Posted on 10/16/2007 10:09:52 PM PDT by bruinbirdman
Foreign investors slashed their holdings of US securities by a record amount as the credit squeeze intensified, according to the latest Treasury figures.
The Treasury International Capital report – known as the Tic – for August will be closely watched because it appears amid growing concerns about the weakness of the US dollar, which hit a record low recently against a basket of major currencies.
“The bad news is that [the data] plainly show how vulnerable the dollar is to a continuation of the credit crunch-risk averse environment,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital. “There is no way to get away from the lack of corporate bond inflows, the foreign selling of US equities and the countervailing strong US purchases of foreign equities and bonds.”
The Treasury said net sales of US market assets – including bonds, notes and equities – were $69.3bn in August after a revised inflow of $19.5bn during July. The August outflow exceeded the previous record decline of $21.2bn in March 1990.
Until now, US policymakers have appeared relatively relaxed about the dollar’s decline, since there has been little sign to date that this has been been triggered by a broader global aversion to US assets. However, that attitude could change if signs emerge in the coming months that non-US investors are becoming more nervous about holding dollar assets, as a result of the recent credit squeeze.
Some analysts said on Tuesday that the August data might turn out to be an aberration, since it occurred during the most intense period of this summer’s credit squeeze – when investors were arguably most uneasy about the market outlook. Consequently, some said they hoped that the outflows will have been reversed in September.
“There was clear panic-selling of equities in August, but given the market’s subsequent rebound, those flows should have reversed,” said Dominic Konstam, head of interest rate strategy at Credit Suisse. “If foreign investors return to buying equities, it is not obvious that there will be a capital flight from the US that will lead to a dollar crisis.”
However, others suggested that the scale of swing in August indicated that more fundamental pressures were now bubbling – not least because the dollar continued to decline in September.
The dollar was generally firmer on Tuesday after traders digested the Treasury data. The dollar index was 0.2 per cent higher at 78.25, but that is only 0.8 per cent above its record low set late last month. The dollar was up 0.3 per cent against the euro, but was 0.6 per cent lower against the yen.
Since August 1998, Tic flows have been positive and the last period of pronounced outflows was in the early 1990s when the current account deficit was briefly eliminated.
A breakdown of the data showed that one key reason for the outflows was that there were net foreign sales of US equities of $40.6bn in August, more than reversing the purchase of $21.2bn in July. Reflecting the pressure on US markets and the dollar, US residents purchased a net $34.5bn of long-term foreign securities.
In the debt world, there were net sales by foreign investors of US corporate bonds – but overall holdings of US government debt remained relatively balanced.
I'm a little more conservative with IWM.
For individual equities, I am way overweight energy.
yitbos
One of the primary reasons the Euro is so strong is their interest rates are much, much higher than ours.
yitbos
Oh ok - that said I guess inflation is a problem in a high priced commodities environment. Ecpecially for a country that doesn’t have much intrinsic efficiency for the use of oil and gas.
hu ? I though we got still 1% less then you guys.
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I just wanted to correct one of your comments. You are absolutely right that Euroland is not running a trade deficit and in most years runs a surplus. However, the combined Euroland economies run budget deficits larger than the US budget deficit (and ours is coming down to around 2% of GDP. Euroland has a restriction of budget deficits of 3% of GDP but many countries are seriously in excess of that. Furthermore, our public debt/GDP figure is around 64% which puts us below most Euroland countries (about equal with France and Germany).
I too watch the TIC reports carefully. My gauge is three consecutive negative reports, then long term rates explode to the upside and this credit cycle is history.
BUMP
DB:
Euro rates are lower than USD rates: 1 MO Euribor: 4.18% and 1 Mo LIBOR is 5.08%.
It’s the trade deficit although we actually run a surplus with a lot of the European countries. We are the No. 2 exporter in the world. It is the deficit with Asian countries and OPEC that are the problems.
RT
So far this year FXI & EWZ have had a great run. But when you look at the near vertical curve, it is time to cash in some chips.
Okay... Call me stupid...
I really did think the interest rates were significantly higher...
Sorry.
ping
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Hey, we’re all here to learn.
Awesome post Pro. So it seems to go long dollars big time, unleveraged, so you can hold for the long haul.
“Buy dollars young man...”
you’re only part stupid - the limees got more interests (higher then 5 if I recall correctly) US is 4.75 and EU 4
Seed articles/opinion so that the not-as-smart money takes positions OPPOSITE theirs. Think about this... At market turning points, i.e. if you are long, you need to go short to take your profits. So you don't "tout", 'Gee, I think we've reached the top so you other guys should start selling along with me so I get WORSE prices." No, it's "BUY, BUY, BUY, the market going to the moon...".
Capishe?
I’ll read the international finances seminar later.
That's probably the biggest question in international economics right now, even bigger than the Arabs messing around with oil. China is very rapidly building an urban middle class. It is about to become the world's largest automotive market. They've got traffic jams. Refrigerators, tv's, and washing machines have become standard in city apartments. So far, so good. The sooner China evolves as a mass consumer society, the better all around ... and urban China is bigger than either the U.S. or the EU.
But meanwhile, they've still got 600 million people out in the countryside, many of them desperately poor and willing to work for next to nothing. Sticky situation.
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