Renminbi: Less Currency Basket More Dollar Peg

From Bloomberg:

China's central bank said today it will allow the yuan to strengthen by as much as 3 percent from a daily fixed rate against the euro, from 1.5 percent previously. It kept the range against the dollar unchanged. The 12-nation currency is also being hurt by expectations the interest-rate advantage of U.S. government debt over European bonds will widen.

Macroblog has more on the news but Brad Setser had something a few weeks back that telegraphed this pretty well. To me this news means China is not giving up on the dollar peg anytime soon. More important than my interpretation is what the U.S. congress makes of it. A lot on their plates now but protectionism was certainly more popular before China announced its currency basket. Probably bad for stocks if that sentiment returns.

UK Property Derivatives Market

From the FT:

Major players in the financial services industry are to partake in a trading game in property derivatives starting next month in a drive to accelerate the development of the market in the UK.

The initiative, which is being spearheaded by Hermes, the investment fund, is intended to give investors, property companies and investment banks the chance to gain practical experience in trading derivatives in a realistic environment – but on a virtual basis. The exercise is also aimed at gauging the level of potential demand.

Derivatives are financial instruments that effectively allow investors to bet on the direction of a particular market. A property derivative would give investors and companies exposure to the sector without having to own bricks and mortar. Buying derivatives is also often quicker and easier than physical property transactions.

Now that is interesting. I have believed for a very long time that with the massive amounts of wealth tied up in real estate and the normal concentration of risk by geography that a derivatives market was overdue in the sector. I am not familiar with the particulars of the contracts but it will be interesting to see how increased derivatives trading will impact the underlying market.

The Refinery Side of the Equation

From the FT:

Assessing the impact of the storm that closed refineries in the US's most important oil producing region, Europe's second largest oil group said it expected production in the region to reach only 60 per cent of the pre-hurricane levels by the end of the year.

It added that refineries at some sites including Mars, one of the gulf's largest deep water platforms capable of producing 220,000 barrels a day, were unlikely to resume activities this year.

The region, which produced an average 450,000 barrels of oil equivalent per day or about 15 per cent of group production in the first half of the year, is now only producing 160,00 boe/d following the damage caused by the storms.

This is the flipside of the story from last night.

Update: I may have confused some details and I kind of wonder if the author of the story did as well. Despite all the references to refineries and refining capacity near the top, the story closes with this:

In addition, Shell said a third of its refining capacity in the US had been knocked out by Hurricane Katrina. Before the storm Shell refined a million barrels of oil a day at its seven refineries in the US. Two of these sites - Motiva Convent and Motiva Norco had been affected but were expected to return to pre-hurricane levels by the middle of next week.

At this point I am guessing this last section is the only portion dealing with refining and that the deep water platform, Mars, is mistakenly referred to as a refinery.

Watching Oil vs. Gasoline Spread

From the FT:

The US and Europe are releasing more emergency crude oil than refineries in the Gulf of Mexico can handle, reinforcing suspicions that governments are using the crisis triggered by Hurricane Katrina to cap record oil prices.
Data from US oil inventories released on Thursday showed that crude oil stocks had fallen by 6.45m barrels, well below the 13.6m barrels of oil production that by Wednesday had been lost as a result of the hurricane.

This has been pretty well telegraphed with most people being very aware that the hurricane had a bigger impact on refining capacity than oil production. Prior to the hurricane refineries were already being talked about as a bottleneck.

It could still make an interesting situation though as a trader could have been very right and foreseen an inflation spike but still end up being positioned exactly wrong as oil (which has been leading the commodity charge) goes the other way. I don't know the commodity market as well as the credit market but the situation is a bit similar to the wishbone in the automotive sector when the credit downgrade came on the heels of Kerkorian's GM tender.

I haven't been blogging much lately as my views haven't changed very much since early Summer. The continued strength in the equity markets has been at odds with the problems I see so I have done very little. Prior to Katrina I thought the housing market was finally losing steam and leaving little cause for inflation. That is no longer the case as the refining and general transport issues caused by the storm are unknowable at this point.

Got to be one of the more interesting Fed meetings approaching. I lean towards a hike at this meeting.