it has gotten this far will cause some serious people without an ideological dog in the Federal Reserve fight to buy a bit of gold, which is really a sort of anti-currency, as a hedge against increased political influence in the process of making monetary policy.
Undoubtedly many people who think keeping the Fed on a short leash attached to an elected body is a good thing also think the Federal Reserve should have been much less aggressive in creating money and risking inflation. History shows that the risks are actually skewed the other way: tighter political control of central banks more often means more inflation and a higher risk of a debased currency.
The Dollar has to stabilise sooner or later, otherwise the asset bubbles in Asia countries and the “gold bubble” will get bigger. Once the Dollar appreciates, the bubbles will burst and hurt the economy of these countries.Those who invest in Gold will lose heavily too.China is trying very hard to control the bubble in stock market and real estate. If USD does not stop the decline, it’s very hard for China to succeed.
A rising tide of capital controls
(James Saft is a Reuters columnist. The opinions expressed are his own)
Easy money in the United States, a falling dollar and growing flows of funds seeking better returns in emerging markets are touching off a new round of capital controls in hot emerging markets, a trend that could accelerate and will at the very least increase market volatility.
It shouldn’t be a surprise, really; loose money in the developed world is helping to spur investment into emerging markets, driving currencies up and making local exports less competitive for countries which, unlike China, aren’t hitching a free ride as the dollar declines.
Inflation may be a threat for many of these, but with the global economy still struggling, it certainly won’t feel that way to policy makers.
Russia on Wednesday joined the list of countries eyeing new measures to stem currency speculation and appreciation. Moscow was careful to say it would not impose actual capital controls, which seek to regulate flows of funds into or out of an economy, but the measures they are considering would have exactly that effect, making it tougher or more expensive for money borrowed abroad to be brought into Russia.
Kazakhstan, which has been intervening actively to slow the ascent of its tenge currency, has introduced legislation allowing capital controls, but so far has not used them.
Indonesia said this week it will consider curbs on foreign holdings of short-term official debt, sending its rupiah into a brief swoon until central banker Hartadi Sarwono damped things down by saying currency moves based on such flows were so far manageable.
The more critical question is: when will the asset bubble in emerging markets burst? Will the world go into double-dip recession if the bubble burst?The moment the Greenback appreciates, and shows signs of sustained appreciation, the money will flow out of emerging markets, causing havoc for many small countries.
Can recovery and credit crunch coexist?
(James Saft is a Reuters columnist. The opinions expressed are his own)
New studies from the Federal Reserve and European Central Bank show that, whatever else, a recovery in the economy is not being supported by a resumption in bank lending, raising concerns about how exactly growth will become self-sustaining when official stimulus ebbs.
The ECB last week released its loan survey showing banks tightened credit yet again for businesses and consumers, though at a less severe rate than in the previous quarter. Much was made of the fact that banks said they expected to ease terms to businesses, but not individuals, slightly in the last three months of the year.
Days later the Fed was out with its own survey, and again the news is getting worse more slowly, which must mean it is time to pop open the tap water. Banks are tightening terms and conditions to large firms, though fewer are doing so than before. Of course we should be thankful for small mercies, but the fact remains that this is a relative rather than an absolute survey, which means that even if fewer are being tougher the vast majority are being just as tight with money as they were three months ago when things were very tight indeed.
But wait, I can almost hear you ask, banks are making money again. If not making loans, what are they doing with it? Funny you should ask, they are lending it to the government. According to Fed data October marked the first time in years that banks held the same amount in Treasuries and Fannie Mae and Freddie Mac bonds as they did in commercial and industrial loans. Business loans have plunged 18 percent in a year, while Treasury and agency bonds are up 8 percent.
Banks are choosing to lend to the government and to government-backstopped mortgage firms because they see it as the best way to survive: hunker down, take fewer risks and content yourself with the thin gruel and thin margins of taking deposits and lending to the entity insuring those deposits. It’s a good way to get solvent but it will take a terribly long time.
Falling demand for credit is a factor too. Firms are concentrating on expanding margins by cutting back on costs, rather than positioning themselves for an upswing in demand. That means they want fewer loans to support capital expenditure. It also sadly means that they are not yet hiring.
One man’s debt is another man’s credit scheng1. My biggest worry is that one man’s credit will be the rest of mankind’s (including women and children… even those unborn yet) debt. Democracy is dead, long live the monarch?
A rally that is both rational and crazy
(James Saft is a Reuters columnist. The opinions expressed are his own)
Stocks and other risky assets are rallying around the world this week because the Group of 20 nations said on the weekend they would keep the economic stimulus flowing, a state of events which illustrates where we are and what a very strange place it is.
The G20, the only group of big hitters that matters because it is the only group which includes the Chinese, met in Scotland over the weekend and, as is the way of these things, did very little with immediate consequences for anybody.
In the communique they issued, the Group of 20 finance ministers, after congratulating themselves on the recovery, more or less admitted that the measures we once thought of as heroic are in the process of becoming commonplace.
“However, the recovery is uneven and remains dependent on policy support, and high unemployment is a major concern,” the statement said. “To restore the global economy and financial system to health, we agreed to maintain support for the recovery until it is assured.”
Let me put that in human terms for you:
“We’ve spent untold trillions saving the economy, but, er, we’ve really only saved the financial system and that only to the extent that we keep on saving it. Jobs, well, not so much. We therefore pledge to continue doing this thing that may or may not be working until we are sure that it is.”
Property taxes, utility bills (you call them rates I think) haven’t changed and the towns and cities haven’t noticed that the bubble burst. In fact the property taxes and utility bills still creep upward due to their own COLA logic. This does not help the consumer who is supposed to be stimulating the economy through big consumer spending. None of this local taxation does anything to stimulate economic activity. It just sucks up income on more or less unproductive efforts. All town projects are really on hold. But it must be nice to work for the local schools or town hall. Talks with my dear old Dad remind me that this is what the Depression was like. You were well off if you worked for the Town or State government – but those days almost sound humane because town or state employees didn’t have contractual cost of living adjustments.
All the towns and cities may be doing is waiting until the dollar has inflated to levels where the assessments seem like they match and make sense again. Our houses won’t be more valuable, they will only sound like they are. But nothing much is selling so I can’t understand how that will ever work. Since the property in towns and cities has dropped appreciably in price and still aren’t selling, how can it ever get back, even with inflation, to the levels before the prices collapsed? There is some increase in the employment here but the wages haven’t risen. A very few more people can now pay their bills but those bills are getting larger. They have invisibly risen dramatically actually, because they are being based on assessments made at the peak of the bubble. But in visible terms they are still also rising.
It’s a little like living in an expanding universe and actually feeling the phenomenon.
Look out for emerging markets inflation
(James Saft is a Reuters columnist. The opinions expressed are his own)
Emerging markets could be the first to suffer destabilizing inflation, courtesy of a strong economic rebound, a weak dollar and extremely loose monetary policy in the developed world.
Inflation, in faster growing emerging markets, was not high on the list of worries even months ago, but the speed and strength of the rebound and red-hot asset markets in some places show that it may be a rising threat.
“The surprise could be that inflation in emerging markets really takes off,” Amer Bisat of hedge fund Traxis Partners said on Tuesday at a Euromoney foreign exchange conference in New York.
It is not yet a central case, but should price pressures in countries like China, Korea and Brazil take hold, it will leave policy makers in a bind and would roil financial markets.
Interest rate hikes might only attract more hot capital and may be only partially effective. Rising currencies can be self-fulfilling and higher interest rates in emerging markets make carry trades — borrowing in dollars, for example, and reinvesting in something like Korean won — all the more attractive.
Other methods of stemming currency appreciation, which stokes inflation, may also become more popular; Brazil in October imposed a 2 percent tax on foreign inflows into equities and fixed-income instruments designed to keep the real from appreciating too quickly.
The problem is that China is too big. Inflation in the cities will have a ripple effect on the rural areas. When the cost of real estate escalates in cities, the manufacturing cost increases, the farmers will have to pay more for products and services originate in cities.
This will cause the rich-poor gap to widen between city-folks, and rural folks.
