This is the second straight month that the RBA has raised interest rates. From the Sydney Morning Herald:

The Reserve Bank has lifted its key interest rate for a second month in a row as it attempts to keep Australia’s economy on track for sustained growth.

Today’s widely tipped 25-basis-point increase raises the central bank’s cash rate to 3.5 per cent, marking the first back-to-back monthly increase by the RBA board since March last year when rates peaked at 7.25 per cent.

I remember seeing data showing that once central banks start raising rates, they continue to do so for months. They do not raise rates one month, then lower them the next and then reverse course. Does anyone have the data? This makes me suspect that rates are due to go higher globally rather than lower.

If you think this rate increase will lead to a global double dip because of underlying economic weakness, you should expect the yield curve to flatten. Operation Twist anyone?

Related posts:

• Norway makes three
• Interest rates, the pound and good news for Brits
• Credit markets are easing again
• RBA hikes rates 25 basis points in Australia
• Australia is set for a slowdown

The Reserve Bank of Australia unexpectedly raised rates by 25 basis points to cool down its economy. It will “gradually reduce stimulus” in anticipation of sustained recovery. Australia has probably been the major economy least affected by the global economic slowdown, so one would expect the RBA to be the first major central bank to increase rates. However, the question now is whether other central banks will follow.

In the U.S., Donald Kohn and Richard Fisher have made fairly hawkish statements suggesting that the Federal Reserve is going to be more anti-inflation now than in the Greenspan era.  However, New York Federal Reserve Chairman William Dudley obviously didn’t get the memo about jawboning the market in a hawkish way.  Yesterday, he indicated that the U.S. Federal Reserve is likely to keep rates very low for a prolonged period for fear of choking off a tenuous recovery.

So while the RBA is raising rates, the Fed and the ECB may not follow anytime soon. That is certainly supportive of the Australian dollar.

Below is a CNBC video that gives you a chance to see the real-time reaction to the RBA’s decision and another with some commentary on the Aussie dollar.

Related posts:

• Reserve Bank of Australia lifts rates again
• The ECB cuts rates 50 basis points to 2 percent
• Is the Fed just jawboning?
• Chart of the day: interest rates
• Norway makes three

This comes via the Sydney Morning Herald:

A year ago, after Stern Hu had survived 20-odd rounds of negotiations and won Rio Tinto and Australia an extraordinary 87 per cent price increase for its iron ore contracts, I asked him if he was being too aggressive.

He said he had no qualms with driving as hard a bargain as he could on price. But he had misgivings about whether Rio Tinto should risk its integrity in China by claiming "force majeure" to wriggle out of long-term contracts to chase higher prices elsewhere.

"We acted in accordance with the letter of the contracts, but not the spirit," he said.

One of the ironies and tragedies of Mr Hu’s incarceration, together with his senior staff, is that he is widely known in China and at Rio Tinto for his integrity and quietly spoken good judgment.

He is reputed to know exactly how far to push China without breaking the relationship.

He is said to understand how relationships work, the importance of face, and almost everything that is worth knowing about the Chinese steel industry and the government and industry bureaucracy that tries to manage it.

It was notable that Chinese steel managers spoke up for Mr Hu yesterday even though he stands accused of one of the most serious crimes.

More here

Related posts:

• Should we expect a protectionist China?
• China detains Rio executive on suspicion of espionage
• China cutting overcapacity
• China’s skyscrapers will be ten times New York
• China: we “will take steps to protect the interests of our domestic industries”

Rio Tinto was one of those companies which levered up just as the economy was turning down, rushing its bottom line ad forcing it into the hands of Chinalco, a large Chinese commodities company.  However, as commodity prices have turned up and investors have simultaneously started buying shares, Rio was able to escape the Chinalco deal ad link up with rival BHP Billiton.

The Chinese are naturally sour, despite earning a nice deal breakup fee.  The question is whether their displeasure has taken a dangerous turn.  At the weekend, four Rio executives in China were detained.  Now, one is being held on suspicion of spying.

An Australian Rio Tinto employee has been detained by Chinese state authorities on suspicion of espionage and stealing state secrets, Stephen Smith, Australian foreign minister, said on Wednesday.

Stern Hu, an Australian citizen who is working as a marketing executive with the miner and currently living in Shanghai, is one of four Rio employees detained by Chinese authorities since Sunday.

Mr Smith ruled out any commercial link between the surprise detention of Mr Hu and his three colleagues and any commercial matters concerning Rio’s, bitter rejection of a $19.5bn deal with the Chinese state-owned minerals giant Chinalco last month.

They would say that, wouldn’t they.  The sequence of events should make one sceptical about why Mr. Hu is being detained.  Until this matter is adequately explained, we should all be vey nervous about what it portends regarding future Chinese retaliation for protectionist measures.

Apropos protectionism, the German government has now confirmed an official bid for automaker Opel by a Chinese car company, Beijing Automotive Industries (BAIC). As the Chinese have become noted of late for being the high bidder, I suspect BAIC has put in a good offer. (Update 920ET: The Telegraph puts this offer at €660 million for all of GM Europe including Vauxhall) To be sure, the Austrian-Canadian auto parts maker Magna is on the verge of finalising its bid.  Nevertheless, the Germans are going to need to treat the Chinese bid with diplomatic aplomb.  We have already seen enough protectionism against Chinese companies.  Another slight of this nature would be proof positive that Chinese money is considered no good for buying top-tier western companies.

Source

Rio executive held by China on suspicion of spying – FT

Related posts:

• Should we expect a protectionist China?
• Germans reject Chinese offer for Opel
• China wants all of Repsol’s Latin American oil assets
• China slams U.S. profligacy
• China’s skyscrapers will be ten times New York

The goings on down under are not getting that much play in the press outside of Oz. But, Babcock & Brown, Australia’s second-largest investment bank has just gone under.

The corporate undertakers were finally called in on Babcock & Brown yesterday after noteholders in New Zealand voted against a proposal that would have stripped back their debt’s privileges and offered little in return.

But the real shock may still be about to hit. The administrators, Deloittes’ David Lombe and Simon Cathro, have, in effect, taken over a corporate shell while the assets of the group remain out of reach in a Babcock subsidiary, Babcock & Brown International Pty Ltd.

Babcock’s only real connection to BBIPL is its 99.7 per cent shareholding, now worthless, and the $600 million from Babcock noteholders which was lent to BBIPL.

The loan is also, in effect, worthless because it is “subordinated” to the $3.2 billion debt from BBIPL’s banks, which is already swamping its deflating asset values.

Mr Lombe said yesterday that the listed Babcock company now in administration had “very few assets and a small amount of cash”. He said the administrators would be looking into what rights Babcock had in terms of recoverable assets. “That will involve a substantial investigation,” he said.

Babcock’s board and management released a statement to the market yesterday saying they “deeply regret the loss of subordinated note and shareholder value that has occurred and acknowledge the financial hardship this has caused”.

The board said it was disappointed the restructure of the notes was not achieved and stuck by its claim that that would have produced a better result “for all investors in the company’s securities”.

The outcome for noteholders should not be a surprise as they were warned of the meagre prospects should Babcock collapse.

This comes as a surprise to no one in Australia as the newspapers there have chronicled the problems at B&B for months now. The real question now is Macquarie.

As evidence mounts that Australia is not going to escape this global recession, more and more problems are popping up in Australian finance and lending, particularly in the residential property sector. Macquarie would be well-advised to raise capital sooner than later. These are developments to watch.

Sources
Investors send B&B to corporate graveyard – Sydney Morning Herald
Banks will take control of B&B – Sydney Morning Herald
Macquarie reassures on capital strength – FT Alphaville
Macquarie Group comments on market speculation – Macquarie website
Babcock & Brown – FT Lex

Related posts:

• Australia bans short selling too
• Danish banking crisis the worst in Europe
• Two largest wholesale credit unions seized
• Marc Faber: “I think a lot of banks are already bankrupt”
• Tribune bondholders will lose 98.5 percent

This is the absurd thinking of economists. Australia has a 40% chance of recession next year. What does that even mean? If you asked me, I would say the chances of recession in Australia are 100%. You have a slowing property market, financial sector turmoil, a falling currency, plunging commodity prices and a global credit crunch. How do Australian economists figure Australia is going to be immune to this? Was this not the thinking in the U.S. just 4 or 5 months ago?

Australia’s economy will slow sharply in 2009 but is not expected to contract, before growth rebounds in the following year, a survey shows.

The survey of forecasts of the 14-member Australian Business Economists executive committee found business and dwelling investment would ebb next year, resulting in a median gross domestic product (GDP) growth rate of 1%.

That would be down from an estimated 2.3% in calendar 2008, and come ahead of an uptick to 2.2% in 2010.

“Despite the weaker prognosis in 2009, annual average GDP growth was not forecasted by any committee member to contract in 2009,” the ABE survey said.

Asked what chance the economy had of going into recession, members settled on a relatively high 40%.

It’s this type of forecasting that leaves most people underwhelmed by economists.

Source
Economists sees 40% chance of recession – Sydney Morning Herald

Related posts:

• Australia is set for a slowdown
• The Economy Is Definitely In Recession
• Australia: housing slowdown?
• Australia guarantees bank deposits for three years
• Recession ‘95% likely’ in Britain

Just as Japan is starting to unwind its carry trade, a new one might be forming in the form of 1% base rates in the United States. The carry trade was very popular amongst Japanese retail investors, especially using leverage (see article – hat tip Yves Smith). But, this trade unwound in a vicious way these past few months (see links here and here).

Now, a new carry trade is forming to take its place (at least for the moment). I am NOT bullish on the dollar, but if you can get 18% on Krona investments versus a measly 1% in USD, you might be tempted. Such are the consequences of easy money.

Nevertheless, I digress because this post is about Japan and its carry trade. Below is an article that gives you a feel for what that trade is all about and why its coming undone. Mrs. Watanabe might be advised to stick with domestic savings no matter what the yield.

Mrs Watanabe is crude shorthand for Japan’s $15,000bn pool of savings, the deepest in the world and worth more than the annual economic output of the US. These vast resources are somewhat apocryphally marshalled by Japanese women, who have traditionally held a firm grip on family finances.In fact, Mrs Watanabe is very crude shorthand indeed: she is just as likely to be Mr Watanabe, the manager of a Japanese life assurance company portfolio, or Mr Smith, an American hedge fund manager, borrowing in yen to buy South African rand, U.S. mortgage-backed securities or tea futures. Whoever, she is, she borrowed cheaply in yen, courtesy of Japan’s rock-bottom interest rates – which have been stuck between zero and 0.5 per cent since 1999 – and put the money in higher-yielding assets abroad.

The important thing to know about Mrs Watanabe is that, temporarily at least, she has all but stopped flapping her wings. In the past days, as spectacular moves in global currencies reveal, the carry trade has been violently unwound. With last week’s panic retreat from risk assets of almost every description came a dramatic rise in the yen, partially reversed in the past two days on rumours of a Japanese interest rate cut. Even so, the yen was trading on Wednesday at about Y97 to the dollar, the other “safe haven” currency, against a remarkably steady Y110-Y120 in recent years.

No, if you have your calculator handy, you probably already realized that 97 yen is only 80% of 120 yen. If Mrs. Watanabe was investing in U.S. treasurys, she’s not so happy right about now. And, if it as Australian or New Zealand Dollars, less so. But the interest spreads are pretty intoxicating. Where else is one to put one’s money – Japanese stocks hit a 26-year low recently.

These gyrations do nothing to solve the underlying problem, which is that Asia has an excess of savers and the U.S. and Europe an excess of spenders. Unless that is solved, the world seems condemned to repeat the swings of recent years, as capital is arbitraged between countries where money is cheap to those where it is expensive.Until recently, one of Mrs Watanabe’s favourite wheezes was to take her Japanese yen and put them in Australian dollars, earning her a roughly six-point interest rate gain. This week, she – and those who travel with her – will not have missed the fact that Iceland just raised its interest rate to 18 per cent. That is a 17.5 point differential with Japan, and counting. Krona, anyone?

Related Posts
Currency crisis is gathering storm
Chart of the day: Aussie – Yen cross
Chart of the day: Japanese Yen
Japan’s easy money policy was the trigger for the tech wreck

Related articles
Mrs Watanabe and the sudden rise of the yen

Source
Beware the unwinding of the yen carry trade – FT

Related posts:

• Quote of the day: Nationalized banking predators
• Reverse carry trade borrowing is deadly
• Wassup 2008
• US GDP shrinks 0.3% in Q3
• Chart of the day: Aussie – Yen cross

Of the major currencies, the Japanese Yen has been the strongest in the last few months, while the Australian Dollar has been the weakest. These two currencies have also been the most conspicuous in the Japanese carry trade. That trade is now coming unstuck, precipitating changes of epic proportions.

For those of you who don’t know what the carry trade is, it is essentially a debt/asset position whereby one borrows money at low interest rates and invests that money in higher yielding assets (often with significant leverage). In Japan, after the stock market imploded and interest rates were cut to near zero, the carry trade took on monumental proportions amongst retail investors. See Yves Smith’s tale about this phenomenon from last year.

With an enormous gap between Australian interest rates and Japanese interest rates, buying Australian Dollars and selling Japanese was a particularly good trade for a very long time. However, those days are well and truly over.

The chart below should give one pause as to whether the trade was ever really worth it in the first place. The violent move out of the carry trade has left many with enormous losses.

In the end, it demonstrates the unintended consequences of easy money policies.

Related posts:

• The carry trade unwinds and it’s not pretty
• Japan’s easy money policy was the trigger for the tech wreck
• US Dollar rising dramatically
• U.S. Bailout: the mother of all carry trades?
• Is the U.S. dollar carry trade replacing the one in Japanese yen?

So, I am back in the saddle after a great weekend in Palm Beach. And three days almost entirely away from Newspapers, Televisions, Telephones, and Computers is a very good thing to clear the head. (Although I did happen to catch Sarah Palin on “Saturday Night Live” and I thought it was well done.)

Let me start off this week with some thoughts that come out of conversations with friends in the financial industry that I spoke to at the weekend. I sincerely believe the panic that we experienced over the past few weeks is over. In time, risk premia like the TED Spread and LIBOR-OIS spread will damp down somewhat and they have already begun to do so.

However, much of the underlying problem: leverage, excessive debt and inflated asset prices remains. Moreover, we are now about to experience the pain of recession, which is an entirely different beast than what we have experienced to date. And all of this will take time to work through.

However, my focus will be on Asia because Asia is next. Let me explain why?

This crisis and downturn is a manifestation of how markets respond to a realization that an unsustainable mania has weakened the entire banking system. In Manias, Pancs and Crashes, Charles Kindleberger outlines the stages of a financial mania and crisis.

The events begin as a result of legitimate speculation in a promising asset class: metallic coins in the Holy Roman Empire in 1618-23, British Government Debt in Amsterdam in 1763, Railroads in the U.S. in the 1870s, Technology and Telecom stocks in 1995. However, easy money steps in and monetary expansion fans the flames of the speculation turning legitimate speculation into a bubble.

As the bubble takes form and money is to be made, swindlers enter the scene. Time and again, this has bee the case and in the present case things were no different. However, at some point the unsustainability of things becomes evident. Warning signs appear, leading to changing expectations, and, eventually, financial distress. Then comes the crash and panic. This is what we have seen to date in the present crisis.

However, Kindleberger also mentions the infection of asset classes due to the speculative mania in Chapters Seven and Eight. The speculation and bubble events do not happen in a vacuum. Easy money and large profits spill out into other asset classes domestically and are also propagated internationally.

Now, I would argue we have seen the spill over events in terms of residential real estate infecting leveraged loans, high yield debt, Collateralized Debt Obligations and so on. Moreover, we have seen that a number of countries have experienced housing manias that are in unwinding right now. However, I would argue that, in a globalized economy, no one is going to “de-couple” — no nation can insulate itself from the global effects of this largest speculative mania in history, That is why Asia is next.

In August, I penned a blog post “Europe is next,” in which I said:

As you could probably tell — from all the stories I have been writing about the Baltics, Denmark, Sweden, you name it — I believe that Europe is the next leg down in the global housing bubble. As such, it will pay to focus as much attention on events outside the US, where the housing bubble began as it will to focus on the continuing U.S. problem.

Make no bones about it, with distress in Alt-A, Prime, Option Arm, and Negative Amortization mortgage products still rising, the U.S. has many more writedowns to come and some bankruptcies. Yet, it is Europe where the next leg down will be interesting.
-Europe is Next

I went on to elaborate on how I saw distress in Europe and that Europe was going to suffer along with the U.S. in this downturn. And the script has largely unfolded as expected. Now, it is Asia which should move center stage. The signs of weakness are readily apparent. Three major economies are in recession: Japan, New Zealand and Singapore. Others will follow.

Moreover, the financial distress that we saw first in the U.S. and then in Europe is also apparent as well. Look at the Bloomberg headlines from Asia today:

India Lowers Key Rate for the First Time Since 2004
Citic Pacific May Lose $2 Billion From Currency Bets
Kazakhstan to Use Oil Reserves to Avert Bank Failure
Asian Stocks Rise as Government Policies Provide Market Support
Dollar Hoarding Fuels Won, Rupee, Real Drop on Losses
Pakistan May Seek IMF Bailout to Avoid Debt Default
China’s Economy Grows 9%, Slowest Pace in Five Years

All of this suggests that the ill effects of the global economic crisis have finally made their way to Asia and emerging market countries in Latin America and elsewhere. For me the South Korean banking mess is the canary in the coalmine here:

South Korea sought to rescue its financial system by guaranteeing $100 billion of lenders’ foreign-currency debts and providing $30 billion in U.S. dollars to banks.

The won rose and the Kospi was little changed after the government said it will also give tax benefits for long-term investors, and the central bank will provide “adequate” currency liquidity to the markets. The plan, unveiled yesterday, aims to help lenders overcome overseas funding difficulties.

South Korea, struggling with Asia’s worst-performing currency and a stock market that has lost 38 percent this year, joins Europe, Australia and Hong Kong in providing banks with state backing amid a global lending drought. The measures should boost confidence in the banking system and return attention to “Korea’s solid macroeconomic fundamentals,” the International Monetary Fund said.

The guarantee is “essential,” said Kim Hag Ju, head of research at Samsung Securities Co. in Seoul. “Rather than give banks the money they need, it’s much cheaper and effective to back their debts so they can borrow it. With the credit freeze, it’s extremely difficult for a bank or company to be able to borrow money without a sovereign guarantee.”

The Kospi slipped 0.3 percent to 1,177.11 at 9:29 a.m. in Seoul after initially rising as much as 1.3 percent. The index fell 9.4 percent on Oct. 16, the biggest drop since September 2001, and is heading for its first annual decline since 2002.

Currency Rises

The won gained 4.1 percent to 1,280.80 against the U.S. dollar today. The currency fell last week by the most since an IMF bailout of South Korea in 1997 after Standard & Poor’s said it may cut the credit ratings of the nation’s largest lenders.

South Korea’s government said it has no immediate plan to recapitalize lenders or increase deposit guarantees.

-Bloomberg News

If you recall, these were measures initially undertaken in the U.S. and across Europe. Eventually, greater support in the form of bank recapitalization and explicit deposit guarantees were necessary. Why would it be any different in South Korea or elsewhere in Asia?

My last though on this issue is about China. China has had a massive property and stock bubble. The stock bubble has burst and the monetary authorities are doing all that they can to keep the property bubble from collapsing in a disorderly, panic-filled way. However, it seems to me that China will suffer a hard landing as the magnitude of these bubbles become evident.

What’s my point? Asia is in a much better situation than either North America or Europe. Yet, it will not completely de-couple. The speculative mania certainly spilled out into Asia in terms of excess capacity across Asia, stock market and property bubbles in China in particular, and inflation and easy money across the entirety of Asian economies. Therefore, while Asian macro data is better than it is elsewhere, I believe we are about to witness the next leg down in the global credit crisis and it will be in Asia where the action takes us.

Asia is next.

Sources
Manias, Panics and Crashes – Charles Kindelberger

Related posts:

• Jim Jubak joins the inflation made in Asia crowd
• Asia is de-coupling
• South Korea going gangbusters in contrast to UK
• Hungary cut to a notch above junk by S&P
• Is China avoiding using US dollars?

This comes from the Sydney Morning Herald. I will have a comment on this post later today.

UPDATE: combined with the news out of the EU regarding bank backstops and interbank guarantees, the news from Australia is now being greeted quite well. The Aussie and Kiwi Dollar are trading straight up in massive currency moves. The overall tone of Monday morning trading is bullish, especially for bank shares.

Australia will guarantee all bank deposits for three years and guarantee wholesale funding to Australian banks in an attempt to combat the global credit crisis, Australian Prime Minister Kevin Rudd said.

Australian will also double the funds available for mortgage-backed securities to $8 billion to help maintain liquidity for non-bank lenders, Mr Rudd told reporters today, adding the measures were part of an international response to the crisis.

He said the Australian government was in close contact with other countries, including the G-20, and coordinated action was crucial. A government spokesman later said the Australian move was being coordinated with New Zealand, comments later confirmed by New Zealand media.

”The measures I have announced today are part of also international measures designed to unclog the arteries of the global financial system,” Rudd told reporters.

”The government is reassuring Australians that their credit union, building society or bank is a safe haven for their savings,” Louise Petschler, chief executive of Abacus – Australian Mutual, an industry group, said in a statement, according to Bloomberg News.

Opposition Leader Malcolm Turnbull welcolmed the move to guarantee all deposits in Australia, regardless of size.

”It’s a very important step and we will undertake to give the government every assistance in insuring that the necessary legislation will pass through the parliament promptly,” Mr Turnbull told reporters.

Related posts:

• Ireland guarantees bank deposits at six banks
• Australia is set for a slowdown
• Rumour: NAB wants to buy HBOS Australia
• Australia: 40% chance of recession? Try 95%
• Australia bans short selling too

If the huge sell-off on Wall Street, the gaping up of LIBOR, the halt of credit liquidity everywhere, the nationalisation of financial institutions and the enormous TED spread are not enough to convince you that we are headed for a deflationary world, then the sell off in commodity currencies should!

Just two months ago, mining giant Rio Tinto’s CEO Tom Albanese said:

“There is no question that we are living in an era of unprecedented demand for minerals and metals.”

Well, look at this chart of the Australian dollar.

A move of this size in a few days is unheard of. The Australian Dollar has absolutely collapsed. The same goes for the South African Rand, another commodity currency (see data). I think the market is telling us something… and it’s not demand for commodities through the roof.

Related posts
China’s skyscrapers will be ten times New York

Sources
U.S. Dollar – Australian Dollar cross – Exchange-Rates.org
Chinese skyscraper builders to put up equivalent of 10 New Yorks, says Rio Tinto – Guardian
Rio Tinto expects post-Olympic Chinese boom – Times Online
David Prosser’s Outlook: That 20-year commodities super-cycle is in need of a puncture repair kit - Independent

Related posts:

• Chart of the day: Aussie – Yen cross
• China detains Rio executive on suspicion of espionage
• Has anyone noticed the Dollar has gone into freefall?
• The dollar is rising against floating currencies
• The Dollar Carry Trade

Last night, on Bloomberg TV I heard that New Zealand had become the first Asian economy to officially slip into recession. Today, I have seen the stats confirming this.

Jim O’Neill, Chief Economist at Goldman Sachs, says the chance of global recession is only 10%. I don’t see how he can believe this with economies weakening globally. New Zealand joins the UK, Ireland, Germany, France, and Japan at a minimum which have had negative GDP quarters. As I see it, this downturn is global and it is going to mean a global recession.

O’Neill is a smart cookie. So, if anyone has evidence to the contrary, I’d love to see it.

Below is the FT’s commentary on New Zealand’s recession and the inter-connectedness of Asian economies. Very interesting read.

New Zealand – the first country to see the light of day each morning – has, fittingly, become the first country in the Asia-Pacific region to stumble into recession. Second-quarter GDP data showed a decline in private consumption and exports, offset by only a small increase in government spending. Meanwhile, Japan, on technical definitions, is half way there. Does grim economic data from other Asian economies suggest there will be more casualties in the once robust region?

Strong trade links meant Asia was always going to suffer: if U.S. homeowners are giving back the keys to their homes, they are less likely to be buying Korean TVs or Chinese fridges. That hurts since Asia has become more, rather than less, export-intensive over the years. In 1980, exports represented less than one-quarter of output in Asia ex Japan, China and Taiwan, according to Royal Bank of Scotland; now they make up more than half. Chinese exports comprised one-fifth of GDP in 2001 and 37 per cent in 2007. This downturn has been exacerbated by spiralling food and energy prices, which ties the hands of central bankers.

Policymakers, banking on sustained lower inflation, are now seeking to pump up growth. China, for example, this month reversed years of monetary tightening to cut lending rates and reserve requirements for smaller banks. Taiwan, in milder fashion, followed suit. But not everyone can count on softer price rises – the weakening won, for example, could propel inflation higher in Korea. Besides, even reducing borrowing costs and making more funds available is only half the trick; consumers wary of losing their jobs will usually opt for saving over spending.

Fiscal packages doled out so far are unlikely to change the dynamics much, although China has the firepower to go further. Ultimately, though, the saving grace of Asia is that growth rates are starting to tail off from a high base. Japan apart, recession looks about as remote as – well, New Zealand.

Source
Asia’s first economy in recession – FT

Related posts:

• Recession nears in New Zealand
• Stephen Roach: Downturn in Asia less severe, but recovery later
• Asia is de-coupling
• Nouriel Roubini: we are in recession
• Will Asia’s downturn be worse than America’s?

It seems incredible – this rollback of the free markets. But, six countries have now banned short sellers of financial shares as if they are solely responsible for the market meltdown we suffered in the wake of the Lehman bankruptcy. The latest to join in the curbs is Australia.

The country has yet to see the attacks on financial services shares that we have seen in the U.S. and UK in particular. So, perhaps they are preemptively striking against the shorts lest they be the next country to suffer systemic risk.

Obviously governments around the globe are turning to market manipulation in order to tame animal spirits.

Australia’s corporate regulator extended a ban on short selling to so-called covered transactions, following similar moves in the U.S. and U.K. in an attempt to cut volatility in the stock market.

Traders won’t be allowed from today to transact covered short sales, in which stock is borrowed for the purposes of betting on share price declines, unless they are hedging positions, the Australian Securities and Investments Commission said on its Web site yesterday. It abolished so-called naked short sales, in which traders never borrow the shares, last week.

The ban covers all stocks traded on the Australian exchange and follows the U.K., Germany, France and Belgium in barring short sales to defend banks from trading blamed for helping wipe $3.8 trillion of value off global stock markets this week. The U.S. Securities and Exchange Commission halted short selling of financial companies to stop speculators benefiting from the credit crisis that led to the collapse of companies including Lehman Brothers Holdings Inc.

“Anyone who’s got a short position this morning is in trouble,” said James Chirnside, who manages the equivalent of $63.3 million at Asia Pacific Asset Management, a Sydney-based hedge fund manager. “This decision directly affects about 150 hedge funds, some of which may be forced to close as a result.”

Short sellers try to profit by betting stock prices will fall. In a short sale, traders borrow shares from their broker that they then sell. If the price drops, they buy back the stock, return it to their broker and pocket the difference.

Unwarranted

“Short sellers are not agents of the Devil,” said Ed Rogers, chief executive officer at Tokyo-based hedge-fund adviser Rogers Investment Advisors Y.K. “The current market hue and cry on the part of individuals such as John Mack seems completely self serving and totally unwarranted.”

Australia’s benchmark S&P/ASX 200 Index jumped 3.5 percent as of 11:23 a.m. in Sydney. Macquarie Group Ltd., Babcock & Brown Ltd. and Allco Finance Group Ltd., among the stock market’s biggest losers as they blamed short sellers for targeting their stock this year, surged.

ASIC and the Australian Securities Exchange said the ban on covered short sales did not include hedging positions placed before today. The regulators abolished naked short selling on Sept. 19, raising concerns that investors are flooding markets with sell orders to drive down prices.

The changes will be reviewed in 30 days, ASIC said yesterday.

Related posts
Short-selling financial shares is now illegal

Source
Australian Regulator Extends Ban on Short Selling – Bloomberg

Related posts:

• The short-selling rule and unintended consequences
• Welcome to The United Socialist States of America
• Short-selling financial shares is now illegal
• Everyone wants in on the short sell ban list
• Massive short covering at VW and massive losses for hedgies

From all accounts, it looks like Australia is set for a wicked slowdown. Four global industrial economies have been protected by commodity prices. They are Canada, New Zealand, South Africa and Australia. This Goldilocks scenario looks to be coming to an end across the board.

There are multiple data points indicating that trouble is brewing for Australia:

• The Westpac-Melbourne Institute consumer sentiment index fell 6.7 per cent in July to 79 points, its lowest point since January 1992. -Sydney Morning Herald
• Australian Bureau of Statistics data released on Wednesday showed growth in owner-occupied housing finance fell by a seasonally adjusted 7.9 per cent in May, its fourth consecutive monthly drop. -Sydney Morning Herald
• Home-loan approvals fell to an 8-year low in May as the Reserve Bank’s 7.25% interest rate turns consumers away from buying houses. – Sydney Morning Herald
• The nation’s largest mortgage broker last month sold 22 per cent fewer mortgages than it did in the same month a year ago. -The Australian

Does all of this spell recession? No. But, it does mean that a slowdown in Australia is underway.

Related posts:

• Australia: housing slowdown?
• Reserve Bank of Australia lifts rates again
• Australia: 40% chance of recession? Try 95%
• Australia guarantees bank deposits for three years
• B&B: Australia’s 2nd largest investment bank is bankrupt

No one is paying a whole lot of attention to Australia right now because of the massive busts in the US, the UK, Spain and Ireland. But, Australia has had a property boom as well. And this boom looks like it’s coming to an end.

IN further evidence that the property market has been spooked by rising interest rates and an uncertain economic outlook, it has emerged that the nation’s largest mortgage broker last month sold 22 per cent fewer mortgages than it did in the same month a year ago.

Australian Finance Group, which accounts for 10 per cent of the national market, with a mortgage book in excess of $50billion, yesterday declared a”mortgage recession” following two successive quarters of falling sales.

Last month, AFG sold 5939 mortgages, an 11 per cent drop from May when it sold 6691, and 17 per cent down from April, when 7125 sales were made. In June last year, it recorded 8195 sales.

AGF spokesman Mark Hewitt said average mortgage sizes were still increasing because borrowers needed to take out bigger loans to cover the cost of housing. Where the average loan was $317,000 a year ago, it was now $341,000.

-We’re in a ‘mortgage recession’, The Australian, 4 Jul 2008

What is clear is that the credit crisis is global. Any and all markets that had previously witnessed heady gains should feel the headwinds of global inflation, higher interest rates and a credit growth slowdown.

Countries where this slowdown should be gathering steam include Canada, Australia, New Zealand and South Africa, all of which experienced fairly high rises in the property market. These countries are also heavily leveraged to the commodities sector and have benefitted from high commodity prices. However, if commodity prices fall, all bets are off.

Also see my post Naysayers, the housing bubble was obvious, linking to an article from the Economist attesting to overvaluation in a number of different markets.

Related posts:

• Australia is set for a slowdown
• Australia: 40% chance of recession? Try 95%
• Australia guarantees bank deposits for three years
• Add South Africa to housing victims list
• Australia bans short selling too

This is the latest M&A rumour making the rounds in financial circles. I caught this in Today’s Financial News.

And that may be the moment when National Australia Bank (NAB:Australia) makes a formal offer for the Australian branch of HBOS. NAB, the country’s largest bank, has already begun discussing the feasibility of an offer with advisory firms in London, but hasn’t yet approached HBOS with an offer.

HBOS Australia would be a logical expansion choice for National Australia. HBOS, headquartered in Perth, has capitalized on the mining boom in Western Australia, while National Australia is centered on the more populated east coast. And HBOS may be able to sell the subsidiary for as much as GBP 3.7 billion ($7.3 billion).

Now the question is, how much money does HBOS Australia make for its parent company, and how much is HBOS willing to sacrifice to stay afloat during the credit crisis?

As I see it, this is just a rumour. But, it is something to take note of as the UK housing market suffers and HBOS is in need of cash. We already know that Citibank is looking to shed its German operation.Ultimately, with more writedowns to come, banks should take what they can get.

Related posts:

• HBOS to raise new capital
• Deutsche Bank and HBOS hit by writedowns
• Lloyds gets HBOS for a song
• More on HBOS
• S&P cuts HBOS counterparty credit ratings