Category: Investing

The tax treatment of digital foreign currencies is a challenge for government authorities around the world, as it is for additional aspects of the “disruptive” digital economy.

In October 2014, the Commonwealth United states senate Economics Committee launched an inquiry into digital foreign currencies. The Committee released its report last week, with a particular focus on tax.  Last year, the ATO published several rulings outlining how bitcoin and similar cryptocurrencies should be treated under the Australian income tax and GST regimes.

The rulings supplied useful clarity on bitcoin’utes tax treatment, but the ATO’s approach received widespread criticism.  Bitcoin purportedly functions as money, but the ATO rulings treat bitcoin as a commodity for tax reasons. This disparity creates a number of tax inconsistencies.

The impact is especially acute under the GST routine, where bitcoin transactions are taxed as barter transactions. Australia’utes GST regime applies fairly clumsily to barter transactions, which might cause double taxation, or at best double tax administration, as we emphasised in our submission.

Why should the law be changed?

Imposing 10% Goods and services tax on bitcoin transactions increases the price of purchasing bitcoin from Australian suppliers, affecting the commercial stability of operating a digital currency business in Australia, as we possess highlighted before. Submissions to the inquiry outlined the potential advantages the industry could offer Sydney, but many argued the Goods and services tax treatment stood in the way of achievement.

From a regulatory perspective, helping Australian digital currency intermediaries to determine an industry here is likely to make financial supervision and taxation easier for government.

The ATO’s characterisation of digital currencies like a commodity is probably the best interpretation of the current law, which emphasises broad use and sovereign backing for currencies. However, it is not clear-cut. There is a legal basis to treat electronic currencies as money according to their function as a medium associated with exchange, especially as this gets to be more widespread.

Digital currency and GST

The United states senate report identified the GST anomalies arising from the ATO’s characterisation of digital currencies also it recommends the government amend the GST regime to treat electronic currencies as money. This could promote fairness and neutrality in the taxation of both contemporary and traditional forms of money.

Implementing the necessary changes to the GST Act and Regulations may ultimately require approval from the Earth and all State governments, because it affects the GST foundation.

Adopting the report’s GST suggestion would bring Australia’s GST therapy in line with the UK, and some other EU nations. Last year, the united kingdom changed its VAT laws and regulations (the UK’s GST) to exclude digital currencies from taxation as a commodity.

When the united kingdom first introduced this approach, it was praised for supporting the local digital currency industry, while there is little empirical evidence at this early stage.

Digital currencies are also handled by the ATO as commodities with regard to income tax. The evidence before the Panel, although limited, suggests the majority of bitcoin holders are investors not traders.

The report did not suggest any alterations to the income tax treatment at this stage – and we agree that caution is needed prior to altering income tax treatment. The report recommended further study to determine whether change is needed.

The regulatory future of digital currencies

The Panel concluded that digital currencies drop outside the scope of many associated with Australia’s financial, banking, as well as consumer protection regulations. This recommended that Australia’s anti-terror as well as anti-money laundering regimes should be extended to ensure they encompass digital currency activity.

However, the statement does relatively little to address the longer-term regulatory concerns surrounding digital currencies. At this initial phase, the report proposes to allow the industry to self-regulate, with oversight from a proposed “Digital Economic climate Taskforce”, rather than introducing a specific regulatory framework.

The Committee accepted which extensive regulations might stifle the growth of the digital forex industry. Although digital currencies’ utility has been emphasised recently, their own future remains uncertain. Bitcoin, the biggest digital currency, has seen a steady, significant price decline over the past two years. Further, much of the industry’s innovation comes from little start-ups, which have relatively few sources to comply with regulations. Regulating simplicity seems proportionate at this stage.

It will be interesting to see how effective the self-regulation approach is actually, particularly given digital currencies’ historical involvement in illicit actions and the regulatory concerns been vocal by other governments and also the OECD.

The combination of introducing a more favourable GST treatment and a relatively simple regulatory framework will hopefully foster this nascent industry’s development. If the industry experiences any major growth in Australia, the greater number of users (and more tax dollars at stake) may heighten regulating attention surrounding the technology.

Ultimately, the actual self-regulatory approach and Digital Economy Taskforce is the beginning, not the end, of the government’s involvement in regulating and taxing this new technology.

Around the world, regulators are realising Bitcoin is cash is republished with permission from The Conversation

In 1976, the Standard and Poor's 500 became the first stock market index tracked by a fund when Vanguard launched its legendary Vanguard 500 Index Fund (VFINX), which began with just $11 million and grew to become the largest U.S. equity mutual fund in existence through the late 1990s.

The year 92 saw the first successful launch of an exchange-traded fund (ETF). It, too, tracked the S&P 500. Nearly a quarter century later, and largest ETF in existence is SPY, that tracks — you guessed it — the S&P 500.

The Granddaddy of all Indexes Rules the Index ETF World

According to Forbes, the S&P 500 holds direct index assets of nearly $2 trillion, with an astounding $5 trillion benchmarked to the index, including types. The S&P is the most important and many watched index in the world. The actual 500 mostly-U.S. companies this tracks are the most liquid in the world, and the index is the central indicator of the health and temperament of the overall stock market.

As index ETFs soared in popularity due to their low cost, simplicity and diversification, the funds that monitor the S&P 500 naturally rose to the top of the catalog fund world.

However, for many index fund investors, the honeymoon vacation period may be ending.

The S&G 500 Misses Much of the actual U.S. Market

As Forbes recently stated, the 500 companies monitored by the S&P 500 signify around 80 percent of all market capitalization in the United States, which, on the surface, makes it a logical vehicle for investors looking to capture a large swath of the U.S. market. However, the reality is, the S&P 500 tracks just a fraction of the nearly 4,000 Ough.S. stocks that are exchanged on the market.

Index funds that track the S&P miss literally thousands of mid-cap, small-cap and micro-cap stocks. Money like the Vanguard Total Stock Market Index (VTSMX), which capture more than 99 percent of the market, have filled that void — and these comprehensive index ETFs are luring more and more investors away from traditional S&P 500 funds.

The S&P 500 is Still Good, however no Longer Unbeatable

MarketWatch points out that in the year 2000, when index ETFs began gaining widespread, popular popularity, the S&P wasn’t just the most famous index, but it also displayed the performance in order to back up its popularity with catalog investors. In the two decades prior to the turn of the millennium, the S&P 500 experienced compounded at 18 percent. During the last five years of the 1990s, it compounded at a staggering 28.6 percent.

However, that was after that.

In the ensuing 15 years, the S&P 500 has been great — but not good, enough to warrant its continuing position as the go-to index ETF for domestic stocks. Many investors who’ve purchased nothing but S&P catalog funds are now dusting off their budget planner worksheets to see if they could have done better with other domestic Exchange traded funds. It turns out, they probably could have.

After all, eight of the Ten Vanguard funds that MarketWatch profiled beat the actual Vanguard S&P 500 index fund over the last 15 years.

The S&P remains the most important stock market index in the world, and the funds that track it are safe, profitable, and as popular as ever. However, more and more index investors are falling out of love as other funds offer them everything in the actual S&P 500, plus the other 3,500 stocks within the lower 20 percent that the S&P misses.

The redback’s managers excel in getting the currency markets off-guard. In The month of january 1994, China unified its dual exchange rate program by aligning the official price to the market rate and pegging the yuan to the dollar tightly thereafter. Since 85 percent of yuan trades occurred at market rates at the time, the p facto overall devaluation was a simple 5.25 percent — not the 35 percent that is commonly (mis)quoted. Eleven years later, on 21 July 2005, the actual People’s Bank of China (PBoC) surprised global financial markets by pushing the yuan up by 2.1 percent — in effect, taking out the hard peg and transitioning to a crawling peg-type regime that, by and large, used the dollar as its central tendency.

On 11 July 2015, the People’s Bank associated with China surprised the marketplaces yet again by devaluing the yuan through 1.9 percent against the US dollar. More importantly, it introduced a change in the procedure by which it sets the daily research rate, which determines buying and selling levels in the onshore yuan market. The reference rate will take greater account of market factors and will be set at a rate equal to ‘the closing rate of the inter-bank foreign exchange market on the previous day’ and never left wholly to the discretion of the central bank.

This shift to a managed float currency regime should not have caught markets entirely by surprise. The yuan had depreciated by Two.5 percent against the dollar within 2014 and repeatedly tested the weak side of its daily trading band during early 2015 trading. The central bank has effectively also been running a two-way de facto managed floating regime for some time. During the 57 buying and selling days of the first quarter associated with 2015, the yuan appreciated on Twenty-four days and depreciated on the other 33.

So why now and just what were the key drivers for the move?

The proximate driver was a series of near-term macroeconomic and financial data which underscored the softness of household demand. Most prominently, the National Bureau of Figures release on 10 August showed that producer prices experienced suffered their biggest year-on-year decline in July since ’09. The PBoC had already decreased interest rates four times since The fall of 2014, cut banks’ reserve requirement percentages, and relaxed local governments’ financing conditions. Devaluing the yuan was among the few available options remaining within the monetary policy toolkit.

The yuan seemed to be at risk of overvaluation. It linked firmly to the dollar, which is strengthening on the back of an anticipated Federal Reserve rate hike later on in 2015. The resultant household disinflation and capital flow unpredictability did not help either.

But the most important driver was the imperative to signal to the international financial community that China has formally — and irrevocably — graduated to some managed float currency regime. It is flexible to two-way movements based on market signals. Later in 2015, the IMF Executive Board is due to formally review the composition and valuation of its Special Drawing Rights (SDR) basket. Such as the renminbi in the SDR basket will be an important marker of the distance travelled on the road to full internationalisation as well as the currency’utes rise, in time, to the ranks of one of two (or even three) key global book currencies within the 21st century worldwide monetary system.

The renminbi is the only currency not in the SDR container that meets the basket’s export criterion: belonging to a country that plays a central role in the global economy. And on 35 of the 40 items in the actual IMF’s classification of funds account transactions, the renminbi is actually fully or partially ragtop. But it remains to be seen if this sounds like sufficient to meet the SDR’s threshold of a ‘freely usable’ currency — that is, one that is widely used to create payments for international dealings and is widely traded in the principal exchange markets. Formally committing to two-way flexibility cannot hurt the renminbi’s chances.

There should not be a misgivings regarding the PBoC’s commitment to a far more market-determined exchange rate. The instances of change in China’s currency routine have been few and far between, and each example has resolutely embraced a steadily liberalising tendency. China’s currency supervisors too are aware of the need for two-way versatility with the gradual opening of its financial markets. The combination of open financial markets and rigid exchange rates has typically been a disastrous cocktail for created and developing countries as well. And Beijing enjoys advantages that other peggers did not have once they liberalised exchange rates — a large foreign reserve buffer and a less liberalised funds account.

While shrill forebodings of a return to ‘forex wars’ are overblown, the outlook for US–China trade quarrels will depend on the pace of the American financial recovery, the Chinese economic transition to a consumption-oriented economy and whether the PBoC will serve as a worthy steward of the yuan’s market-based exchange value. However no virtuous capital expenditure period is evident on the US economic horizon, and China is only starting to implement key systemic reforms. On the broader industry front, Chinese and All of us import volumes have both flat-lined as a share of actual GDP.

No such mixed diagnosis exists for Asian and other emerging market currencies. In the short term, key currencies that are highly dependent on trade with China will witness heavy capital outflows. But the the majority of consequential outcome of liberalisation will be in the actual medium term. The renminbi may rise as the key anchor currency for the broader Asian economic zone, and crucial Asian emerging market economic climate currencies will co-move with the redback. Before the global financial crisis, six of Ten Northeast and Southeast Oriental currencies tended to co-move more with the dollar. Since then, 7 of 10 co-move more using the renminbi. As China becomes a much more consumption-driven economy and the final destination for more of the region’s manufactured goods, the magnitude of these co-movements will expand.

A small step backwards for the yuan might yet prove the biggest leap forward in Asian financial, trade and financial regionalism within the years and decade ahead.

China storage sheds its dollar shackles is republished with permission from East Asia Forum

East Asian financial cooperation is at a crossroads. The Chiang Mai Initiative Multilateralisation (CMIM) and its surveillance unit — the ASEAN+3 Macroeconomic Research Office (AMRO) — are continuing to grow in size and importance. However the structure of these two organizations must change to accommodate this growth.

The CMIM is a currency exchange agreement among the finance ministries as well as central banks of the ASEAN+3 states (including the Hong Kong Monetary Authority). The scheme, which evolved from the earlier Chiang Mai Initiative (CMI) bilateral currency swap network in 2000, aims to provide financial support for short-term assets problems. To manage macroeconomic difficulties, each member can swap it’s local currency with US bucks up to the amount of its financial contribution to the reserve pool times its borrowing multiplier.

After an amended agreement that came into effect on 17 July 2014, how big the CMIM was doubled from its initial value of US$120 billion in order to US$240 billion, and a crisis-prevention mechanism — the CMIM Precautionary Line (CMIM–PL) — was introduced. The IMF delinked portion was raised to 30 percent, meaning that members might draw up to 30 percent of their maximum borrowing amount with out requiring IMF lending conditions.

Despite these types of accomplishments, the CMIM is still a work in progress. In May Next year, some member states pushed to increase the IMF delinked portion in order to 40 percent by 2014, but this has not yet been realised. AMRO continues to be drafting the operational guidelines and qualifications for accessibility CMIM–PL. And AMRO still has to go through domestic processes to ratify the ‘AMRO Agreement’, which will change it into an international organisation.

These issues are intertwined and are essential to advancing this regional financial safety net. Addressing these issues requires clear vision about the long term relationship between the CMIM and other international lending institutions such as the IMF.

The CMIM lending conditions must be tailored to be perfect for the interests and needs of East Asian nations, and can likely be different from the IMF’utes. But the differences between CMIM as well as IMF conditions must complement — not compete with — each other.

The link with the actual IMF remains another concern. Once the CMI was introduced, ASEAN+3’s monitoring mechanism was not on par with the IMF’s. The states agreed to include IMF lending conditions into the CMIM in order to discourage moral hazard (when states take on more risk after being insured through other institutions).

Since then, CMIM participants have worked to reduce links to the IMF. The delinked portion increased through 10 percent in 2000 to 30 percent in 2012. So when may ASEAN+3 raise the delinked portion further?

The solution largely hinges on how AMRO evolves in years to come. If AMRO is strengthened and functioning well as a surveillance unit, the likelihood of moral hazard will be reduced, requiring less links with the IMF.

But the entity must improve capability and further its role as an independent authority to effectively undertake these functions.

The easier job is strengthening AMRO’s effort. AMRO remains very small — housing no more than a dozen experts — but there has been steps in the right direction. ASEAN+3 possess added two deputy directors and something chief economist to the office.

But the jury is still out on how to make AMRO more independent. The entity aids the Executive Level Decision-Making Body (ELDMB) to create decisions on issues such as approving CMIM lending. But the ELDMB is actually mandated to oversee AMRO’s actions. The ELDMB consists of the deputy-level authorities of the ASEAN+3 finance ministries and main banks. As such, AMRO is inevitably tied to governments. Such a relationship could affect its activities.

It seems clear that the CMIM cannot escape from the old game of sovereign politics. In East Asian financial history, inconsistent interests and contestations between states have spilled over and influenced several CMIM details.

How may future outcomes unfold? Will they be in favour of the possible lenders (China, Japan and South Korea) or the potential debtors (ASEAN)? The decision-making structure of the CMIM has been set up in a way that no single fellow member is dominant. China (such as Hong Kong), Japan and the 10 ASEAN nations have equal vote reveal at 28.41 percent. South Korea’s vote reveal is smaller (14.77 %), but the two-thirds supermajority voting system allows the country to cast a determining vote under certain circumstances. Neither ASEAN nor the +3 nations may block a collective decision on its own. Future results will depend on how the parties collaborate with one another.

In coming years, we are likely to see how the CMIM will progress. It’ll involve both technical elegance as well as politics. But the outcomes that do unfold will reveal priceless information about the political dynamics in East Asia. For those interested in East Asian local cooperation, the CMIM is definitely worth keeping an eye on.

Where to now for the Chiang Mai Initiative Multilateralisation? is republished with permission from East Asia Forum

The US dollar has been on a roller coaster ride. Many have lost confidence in the underlying trend.  An important prop for the dollar, namely the prospects for the Fed's lift-off, extends again, this time ostensibly due to the heightened unpredictability of the financial markets, apparently sparked by events in The far east.

The September Fed funds futures have nearly fully listed out the risk of a hike next month. The effective Given funds have traded 14-15 bp this month, and the September Fed funds contract suggests an average effective rate of 17.5 bp next month.

We continue to believe that the main driver of this third significant dollar rally since the end associated with Bretton Woods is the divergence of the flight of monetary policy between the US (and UK) and nearly all the other high income countries, and lots of emerging markets, including The far east.  There are a number of cross currents, and other considerations, including marketplace positioning, use of euro as well as yen for funding reasons, and hedging flows which at times may obscure or perhaps reverse (technical correction) the actual trend.

Nevertheless, we expect the actual divergence theme to gain more traction over time.  The Federal Reserve may raise rates at some juncture and not only will the ECB and BOJ continue to ease for at least the next 12 months, but there is danger that the central bank stability sheet exercise lasts a lot longer.  The ECB's staff, which will update its forecasts in the week ahead, is likely to cut both its growth and inflation forecasts at the September 3 central bank meeting.

The Dollar Index slammed to its lowest level since January in the market panic at the start of last week.  This overshot the minimum objective from the double top pattern we noted (~94.30).   It rebounded as well as on Thursday had retraced nearly Sixty one.8% of the decline since the July 7 (~98.33).  The trend line drawn off that high and also the August 19 high (~97.’08) comes in near 95.Eighty on Monday and drops to about 95.15 by the end of the week.  A move above Ninety six.40 would signal a return of the 98.00-98.30 area.

The panic saw the dinar reach almost $1.1715 at the start of last week.  The subsequent sell-off saw it shed a lot more than nickel.  The euro settled on its lows for the week, leaving a potential shooting star candlestick formation on the every week charts.  The break associated with $1.12 creates scope for an additional half cent of diminishes but pushing the euro below the $1.1130 area may require fresh fundamental incentives, possibly by means of more confidence that the Fed is still on track to hike rates next month, or that the ECB is particularly dovish.   On the upside, the $1.1280-$1.1310 band should limit dinar gains if the euro bears squeezed out of their shorts re-establish.

Switzerland suddenly reported that its economy broadened in Q2.  The consensus had been expected the second consecutive quarterly contraction.  That helped booth the dollar's upside momentum.  The CHF0.9680 is a potent block now to additional dollar acquire, though if overcome, the following target is near CHF0.9800.  Assistance is near CHF0.9500.  Support for that euro is at CHF1.0750 and then CHF1.0700.  A rest of CHF1.0680 would mark a substantial technical deterioration.

The dollar additionally retraced 68.2% of its losses against the yen of the drop from August 18 high close to JPY124.50 through the spike have less August 24 near JPY116.20.  Overcoming that retracement objective close to JPY121.35, a band of resistance exists in the JPY121.80-JPY122.15 which will provide the next test.    Around the weekly charts, the buck posted a potential bullish sludge hammer pattern.  An appreciating buck against the yen assumes firm, if not rising US prices, and stability to higher equities.

The greenback rose against virtually all of the currencies last week save japan yen. Sterling was among the poorest.  Losing about 2.20%, sterling nearly matched up the Australian dollar's decline (2.25%), only surpassed by the New Zealand dollar's 3.35% fall.  Since August 18, the implied yield on the June 2016 short sterling futures contract dropped more than 13 bp because investors anticipate that greater deflationary forces will delay the BOE rate hike.

Sterling fell to its lowest level since July 8 before the weekend.   A persuading break of the low established then (~$15330) could spur an additional drop into the $1.5180-$1.5200 area. Sterling shut below its 100-day moving typical (~$1.5480) for the first time since early May.  It has spent most of the last two months above the 200-day moving typical (~$1.5370) as well.  On the weekly graphs, sterling posted a large outside lower week, which is a bearish development.  On the top side, the $1.5450 area ought to offer resistance.

The Australian buck tested a monthly trend collection dating back to 2001.  It is near $0.7025.  Assisted by a head and shoulders bottom on the hourly bar charts, the Aussie dollar bounced a little through $0.7200 before the sellers re-emerged.  It ceased shy of the measuring objective of the head and shoulders pattern, which seems to reflect the aggressiveness of the bears.  Even though there is no expectation that the RBA may cut rates when it fulfills on September 1, they’ll likely not rule out the next cut.  A rate cut gets to be more likely if the currency stops falling.  Look for another check on the $0.7000-$0.7025 support. 

Canada's basic principles are poor and this appeared to outweigh the recovery within oil prices.  In addition, the US two-year premium over Canada recouped most of the ground it had lost earlier in the 7 days. Canada expects to statement a contraction in Q2 Gross domestic product in the coming days and a softening of the labor market in August.  The US dollar's pullback in the CAD1.3355 spike on August Twenty five fizzled near CAD1.3140.   Another run at the highs looks likely.  Over the longer term, we look for the Australian dollar to fall towards $0.6000 and the US buck to rise toward CAD1.40.

Oil costs staged a strong rebounded in the other half of last week after falling to $37.75 on August 24.  The bounce carried the October light crude futures contract to $45.25, which completes a Sixty one.8% retracement of the slide in prices since July 29.  The next objective is near $46.Eighty and then $48.00.  There is great momentum, and the October contract finished the week above it’s 20-day moving average (~$42.95) for the first time since June 23.  The October contract posted a possible key reversal on the weekly bar charts.  It made a new multi-year low early in the week and then proceeded to rally, taking out the previous week's highs.  It closed at its highest level since the finish of July. 

The 10-year US Treasury yield plunged to 1.90% in the stress at the start of last week.  As markets calmed and economic information, including durable goods purchases and a sharp upward revision to Q2 GDP helped yields recover by 30 bp before consolidating.  Some link the rise in US yields to selling by Chinese authorities.  While we do not rule out a few Treasury sales, we suspect exaggeration, as is the market's wont.

Note that the TIC data, which is not complete, but authoritative, shows China's holdings of US Treasuries rose by about $27 bln in H1 14, the most recent data.  The Federal Book custody holdings of Treasuries with regard to foreign officials rose through about $26 bln this month, which includes $9 bln liquidation over the past two weeks.  We assume yields can move back into the 2.20%-2.25% range.  A stronger barrier in yields may be closer to 2.33%. 

The S&P 500 recoup half of what it lost once you have registered the record high on August 18 near 2103 to the panic low near 1867 on July 24-25.  That retracement is near 85.  Small penetration of this did take place, but buying grew shy ahead of the 2000 tag.  The 61.8% retracement is close to 2013, and additional resistance is likely near 2050.   Support is incorporated in the 1940-1945 area.  While the technical factors appear constructive, with a potential bullish hammer candlestick design on the weekly charts, advancements in overseas markets are a wild card. 

Observations based on speculative positioning in the futures market: 

1.  The actual CFTC reporting week ending July 25 saw large swings in currency prices and several significant (10k contracts or even more) adjustments of speculative yucky futures positions.  The gross long euro and yen positions jumped 19.3k contracts (to 87.8k) and 14k (in order to 59.9k) respectively.  A Thirty seven.1k contract decline in the risky gross short position displays a powerful short squeeze. 

2.  The actual gross short Australian dollar position jumped by 13.6k contracts to 111.0k, which makes it the second largest gross short position after the euro.  The euro's gross short position cut by 7.3k contracts, departing 153.9k still short.  The gross short Mexican peso position jumped by 18.4k contracts to 103.5k. 

3.  Although there were minor adjustments in the speculative gross sterling placement, they were sufficient to switch the net position from short in order to long for the first time since Sept 2014.  The bulls added 6k contracts towards the gross long position, that now stands at 58.1k contracts.  The bears cut the gross short placement by 1.2k contracts, leaving 54.8k.  The net lengthy position stands at 3.3k contracts. 

4.  The general pattern was adding to longs and cutting shorts for the euro, yen, and sterling.  Speculators added to gross short Canadian and Australian dollar positions and the Mexican peso.  Speculators trimmed gross wishes of these currencies, except for the Canadian dollar.

5.  Given the following price action over the July 26-28, we suspect that some of these new positions were unwound in the euro and yen.  Sterling drop in the second half of last week warns that some of the late longs may have also been reduce.  Sentiment still appears extremely negative toward the dollar-bloc. 

6.  The web long US 10-year Treasury futures tucked to 1.3k contracts from 7.3k.  Gross longs and pants were cut.  The bulls sold 58.4k contracts, leaving the actual gross long position from 395.2k contracts. The has covered 52.4k gross brief contracts, leaving 393.9k. 

7.  The net lengthy speculative light sweet oil futures positions were pared through 5k contracts, leaving 215.6k.  Given the large movement in prices, it is surprising to see exactly how small of a position adjustment took place.  The longs added 1k contracts, lifting the yucky position to 474.2k contracts.  The bears trimmed their own gross position by 4k agreements, leaving 215.6k.

The Dollar: Now What? is republished with permission from Marc to Market

The capital markets are quieter today.  Equities remain heavy, however losses are comparatively moderate.  Core bond yields are slightly softer.  The US dollar is firmer against the major and most emerging market currencies. 

The news stream is light and the focus before the ECB meeting tomorrow is the US ADP work estimate.  Expect a 200k increase after 185k in July.  The Bloomberg consensus is for a 218k rise in nonfarm payrolls when reported on Fri. 

The EIA energy report also will draw attention.  The crude stockpile expects to rise by 900k barrels.  Even when US production is not what it really was estimated under the prior methodology, output is still popular higher than consumption.  Last week's run-up to almost $50 a barrel for that Oct light sweet raw contract is a distant memory.  The nearly $1 loss today brings the contract to nearly $43.50, which is a 50% retracement of the rally off the spike low on August Twenty-four.  The next retracement level is near $42.15.

Australia reported Q2 growth had been half of what the consensus anticipated at 02% on the quarter.  The actual Australian dollar was pressed below $.7000 for the first time in six years.  It recovered to $0.7050 were it had been sold again.  A break of $0.6980 focuses on $0.6950.  On Thursday, Australia reviews retail sales and trade figures.  The derivatives markets are pricing in about a 50% chance of a November rate reduce. 

The UK reported a under expected improvement in building PMI.  The August studying stands at 57.Three, up from 57.One in July, but shy of the 57.5 consensus forecast.  Sterling has under-performed this week, despite BOE'utes Carney signaling higher rates in the UK at Jackson Hole last weekend. After the Aussie and Kiwi's 2% reduction over the past three sessions, sterling may be the weakest of the majors, shedding about 0.75%.  It has been pushed via $1.53 for the first time since earlier June.  The initial approach associated with support near $1.5250 has sparked some buying.  It that much cla goes, stronger support is near $1.5200. 

Chinese markets, which ostensibly have been the source of the increased volatility, are now closed till next Monday. President Xi offers put much importance ultimately of WWII celebration in China. Production was slowed or halted around Beijing to reduce the pollution.  Even though some reports had suggested large-scale treatment in the equity market might cease, the guiding hands of officials was still regarded as present in order to provide a few element of stability ahead of the special event. The key then is what occurs next week. 

We have argued the seemingly policy confusion is a reflection of a political struggle within China. We suggested the concentration of power by Xi means the curbing of the Leading Li.  Li is being associated with the large-scale intervention in the stock market that has failed to originate to the tide.  Xi has upped the ante by rebuking the Youth League, which is a main political faction.  Li's roots are with the League.  Xi criticized them to be out of touch and apparently trying to block Xi's changes. 

Separately, yesterday Hong Kong Monetary Authority intervened the other day to prevent the Hong Kong dollar from appreciated through the top of its peg.  The intervention was the very first since April.  Officials verified selling about HKD15.5 bln (~$2 bln) to protect the HKD7.75 level. The US dollar remained pinned there these days, suggesting the possibility of more intervention.  Official confirmation has not yet been provided. 

Reports suggest that because 2009, there have been eight occasions in which the S&P 500 offers lost more than 2% on the first trading day of a new 30 days.  The market finished the 30 days higher each time.  Twice the gain was less than 1%, as well as twice the gain had been more than 10%.  Three times the monthly gain was between 5.9% and 6.7%.  The remaining time, the market finished 2.35% higher. 

The euro is finding assistance near $1.1240.  On the topside, initial opposition is near $1.1320. Yesterday's higher was near $1.1330.  The 38.2% retracement of the move from $1.1715 on August 24 to $1.1155 on July 28 is near $1.1370. 

The dollar recorded a low near JPY119.20 late in North America the other day and has since recovered toward JPY120.50.  While the euro offers retraced almost a third of its losses, the yen has retraced 50% at JPY119.15.  A move above JPY120.Fifty today likely requires increases in the S&P 500 as well as firmer US yields.

Calmer Markets but Sense of Foreboding still Powerful is republished with permission through Marc to Market

According to Dan Steinbock, the internationalisation of the renminbi is actually accelerating. The inclusion from the yuan in the IMF basket of reserves is now a matter of time.

On July 11, the People’s Bank of China (PBOC) adjusted the actual exchange rate of the Chinese language renminbi (RMB) against the US dollar to reflect market conditions. The net impact was a devaluation of 1.9% in accordance with the dollar.

The adjustment had been an effort to comply with the requirements the International Monetary Account (IMF) to include the yuan in the book currency basket. The move towards a more market-determined rate is what the IMF and the US Treasury, along with European financial authorities, have been asking for.

It aligns well with Beijing’utes effort to speed up the RMB internationalisation.

The Renminbi Goes International

Today, China is the world’s biggest exporter and the second-largest economy in the world in absolute terms. At the end of last year, the RMB moved into the fifth position in global payments, but still accounts barely over 2% of the international payments total. However, its explosive possible reflects its rise as a settlement currency for China’s global trade to 23% by early 2015.

Until the global financial crisis, the RMB had little exposure to worldwide markets because of government controls that prohibited almost all exports from the currency, or its use within international transactions. In the era of Xi Jinping and Li Keqiang, China is rebalancing toward consumption and development, and Beijing is fostering the RMB’s rise in worldwide finance.

After China joined the planet Trade Organization (WTO) in Mid 2001 and exports truly took off, the actual RMB has evolved as an international currency for paying for goods and services. Within this era – roughly, the 2000s before the global crisis – foreign multinationals invested in China, but Chinese foreign investment was minimal.

In the 2nd stage – the first half of the actual 2010s – China consolidated its part as the world’s trading engine. As Chinese capital is actually increasingly going out, leading Chinese brands, from ICT (Lenovo, Huawei, Tencent, Alibaba, China Cellular) to financial institutions (ICBC, China Construction Bank, Agricultural Bank associated with China, Bank of The far east) to oil and gas (Sinopec, PetroChina) are becoming familiar abroad.  Further, the RMB’s role is expanding as a currency for worldwide investment.  Concurrently, the number of Chinese vacationing overseas has soared in order to 117 million.

In the third stage, the actual RMB seeks to achieve a new status as a reserve currency with sovereign governments. That is where we’re today. The transition will not occur without friction. All major international currencies – the US dollar, Euro, British sterling as well as Japanese yen – have experienced their share of growth discomfort.

The summer turmoil in the Chinese equity markets reflects these types of transitional challenges. In early The year 2013, I predicted the impending boom in the Chinese markets. Within mid-June, that boom resulted in a serious correction. Despite volatility, the potential of Chinese market prevails.

RMB Monetary Channels

The internationalisation of the RMB also benefits from the actual steady expansion of new RMB cleaning banks, which provide direct access to RMB liquidity in China, while contributing to the expansion of offshore RMB.

The launch of the Shanghai-Hong Kong Stock Connect – the cross-boundary investment channel which connects the two markets – has boosted the growth of trading volumes, along with Shanghai’s Free Trade Zone (FTZ), which is paving way to new FTZ reforms in other cities.

Despite initial specialized challenges and the Chinese stock market correction, the China Worldwide Payment System (CIPS) expects a fall introduction. Scaled down, its use will be for cross-border yuan trade deals.

There are almost an estimated $500 billion of RMB bilateral currency swaps – agreements between two nations to ensure access to each other’utes currency if needed – in China and more than 30 countries.

These efforts are complemented by the launch from the massive “One Belt, 1 Road” regional initiatives in China’utes regional proximity and internationally.

After years of hollow reform promises by the G7 nations, China can also be taking a more proactive role in global finance, with the BRICS New Development Bank and also the Asian Infrastructure Investment Bank (AIIB). Despite initial US resistance, the AIIB took off dramatically last spring, especially after the UK joined the bank, which provided the way for other EU economies.

Emergence of RMB Commodity Trading

Intriguingly, the dominant role of the dollar in global commodity pricing evolved in the 1970s once the US dominance began to deteriorate. When America became an energy importer, it grew more dependent on the leading oil producers. As the Middle East’s oil economies opted for the dollar because payment currency, the petrodollar era came to rest on financial and strategic relations (oil for US dollars and military aid).

Until recently, these arrangements have enhanced US geopolitical might in the Middle East, including Washington’s ties with Saudi Arabia. However, as the US shale revolution became popular and China’s role as the largest buyer has steadily increased in the region, the old status quo is gradually eroding.

While the actual dollar remains the dominant forex for most commodities, China’s part in international commodity trade has increased dramatically. It is the biggest consumer of iron ore, zinc oxide, lead and copper. In the coming years, increasing share of commodity trade is likely to cost in RMB, as evidenced through the emergence of RMB-denominated contracts upon exchanges in Chinese cities.

As the world’s largest customer and producer of precious metal, China also hopes to lead to determining gold prices. Just three years ago, Hong Kong Exchanges and Clearing bought the London Metals Exchange, while Shanghai is going to launch an RMB-denominated gold-index.

In the future, item prices are likely to gravitate towards the RMB and other large emerging-economy currencies.

The $1 Trillion Dollar Reserve-currency Decision

The RMB’s route to a major reserve currency includes economic and geopolitical challenges. In the past, the value of the currency has caused major debates. These ended in May, when the IMF reported that the RMB was valued, while advocating Beijing to develop a flying exchange rate within 3 years.

Nevertheless, US Congress and the Treasury still argue that the RMB should be buying and selling at higher levels from the dollar, due to China’s industry surplus, the plunge associated with oil prices, and rising Chinese productivity. These quarrels are no longer persuasive, however.

The trigger for the fall of oil prices was the US shale trend and the Middle East’s overcapacity. The US has had regional trade deficits for decades with East Asia (first with Japan, then with the Asian tiger financial systems, and more recently with China). In addition, in the decade just before recent turmoil, the RMB appreciated 30% against the dollar.

According to China’s central bank, foreign central banks held over $110 million in RMB-denominated assets in April. Despite rapid RMB expansion, the actual starting-point is low. In 2014, complete foreign exchange reserves amounted to more than $6 trillion.

Today, the RMB satisfies most basic preconditions of a reserve forex. China has become the second-largest economy on the planet. Second, the RMB has evolved within an environment of low inflation, small budget deficits and stable growth. Third, an upswing of the RMB as major book currency relies on strong institutional support. The fourth condition requires deep, open and well-regulated capital marketplaces, which is why China is speeding up financial reforms. In April, Beijing pledged that the capital account liberalisation would occur after the year.

China had hoped the RMB could be in the IMF’s container by January 1, 2016. Nevertheless, in early August, they requested the IMF to delay its RMB inclusion until September 2016. The timing matters. Before the summer, Standard Chartered and AXA Investment Managers estimated that at least $1 trillion of worldwide reserves would switch in to Chinese assets when the IMF encourages the RMB as a reserve forex.

Toward Multiple-currency Reserves

In nominal terms, the size of the Chinese economy is likely to exceed those of the US in the 2020s. However, dimensions are not everything. While the US economy surpassed that of Britain in the late 19^th century, sterling remained the preferred currency in international commerce and the dominant device for investments and sovereign reserves well into the early 20^th hundred years.

Things began to change after The first world war, when the dollar surged within trade finance. As traders began to move from sterling to dollar and central banks started to expand their dollar reserves, the stage was set for a transition.

In the past half a decade, the RMB has achieved dramatic progress in commodities, trade, investment and sovereign reserves. It is increasingly central to item trading. The RMB’s catch-up using the Japanese yen and the British pound will take longer – and even longer, to gain parity using the dollar and the euro, which still represent 45% and 28% associated with international payments, respectively.

Nevertheless, the actual RMB’s role as a main reserve currency is now a matter of time. In the short-term, the changeover means increasing market unpredictability. In the medium-term, it has potential to support China’s rebalancing and thus growth potential customers globally.

The RMB will be the first emerging-economy currency that will join the sovereign supplies. In that role, it will lead way to other major emerging-economy currencies in the future.

The Internationalisation of the Renminbi is republished along with permission from The Difference Group

The emission scandal at the world's second largest automaker, Volkswagen, offers reportedly "rocked" the German politics and business elites.  Some possess argued that it will rival the actual refugee challenge for Germany.  Other people have argued that it is a supply of euro weakness.

To be sure, Volkswagen is the not first car maker caught manipulating its emissions tests. Ford did a similar thing with its vans in The late nineties.  Hyundai and Kia compensated $100 mln in fines last year for fixing their tests.

This is not to justify in any way what Volkswagen has done, but simply to note that there is no precedent for this turning into some sort of systemic crisis.  One should not exaggerate its impact on the euro's exchange rate.  First, consider the euro-dollar's correlation using the DAX.  Conducting the correlation around the percentage change finds the actual correlation is -0.39 over the past 60 days and -0.45 over the past 30 days.  However, the inverse relationship is greater between the euro and also the S&P 500 than it is using the DAX at -0.52 and -0.Sixty for the past 60 and 30 days respectively.

Second, here is a Great Graphic (made up on Blomberg) that shows the performance of Volkswagen ADR (whitened line) and the euro-dollar exchange price (yellow line).  The dinar rallied strongly in April through mid-May, while Volkswagen shares continued to trend lower.  Similarly, in the first part of 06, the euro appreciated without an interruption of Volkswagen's downtrend.  This particular happened again in late July.  When news of the scandal first broke, the euro had been coming off from its post-FOMC rebound.  

Just because the Volkswagen scandal may not have larger capital market implications doesn’t take away from the gravitas of the situation.  Volkswagen employs 270k workers straight and even more indirectly through its suppliers.  The German car sector employs 775k people.  Autos and parts are the biggest German exports accounting for about 20% of roughly 200 bln euros.

The good from US authorities may be a maximum of $18 bln.  There are also other lawful costs, including likely penalties from other authorities.  In addition, there are costs associated with the recall.  There may also brand costs and increased costs of production to fix the problem, let alone expenses associated with tougher regulation, which will be a probable consequence.  In terms of valuation, the market cap is lower by a little more than 20 bln euros.  The German auto industry also encounters headwinds from the Russian sanctions and also the slowdown in China.

More broadly, the scandal comes at a time when many Germans find themselves in a crossroads.  Through the financial crisis and the sovereign debt crisis, Germany emerged as the regional hegemon, though many Germans would not accept that label.  Yet it is clear that France has been unable to match German economic prowess or competitor it for leadership within Europe, even if still may command key appointments in the multilateral institutions.  

Germany was widely criticized for wanting strict enforcement of the controlling treaties associated with EMU, especially on fiscal exchanges.  After losing a election at the ECB, the Bundesbank participated in a finish run to the European Court of Justice.  The ECJ overruled the Bundesbank's objections.  Germany has additionally received criticism from the European union, the IMF, and the US because of its large current account surplus and the lack of stimulus to help offset the austerity in the periphery.  Most recently, criticism has been over displaying flexibility over the rules for its unilateral overture to take 800,000 refugees. 

The Vokswagen scandal is much more embarrassing for the German model and conceit of rules-based society than material for the German brand.  Germany's two fears, being isolated or blamed for that destruction of Europe, is not at play here.  However, the German export associated with schadenfreude is fully in play.

Volkswagen and the Euro: Preliminary Ideas is republished with permission from Marc to Market

There were three significant risky gross position adjustment one of the currency futures in the Commitment of Traders reporting week ending November 3.  They were all expanding the gross short positions. Speculators additional 30.9k contracts to raise the gross short dinar position to 207.2k.  It’s risen by 69k contracts in the past two weeks.

The bears increased the web short yen position through 14.9k contracts to Eighty five.3k.  In the past two weeks, it has elevated by nearly 33k contracts.  The actual gross short Swiss franc position doubled to 24.8k contracts. This is the biggest jump in more than four years. 

The jump in the yucky short franc position was adequate to swing the net placement from long 1.5k agreements to short 7.0k contracts.  Speculators were net really miss two weeks.  In contrast, speculators tend to be remain net long sterling futures, albeit marginally so (0.2k  contracts).  However, given sterling razor-sharp slide in recent times, many likely wished they had sold more. 

Speculators added to gross short currency positions with minor exceptions in the Canada and New Zealand dollars.  Because of the newfound dollar bullishness, this is not surprising.  What’s surprising is that speculators additionally added to gross long currency futures positions.

There were 2 minor exceptions, sterling, and the Canadian dollar, both slipped with a little more than 2k contracts.  The actual gross long peso position rose less by less than Twenty contracts, which we curved to zero.  

The bears designed a significant stand in US Treasury futures.  The gross short placement jumped by 87.3k contracts, the most since March 2011, to 570.9k.  The bulls pared back, reducing 10% of gross long placement or 41.3k contracts in order to 406.6k.

Since the end of the reporting period, the December 10-year note dropped a full point.  The net short position jumped to 164.3k contracts from -35.6k.  It is the third 7 days of net shorts.  In the middle of October, speculators were transporting a net long position (Seventeen.7k contracts). 

Speculators in the oil market pulled back.  Both longs and shorts were trimmed.  The actual longs were shaved by Six.2k contracts, leaving 493.4k.  Almost 16k gross short contracts were covered.  The bears are holding on to 247.2k short connections.  The net long position increased by 9.6k contracts to 246.2k.

Observations on the Speculative Placement in the Futures Market is republished with permission from Marc to Market

The IMF will decide this 30 days whether to make the Chinese renminbi the 5th international reserve currency. For that euro, that would not be victory or lose game.

Behind the actual facade, there has been much discussion about the inclusion of the Chinese currency – the renminbi (RMB) – as the fifth international reserve currency.  Initially, Beijing hoped that, following the International Monetary Fund’s (IMF) long-anticipated November meeting, the RMB could become part of the international currency basket through 1 January 2016.

After China’s development deceleration, and the boom and modification of its equity markets, the actual Fund’s experts recommended in early August that the IMF would delay its RMB inclusion until Sept 2016.  The IMF meeting will take location at the end of November. What will the choice – whatever it will be – mean towards the euro?

Two-step Review

The basis for the IMF inclusion decision will be on the review of the Special Drawing Right (SDR), that the Fund created in 1969. It is an worldwide reserve asset, which currently includes US dollar, euro, British pound, and Japoneses yen.

China’s first work to have the RMB included in the SDR basket took place at the previous IMF Review in 2010. That attempt failed, because of inadequate capital account convertibility. In the era of president Xi as well as Primer Minister Li, Beijing has made the liberalization of the capital account and the exchange rate a major priority.

The IMF review consists of two steps. The first requires that China is a major trading country. Well, today, China is the world’s largest exporter and second-largest importer, immediately after the US.

However, the IMF also necessitates the RMB to be “freely usable.” China achieved full convertibility of the current accounts already in 1996, however capital account restrictions perform remain.

Nevertheless, reforms have accelerated and the IMF does not necessarily need full convertibility. The Japanese yen had been freely usable already in 1978, two years before Tokyo eliminated its foreign exchange regulates.

The IMF Review’s second step requires a final vote by the IMF board. That is the political and subjective area of the IMF procedure. In practice, the RMB needs a 70 percent majority in the last vote to become a reserve currency.

Financial Repercussions

Recently, exchange rates have seen massive forex movements. Since mid-2014, the euro is down by more than 10 percent. Nevertheless, as Europe’s cyclical recovery has proved weak, the European Central Bank (ECB) recently announced it was missing it’s inflation target and had been considering new stimulus.

The ECB main Mario Draghi shuns euro appreciation. When the euro has threatened to appreciate past $1.15, the ECB has warned of additional quantitative easing (QE). After the IMF’s RMB decision, Draghi will decide the need for more QE.

In this environment, the actual near-term effect of the RMB inclusion within the IMF reserve currency basket would likely be small. It involves the reweighting from the $30 billion SDR basket.  Currently, the US dollar accounts for 42 percent and the euro for Thirty seven percent of the total, whereas the British pound as well as Japanese yen are about 9-11 percent each.

The long-term consequences of the RMB inclusion would be huge.

An IMF endorsement could unleash a massive, though gradual reweighting of the global $12 billion reserve portfolio. Private investors would be likely to follow in the foot prints, especially as China’s capital markets evolve and assets improves.

Let us assume that the IMF reserve currency basket would include the RMB and that it would undergo a reweight.  If, initially, Chinese language currency would be about 10 percent of the total, along with Japanese yen and British pound, then the role of the US buck would be likely to decrease to 38 percent and euro to 34 percent, respectively.

That would unleash 10 percent from the $11.6 trillion of global reserves – more than $1.1 trillion – could flow into RMB assets.

No Win-Lose Game

Some believe that the RMB’s gain will be the euro’s loss. This stance unites those pan-Europeanists, who want much more rapprochements with Washington and less along with Beijing, and those eurosceptics, who mistake self-sufficiency with Fortress Europe.

In actuality, the rise of the RMB is every thing but a win-lose game. From Beijing’s standpoint, a healthy European countries is positive to Chinese exports and direct investment, which is why president Xi recently urged the UK to remain part of the EU.

Second, a healthy euro will support European foreign direct investments as well as exports in China, which is rebalancing towards consumption. Indirectly, the euro’utes strength also ensures that US dollar’s unilateral monopoly in global financial will erode over time.

Third, the effectiveness of the RMB in no way implies that currency advantages will remain in The far east alone. US and Western portfolio managers and individual investors would like to invest much more in China’s growth regions and sectors.

However, the reverse is applicable as well. Chinese institutional investors are eager to diversify risk through internationalizing their portfolios, which nevertheless focus on the mainland.

The RMB inclusion is just a matter of time, as the IMF md Christine Lagarde has acknowledged. Even if The far east misses the cut drop 2015, there is a high likelihood of an interim-meeting review that will grant RMB the actual SDR status before the next scheduled decision in 2020.

Making renminbi a world forex would not be bad for euro is republished with permission from The Distinction Group

26 January 2011.

Last springtime, an executive from a Chinese telecoms equipment company made a good intriguing job offer to some Silicon Valley software professional.

The Chinese company, Huawei Technologies, desired to get into the booming marketplace for Internet-based computing,

and it had simply moved its United States study headquarters here to capture some of the best local talent.

“How many engineers would you like for your group? Several hundred? That’s not a problem,”

the employer said, according to the engineer.

When the software manager turned down the offer, the Chinese executive was undeterred

and asked for the name of the engineer working under him.

The exchange underscores Huawei’s bold entry onto the world’s technology phase.

In the span of a decade, it has gone from imitating others’ products

to taking on international rivals using its own innovative computing as well as communications gear.

Huawei is one of many Chinese companies that are pushing into more sophisticated and profitable businesses.

Indeed, some analysts think its spectacular rise is really a model for other Chinese companies seeking to compete worldwide.

And its American drive is even more significant because it is China’s first truly home-grown multinational company.

Huawei is now the world’s second-largest telecommunications equipment supplier behind Ericsson associated with Sweden,

and with Chinese federal government backing, it has sewn upward major deals in Asian countries, Africa and Latin The united states.

In Europe, Huawei has outmaneuvered Ericsson to supply gear to big carriers.

Industry experts say Huawei, based in Shenzhen, has rapidly matured into a fierce competitor

in one of the most important and fiercely contested technology arenas:

sophisticated gear that enhances the delivery associated with voice and video over the Internet and through wireless devices.

They say Huawei is gaining, in part, due to heavy spending on research and development.

Chinese companies are generally weak in R.&D.,

but Huawei offers 17 research centers all over the world,

including Dallas, Moscow, Bangalore, India, & most recently, Plastic Valley’s Santa Clara.

Indeed, of the company’s 96,000 employees,

nearly half are engaged in research and development.

In May, Huawei opened a stunning $340 million research center in Shanghai

that this says will eventually house 8,000 engineers.

But Huawei has largely been locked out of the United States — until now.

Because security concerns help to make telecommunications a particularly delicate industry in this country,

even the touch of a Huawei presence has generated powerful reaction in Washington.

Some in Congress and the national protection establishment fear Huawei’s close ties to the Chinese military may allow China to tinker with American communications equipment.

The company has repeatedly already been linked to the People’s Liberation Military of China,

partly due to the fact it began by Ren Zhengfei —

a former soldier that worked for 10 years in China’utes Army Engineering Corps —

as a merchant of telecommunications equipment within 1988.

Mr. Ren, now 66, hardly ever grants interviews.

But according to the biography published in China, he insists on military-style efficiency

and the “wolf spirit” mentality that encourages the sales force to relentlessly attack competitors.

Last fall, several Congressmen wrote a letter to Julius Genachowski, ceo of the Federal Communications Fee,

raising the specter that an equipment purchase might permit the Chinese federal government to manipulate parts of the marketing communications network,

making it possible to disrupt or intercept phone calls and Internet messages.

Anticipating these obstacles, Huawei has hired a remarkable variety of Washington lobbyists, lawyers, experts and public relations firms to assist it win business in the usa.

It has also helped create Amerilink Telecommunications, an American distributor of Huawei items whose high-powered board includes

• former Representative Richard A. Gephardt,
• the former World Bank president James Deb. Wolfensohn,
• and the one-time chief executive of Nortel Networks, William A. Owens.

Amerilink executives appear at first sight primarily interested in helping Huawei conquer objections that its entry in to the American market could endanger national security.

“We take the accusations very seriously,” said Kevin Packingham, who recently left Sprint being chief executive of Amerilink.

“But regardless of the accusations, we have a model in position that ensures the security” from the network should Huawei win American contracts, he said.

The effort is beginning to repay.

Last fall, for example, the American Internet communications firm Clearwire

began screening a system based on Huawei’s 4G, or fourth-generation, network technology.

Still, Huawei has battled to break into the United States market,

largely because of the security concerns,

and accusations of intellectual property theft and company espionage.

Over the last decade, it has been sued in the United States by two of its major allies / rivals, Cisco Systems and Motorola,

who claimed that it stole software designs and infringed on patents.

But Cisco settled its suit along with Huawei soon after filing it.

And although Motorola, with whom Huawei has had a good alliance since 2000,

alleged that

• a group of Chinese-born Motorola engineers developed contacts with Huawei’s founder,
• and then, between about 2003 and 2007, conspired to steal technologies from Motorola,
• for which they utilized a dummy corporation set up outside the company,

just this week, Huawei sued against Motorola 

to block it from selling one of its sections to Nokia Siemens Networks.

Huawei wants the deal to exclude any kind of equipment based on widely used GSM and UMTS technology standards

because of fears it would transfer Huawei proprietary information to Nokia Siemens.

In addition, the deal with Motorola would push Nokia-Siemens ahead of Huawei in the global network gear market.

The reservations about Huawei lengthen outside the US as well.

In Europe, some competitors are now whining about so-called subsidies that Huawei receives from the Chinese government.

And within India, there are worries that Huawei networks could pose security risks.

Huawei denies it has ties to the Chinese military and disputes accusations of intellectual property theft.

Ross Gan, a company spokesman, says that Huawei is employee-owned and that it has grown through developing its own technology.

“We’lso are an innovative company driven by the business needs of customers,” he said.

Most significantly, in a statement, the company additional:

“Huawei has never researched, developed, produced or sold technologies or even products for military reasons in any country.”

Analysts also note Chinese companies have been willing to buy telecom equipment from American makers like Motorola,

apparently setting aside any concerns china might have about American espionage.

Obviously, Huawei’s drive to become multinational has not been entirely smooth.

“It was a huge problem for the company,” said Geoff Arnold, a veteran Silicon Valley software designer

who spent several years helping the organization develop a cloud computing product.

“The bean counters in Shenzhen didn’t have a clue about how to operate outside of China,” Arnold said.

“Huawei has great difficulty understanding what is happening outside of China as well as adapting their business practices.”

In 2008, for example, worries about national security and China’s weak protection of intellectual property

forced Huawei to drop its $2.2 million joint bid with the American firm Bain Capital to acquire 3Com, the American networking company.

Huawei also failed in other bids this year to acquire the wireless system division of Motorola

as well as 2Wire, a united states maker of broadband Internet software, according to people familiar with those deals.

Those bids collapsed, experts say, because both Moto and 2Wire were told that Wa was likely to block any kind of deals.

Still, Peter J. Williamson, the professor of business at Cambridge University, said that

while some continued to be bothered by Huawei’s origins,

its technological and commercial prowess makes it increasingly hard to ignore the achievement.

“The hardest market to crack is the U.S.,” he said.

“But they’ve cracked Europe,” he told the New York Times.

“And if they can work with Vodafone, one of the biggest service providers in the world, they can work with anybody.”

 

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com

 

4 January 2011. A US economy stuck in neutral, with persistent and growing unemployment.

An on-going financial crisis in Europe.

Everybody knows 2010 has been a fiscal disaster throughout the "developed" world.

But because traders like to point out, there will always be ways to make money —

even if the global situation is filled with gloom.

And as fewer of those exact same traders are willing to admit, even more importantly,

there’s often very little connection between what goes on in the marketplaces, equity and otherwise,

and also the "real economy", in which they are allegedly rooted.

So despite all the negatives — and a few surprises, like the actual terrifying “flash crash” of the stock market in May, which STILL hasn’t been explained —

2010 proved in the end to be a pretty good year not less than SOME investors —

especially if those possessing shares in some high-flying tech shares, old-fashioned industrials, or gold.

The typical equity fund in the United States returned nearly 19 percent in 2010,

while the conventional and Poor’s 500-stock index flower 12.8 percent.

That had been below the gains of 2009, when the markets rebounded from the economic crisis and the S.&P. index soared 23 percent.

Few expected such robust results for 2010 when the year began, stated Tobias M. Levkovich, chief United States collateral strategist at Citigroup.

So why did stocks do well this year when so much is clearly going wrong?

Perhaps the most important factor was the pro-corporate guidelines of the Obama administration,

notably, the Federal Reserve’s decision in early November to function $600 billion into the economy by purchasing Treasury assets,

along with continuation of the pro-corporate / pro-wealthy individual tax slashes passed by the lame-duck Congress in December,

which together helped launch a year-end rally, lifting the actual benchmark S.&P. catalog by about 6.Five percent in December alone.

The general result was a predictable increase in corporate earnings,

helped along, obviously, by rampant slashing in work forces throughout the year,

a convergence that, not surprisingly, was mirrored in broad market increases.

But in what is likely to be a worry with regard to next year,

profits were bolstered by job cuts and other restructuring efforts AND NOT revenue growth.

In the third quarter of the year, for instance, earnings were 31 % higher than last year, but revenue increased by just 8 percent.

The disparity was even greater in the first 1 / 4, as earnings jumped Fifty eight percent but revenue rose only 11 percent.

With just so much room to cut expenses — after all, how many times can you fireplace the same workers ??? —

that kind of overall performance will be difficult to repeat, boding sick for stocks this year.

Not surprisingly, analysts expect profits to increase by 13.4 percent this year,

far lower than the estimated Thirty seven.8 percent gain for 2010, according to Thomson Reuters.

To make matters worse, Wall Street is brimming with optimism,

which, within the looking-glass world of investing, can actually be considered a signal to sell.

“The good news continues to be priced in, and the potential negatives have been ignored,”

said Jerr Hsu, chief investment officer of Research Affiliates, a money manager in Newport Beach, Calif., which oversees $70 billion in assets.

“The market is going to get more nervous at these valuations.”

In this context, the Dow Johnson industrial average finished with a good 11 percent gain in 2010.

The Standard & Poor’s 500-stock index had been less than a point lower, at 1,257.64.

The Nasdaq misplaced 10.11 points, or 0.38 percent, to finish at 2,652.87.

While stocks performed well over all, a small group of listings played a good outsize role.

Within the S.&P. 500, Mr. Levkovich said, the very best 50 performing stocks added about 60 percent of the jump in the index.

Technology was again a star, paced through Netflix, up 219 percent, which makes it the single best performer in the index.

F5 Networks, which makes equipment to manage Internet traffic, wasn’t any. 2, rising about 146 %.

Cummins, the engine maker, took third place with a 140 percent gain.

Automakers also do well, with Ford rising about 68 percent,

even because General Motors returned to the stock exchange in a $23 billion initial public offering, the biggest in United States history.

But numerous individual investors missed the party, having taken their cash out of stocks.

They were frightened off, it seems, because of the unpredictability that followed the brief 1,000-point drop on May 6, the so-called flash crash,

as along with lingering concerns from the financial crisis of 2008, including a real estate and unemployment hangover.

“Investors generally tend to have a reduced tolerance with regard to risk,” said Brian Reid, chief economist of the Investment Company Institute.

The institute estimates that investors withdrew $80 billion from domestic equity mutual funds in 2010,

while they added more than $250 billion to bond funds.

To be sure, investors still have roughly $4 trillion in domestic inventory funds,

but that flight in the market is reflected in additional figures, like shrinking buying and selling volume.

Total volume was down 16 percent from 2009, and was 24 percent below the levels of 2008,

according to Howard Silverblatt, a senior index analyst with Standard and Poor’utes.

That ate into the results of major banks and brokerage companies, like Morgan Stanley and Charles Schwab, which depend on trading commissions.

The government bond market was precarious as well.

Typically, bond prices go up and yields drop when financial growth is anemic,

reversing course when economic activity picks up and the threat of inflation reawakens.

Indeed, as it became clear the economy was sputtering early in the year and the European debt turmoil worsened,

investors began pouring money into bonds, eventually delivering yields to all-time lows through early October.

The yield around the two-year government bond, for example, dropped below 0.4 percent in early October, a record low.

But with the announcement of the Federal Reserve’s aggressive asset-purchase program,

and the extension of Bush-era tax cuts that were due to expire,

bonds began to sell off in November and Dec even as stocks rallied, sending produces higher.

James Caron, head of global interest rate and currency strategy at Morgan Stanley, said

2010 was a year of reversals in the bond market.

He added, “You had a 180-degree shift from gloom as well as doom to optimism.”

For the year, the typical bond fund came back 5.6 percent, according to Morningstar.

Bonds can be a traditional refuge in violent markets, but it was precious metal that really shined.

Like bonds, gold benefited from a flight to safety sparked by the European debt crisis.

But it also raced higher on fears that budget loss in Western countries, including the United States, are unsustainable

and that lax monetary policies might weaken the value of paper foreign currencies over time.

The returns of typical gold mutual fund, including mining companies and a selection of precious metals, moved higher by 40 percent.

Crude oil, another closely watched commodity —

albeit one with real USE-VALUE, unlike the purely speculative gold —

rose from $79.86 a barrel to $91.38 the barrel, less than 15 percent,

after rising 78 percent in 2009, according for this article in the New York Times.

Anyone that pretends to know what’s going to happen in ANY of these markets, of course,

is kidding themselves, not to mention anyone foolish in order to heedlessly follow their words.

But the most summary analysis of the items happened in 2010

should provide pause to anyone who really believes "happy days tend to be here again."

They clearly are not.

David Caploe PhD

Editor-in-Chief

EconomyWatch.com

President / acalaha.com