Hungary's forint has hit a record low against the Swiss Franc, and Ireland's sovereign CDS widened by 20 points on uncertainty about banking sector losses, and and sovereign credit in the Eurozone. Traders are now back to their desks, the holdiay season is over, with strong signs that the brief reassessment of the situation up to now has resulted in an overwhelmingly negative viewpoint on the global economy among market participants. Short-term players continue with their bullish outlook, which makes us recall the days of September-October 2007, when a market similarly in denial of facts was butchered through the November-February period.

Ireland's sovereign CDS widens to 400 points

The Irish government's plan to extend bank guarantees through the year-end received European Commission approval today, pushing the potential costs of the bailout program higher, and in turn, leading investors to demand a higher premium for protection against a sovereign default. Right after the announcement, CDS traders added twenty basis points to the cost of protection, fixing it at 390/405 at 10 am GMT, which is an all-time record (notwithstanding the brief history of the CDS market). The guarantee was previously expected to expire on September 29^th.

Hungary's forint plunges

The Hungarian Rhapsody goes on, with the forint hitting an all-time low against the CHF at HUF226 today in reaction, probably, to troubles in the CDS market, and also generally deteriorating risk sentiment. Those interested in the region would remember the declaration of the prime minister that they were the next Greece, and also recall the breakdown of IMF talks in July all of which have placed the country in a peculiar situation vis-a-vis the markets, to say the least. It seems that after remaining quiet during the summer, traders will soon be back to punishing the country, and with a large amount of consumer and mortgage loans being denominated in foreign currency (especially the CHF), the outlook for Hungary is grim indeed.

Bangladesh reports rapidly rising exports as buyers shift from China

If you wonder why the Chinese are so reluctant to let the RMB appreciate faster even as the displeasure of U.S. officials threatens to reach alarming levels, this little piece of news from the faraway nation of Bangladesh may shed some light on the situation.

The AFP reports that, in July Bangladesh shipped some $1.82 billion of goods, which is the highest amount by dollar value in the nation's 40 years of history. Explaining the 25% year-on-year jump, the head of the Export Promotion Bureau, notes that firms choose to buy from Bangladesh instead of China due to rising costs, as China's currency appreciates, and wages rise. In plain words, Jalal Ahmed, the head of EPB, says that Bangladeshi exporters receive morders from places that would previously source them to China. Shipments to Turkey, Japan, South Africa, and China are reported to have risen by 200%, with U.S. and the E.U. accounting for almost 90% of the countries exports nonetheless.

Let's keep our eyes on China. While most people are focused on the country's real estate bubble, for us just about every part of the Chinese economy is a bubble after the government's pursuing of incredibly lax and reckless policies since the end of 2008. As the Renminbi appreciates, and workers demand higher wages through public protests, the cost of business in China will keep rising at a time when the future of global demand is worsening, and the speculative frenzy in the country reaches its peak. We expect that China well be at the forefront of the downturn in the next few years along with Europe, as it struggles the with the backlash of the crazy policies of 2006-2010.

More yen comments from Japan

The finance minister, and BoJ Governor are making more comments today about the need for "decisive action" after the Yen saw its 15-year high yesterday. With or without an intervention the yen will continue its rise in the long term, but the likelihood of intervention is low because of strong U.S. opposition in the middle of this intense period of bilateral meetings and discussions with China. On the other hand, the yen trade is overcrowded for now, so we advise against overly aggressive positioning.

U.S. July consumer credit falls by $ 3.6 billion, debit card usage exceeds credit cards for the first time in history

Consumer credit volume has been contracting since August 2008, and this month did not signal change in the trend. Credit fell by another $3.6 billion, although the change was lower than expected by analyst consensus, explaining the lack of strong reaction, so far, to the numbers. Consensus or not, however, the decrease in consumer credit volume is a worrying development for the central bank and politicians, not only because it will convert to less demand in the future, but it signals a shift in sentiment that is far harder and costlier to alter then any single monthly or yearly figure would be.

The consumer credit data summarize the present situation effectively. The Fed keeps pumping money, increasing the availability of liquidity to corporations and consumers in order to create demand out of thin air, but because U.S. consumers are highly unsure and fearful about the next years, and months, they quite simply refuse to take what is being offered to them. And they are not being unwise in this choice, because, although credit card rates are not that high, the penalties for delays are above 20-25% in many cases, easily paving the way to bankruptcy, with a weak labor market in the background, for consumers who are less than prudent in their spending habits.

The deflationary case in the U.S. at the moment is not very different from the inflation crisis of the 70s and 80s. Back then, the oil shock, coupled to the Vietnam War, and political scandals, had lead to a fundamental shift in sentiment that regarded high inflation as an permanent problem, and was only remedied by drastic and radical solutions engineered by Paul Volker in the early 80s. This time we had the finance crisis, the stock market crash, and most crucially, the collapse of the labor market coupled to a tigtening of credit standards, directly, or indirectly, leading to an extreme degree of cautiousness among consumers. This is a change in sentiment, a shift in expectations that cannot be addressed by run-of-the-mill solutions, as those being adopted by the government and the Fed. And that in turn means that we will have many more years of falling demand and lacklustre economic performance until radical solutions root out the fundamenal problems faced by the U.S. economy, new legislation establishes the groundwork for a far more restrained finance sector, and the shift from white collar to blue collar jobs is completed, which will also see the share of manufacturing in the U.S. economy rise.

Finally, German July Industrial production figures were also released today, showing 0.1% growth, which is much weaker than previous months, but does not signify a lot for us due to the volatility of this series, and also the strong background of the earlier quarters. Germany will no doubt decelerate, but it has a stronger base to fall back upon in the short term.

We will keep an eye on sovereign CDS in Europe's peripheral areas, updating our readers on developments as the month progresses. We see the recent events harbingering another multi-year downturn that will probably last until the end of the Obama presidency, and remain bullish on the yen, and CHF vs. Dollar, on dollar vs. most of the developing world and the Euro, and on gold vs. everything else.