The US Labor Department reported that the number of new jobless claimants fell last week to 460,000. Despite the decrease of about 14,000 from the previous week, this was still higher than expected and provides further evidence that improvements in the US employment market remain tentative at best.
Late last year, the official unemployment tally was 10.1 percent. It fell to 9.7 percent in the first quarter of 2010, but has since crept upwards to 9.9 percent as of April.
Source: Associated Press
The total value of Japan’s exports for the month of April climbed just over 40 percent to 5.9 trillion yen (US$65 billion). This is the fifth straight month that exports have increased.
Sales to the European Union were up 19.8 percent year-over-year and while this is down from the 26.7 percent increase in March, analysts still feel that exports will remain positive and help get the nation’s economy back on track.
“Exports remain very firm even after very strong growth in January to March,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “The pace of export growth will slow in April to June, but we expect exports to continue to expand.”
Source: BBC News
Spain’s government passed by a margin of a single vote, a plan that would shave 15 billion euros (US$18.4 billion) from its yearly budget. The austerity program includes wage reductions of at least 5 percent for civil servants and shelves other public spending initiatives.
Source: BBC News
The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history. The M3 figures – which include broad range of bank accounts and are tracked by British and European monetarists for warning signals about the direction of the US economy a year or so in advance – began shrinking last summer. The pace has since quickened.
Telegraph UK
Is this the ‘real’ beginning of the end of the EU? Germany rattling their own saber and threatening not to wait for EU or international approval before curbing speculation and making financial institutions cough up monies to cover the cost of the ‘crisis’. Merkel is proposing legislation that her government will expand ‘a partial ban on naked short-selling to all German stocks and certain EUR currency derivatives’. Other EU members believe that the Chancellors attempt to re-open the Lisbon and Maastricht treaties are ‘naïve and ill-advised’. Is China again the ‘white knight’ to sooth Merkel’s madness after declaring its allegiance to European investments? At the moment, the key to the EUR’s weakness is been driven by the ongoing asset allocation shift away from the Euro-zone, supported by the recent flow news (CFTC and FI reports). The currency remains contained, however, after last week’s breakout to the topside, the correction has managed to shake out the weaker short positions. The market seems steadfast on testing the EUR lows once again as positions dictate that.
The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in another ‘whippy’ trading range.
US data yesterday was very strong and certainly supported ‘growth trading strategies’. New Home sales posted the largest increase in 2-years (+504k vs. +425k), supported once again by tax incentive programs and lower median prices. It was predominately the first-time program that expired at the end of last month that aided the record increase. Of course the question on analyst’s lips is what will happen to sales in both the new and resale market now that the tax credit has expired. With signs of growth in the US, the market will be relying on low borrowing costs and continued improvement in the labor market to support future gains, however the ‘magnitude of gains is expected to decline’. Digging deeper, the months’ supply fell to 5.0 (the lowest level in six-months). With the increase in demand for new homes over the last three-months coupled with this report should provide strong support for further home construction. Interestingly, both the median (-9.7%) and mean price (-4.8%) declined last month.
Not to be outdone, the US durable goods report was also strong (+2.9% vs. +1.1%) and keeps the ‘V’ shape recovery on track, at least for now. Digging deeper, inventories have been expanding at a rapid pace over the past 3-months, and should represent a solid inventory contribution to growth being repeated in the 2nd Q. Business investment (ex-non-defense capital goods) happened to decline last month by -2.4%, while transportation advanced +16.1%, offsetting the decline in the previous month. Shipments also happened to rise for a second consecutive month. Both of the above reports are strong proof, despite the fiscal meltdown in Europe, that the US recovery is still gathering momentum. However, with Europe being a part of their equation, the US economy cannot rely on its exports to sustain its recovery. Domestic demand has to lead growth and that’s down to the consumer and their spending habits.
The USD$ is lower against the EUR +0.71%, GBP +0.56%, CHF +0.30% and higher against JPY -0.35%. The commodity currencies are much stronger this morning, CAD +1.14% and AUD +1.51%. The loonie has drifted away from its six-month lows printed earlier this week after equities plummeted on fear of further weakness appearing in the Spanish banking system. The currency retreated on the back of stronger US fundamentals convincing investors that a ‘V’ shape recovery was very much on the cards. Robust commodity and equity prices are allowing ‘risk on’ trading strategies to be implemented and that includes the CAD. It also helps this growth currency that China has come out in favor of Europe and willing not to change its foreign-exchange reserve diversification. Assuming markets remain somewhat stable or less ‘insane’, dealers will begin focusing their attention on the BOC’s rate decision next week. The recent flight to quality, equity losses and the fear of a multilateral currency intervention has convinced a segment of the market (50%) to price out any rate hike by Governor Carney just yet. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency. Longer term investors are looking at the 1.08-1.10 level to begin buying the loonie again. If commodities remain true, then intraday traders will be happy buyers of the currency on ‘any’ upticks.
Finally, the AUD found support and managed to print a one week high, as advancing regional bourses is convincing investors that ‘down under’ can withstand the pressures from a European debt fallout. O/N headlines that indicated China would not change its foreign-exchange reserve diversification helped to support the EUR, risk and therefore growth currencies like the AUD. The currency also found favor amongst investors on rumors that the Australian government was contemplating altering the rate at which its proposed mining profit tax would take effect. Up until last night, the currency had been heading for its worst performing month in nearly two-years as investors shied away from growth currencies. Plummeting equity markets in the region and potential war rhetoric apparently from Kim Jong had pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -10.1% on declining equity and commodity prices. The fickle investor is now a better buyer on pull backs as longer term support levels remain intact (0.8375).
Crude is higher in the O/N session ($72.55 up +104c). Crude prices have soared since yesterday for a number of reasons. Firstly, the weekly EIA report happened, to aid a rallying equity market, to drag crude prices away from this week’s oversold lows on European fiscal issues. The commodity at one point during the day climbed as much as +4.1% after the US Energy Department reported that total fuel demand gained +0.6% to +19.7m barrels a day and with stronger US data delivered yesterday had the bulls breathing a sigh of relief. Secondly, with durable goods increasing, signals growing manufacturing in the largest energy-consuming country. The weekly EIA report showed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Finally, fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing.
Last week the story line was the EUR appreciating, equity losses mounting and inflationary fears ‘none’ existent had speculators heading for the exits. Now that the EUR has lost some of that firm footing has again revived the demand for the commodity as a ‘safer heaven’ asset class. The commodity has managed to rise to a one week high as the asset alternative of choice amid Europe’s sovereign- debt crisis. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,213). Soon we will have to be using an excuse of inflation if the equity market can remain firm!
The Nikkei closed at 9,639 up +117. The DAX index in Europe was at 5,841 up +83; the FTSE (UK) currently is 5,097 up +60. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.26%) and is little changed in the O/N session. After treasury yields managed to print yearly lows on the back of plummeting global bourses earlier in the week, new found belief in US growth has investors willing to add some risk to their portfolio when treasuries were technically in over-bought territory. Yesterday, Treasury’s five year auction came in at a yield of +2.13%. The bid-to-cover was 2.71, on par with the past four auctions. Overall demand was healthy but trailed market expectations. On a macro level, prices should remain bid as demand for the ‘safer assets’ remains. Today we have the final tranche of this week’s US issues, $31b 7-year notes. Dealers continue to see better buying of product on pull backs.
After the furious selling pressure that has taking place in world markets; yesterday, the US stock market was able to rebound and reverse most of its early morning losses. In what has become a familiar pattern, traders push the Euro lower in the overnight session, which causes commodities and stock futures to sell off until the US market opens. At that point, the US fundamentals take over as Europe closes and the potential for reversals is much greater.
And that’s the beauty of the forex market. Once the European session closes, the potential for risk decreases as business is concluded for the day. Every day that the European session can close without some major negative news is a good thing for global economic stability.
So overnight the news was relatively benign; allowing market participants to step back in slowly with risk appetite, though the trend for the Euro is still clearly down. An orderly decline in the Euro is not a bad thing; furious selling based on fear is.
So there is some mild risk-taking in the market, and perhaps a bit of short-covering. Better-than-expected durable goods numbers in the US extend the economic recovery story, however the Euro debt crisis will still be the ultimate factor in global market sentiment.
In the forex market:
Aussie (AUD): The Aussie is higher this morning, as an index of leading economic indicators rose at its fastest pace in almost 13 years. The Australian economy has been one of the better performing economies, and the Aussie has taken a hit as of late due to the unwinding of carry trades.
Loonie (CAD): The Loonie is also higher, catching a bid from its correlation to oil prices, which is back up over 70.5, sporting a 2.5% gain. Prospects for a rate hike at next week’s policy meeting are still on the table, and I mentioned yesterday that now may be an excellent time for the BOC to hike, as the Loonie has sold off due to Euro concerns.
Kiwi (NZD): The Kiwi is also moving higher as risk appetite is beginning to pick up going into the open of the US stock market session. Mild risk-taking as investors “dip their toes back in” is taking place.
Euro (EUR): From the “no news is good news dept.”, the Euro is lower but experiencing a more orderly decline as total meltdown has been avoided so far in the trading session. European stock markets have rebounded from yesterday’s decline, in a sign that the selling may have been excessive. There are still some good growth stories around the Euro zone, however expect Euro weakness to continue as the debt crisis continues. Also Italy announced $30 billion in budget cuts.
Pound (GBP): With a day of rest in the Euro zone, the market has turned its eye toward the UK economy. The Pound is lower this morning as the OECD said that the UK needs to be concerned about potential inflation and may need to raise rates and remove asset purchases going forward in addition to cutting its budget. There is still obvious concern about the UK economy, however at this point it still looks to be in better shape the EU.
Dollar (USD): The Dollar is meandering around as it wants to be weak as equity futures are higher this morning, but is being held up by alternative currencies (Euro, Pound) being weaker. This could cause a shift in the way the dollar trades; reversing from an inverse to a positive correlation with US stock markets. Or we could see a reversion to mean. Durable goods orders rose 2.9% last month, more than doubling the expectation of 1.3%.
Yen (JPY): The Yen is lower vs. all but the Pound and Euro as investors cautiously take risk. BOJ officials are concerned about “excessive involvement” in the allocation of capital, as it attempts to combat deflation. This brings back into focus the debate between monetary and fiscal stimulus, with the BOJ essentially saying they don’t have much room left to maneuver.
Mild risk-taking is happening today as world markets rebound from lows not seen in some time. Every day the Euro zone can get by without a major catastrophe happening will help the markets gain confidence in the global economic recovery.
There are still some good economic growth stories coming from around the globe, and it is sort of becoming a situation where one region has to pick up the slack while another is struggling. The same situation occurred when the US was at the brink of disaster back in 2008 and things looked bleak.
But we made it through. And with global cooperation and support, the EU will as well.
To learn more about how you can take advantage of world events through the currency market, be sure to check out our currency trading courses!
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The US Commerce Department announced this morning that order to US factories for durable goods rose by 2.9 percent in April. A 228 percent increase in orders for commercial aircraft helped boost the orders. The result was more than twice the expected 1.3 percent increase and was the best result since January.
Source: Associated Press
Michel Barnier of the EU Internal Market Commission, said he wants to see European banks pay into a fund to help prevent a future financial crisis. According to Barnier, the funds would be used to manage bank failures in “an orderly way” that would protect the broader system.
An unintended consequence of such a levy is the fear that “moral hazard” could creep into the system. Angela Knight of the British Bankers Association noted that having a massive pool of funds reserved for this purpose could actually help bring about another failure as some institutions could be tempted to take on extra risk with the knowledge of the availability of a financial backstop in the event of a crisis.
“It would surely increase moral hazard by curtailing the consequences of a bank failure,” she said.
Instead, she proposes that each country should strengthen its regulation and supervision, with a national intervention authority, being the Bank of England in the UK.
Source:BBC News
It’s the US dollar libor, the pain of Spanish Banks, Korea, and China’s pending bubble, a trillion dollar bet going sour, restrictions on naked short selling and that’s this week’s issues that are driving investors to seek shelter. The volatility in the currency market begs the question, are risk adverse investors too bearish? Watching how various asset classes ‘snap back’ into positive territory with aggression this morning is telling. Investors are trading ‘intraday’ more now than ever. It’s true that volatility brings great opportunities. However, mounting losses in other asset classes is also driving this volatility. It seems that investors are indecisive in their trading thoughts, the bottom line is so much more important as they juggle with catching a correction or remaining true to the trend. What if the correction is a trend reversal? No matter what, market participants’ acting ‘irrational’ is a lagging indicator and we should expect more of the same for the time being.
The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.
Yesterday, US data ended up providing a footnote to other global concerns as economic and political headlines dominated all asset class movements. Surprisingly, US consumer confidence increased this month (63.3 vs. 57.7), managing to record its strongest print in two-years as consumers became more upbeat about future job prospects. It all comes down to spending. With US growth indicators indicating expansion in the economy, starting in the middle of last year, is finally beginning to negate the ‘pessimism’ that has been dominant throughout this recession. Basically the underlying economy is improving the job opportunities. Proof is in last months NFP print. Is this sustainable? Last week’s weekly claims numbers again edged higher and is beginning to raise a red flag. In the bigger picture, confidence is very much at risk of stalling as Europe’s debt crisis continues to weigh on global equities and eventually erode household wealth. Digging deeper into the report, consumers were more optimistic about the labor market with the number that felt jobs were not as hard to get declining from 44.8% to 43.6%. Those saying that jobs were plentiful, however, also ticked down slightly. Their assessment of business conditions also improved, with the numbers saying that conditions are ‘good’ increased to 10% while the number saying that conditions are ‘bad’ declined to 39.3%. The six month future expectation has consumers expecting more jobs, improving business conditions and higher incomes.
The S&P Case-Shiller seasonally adjusted measure of house prices fell less than expected in Mar. (+2.3% vs. +2.6%). It is the second consecutive monthly dip after a string of eight consecutive gains. However, year-over-year prices are up +2.1% in the first quarter.
Finally, the manufacturing activity in the Richmond Fed’s district remains in expansion mode (26 vs. 26), but the pace is decelerating. Digging deeper, one notices that the rate of growth in shipments accelerated, but the strong pace of growth in new order volumes eased up somewhat from the elevated levels the previous month. Analysts believe that the order backlog coupled with stronger new order volumes should provide ‘shipments strength in coming months’.
The USD$ is higher against the EUR -0.31%, GBP -0.10%, CHF -0.18% and JPY -0.05%. The commodity currencies are mixed this morning, CAD -0.14% and AUD +0.38%. The loonie managed to print a six-month low yesterday as investors shied away from growth assets. With equities and commodities plummeting on fear of further weakness appearing in the Spanish banking system and tension between the Koreas is tentatively promoting risk aversion trading strategies. This month alone the CAD has lost just under -5.5% vs. its southern neighbor as investors seek refuge from the European sovereign-debt crisis. The flight to quality, equity losses and the fear of a multilateral currency intervention has had the CAD underperforming also on the crosses. OIS’s are currently prices a 50% chance that the BOC will hike in June, earlier last week the market had priced in a 75% chance. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency. Longer term investors are looking at the 1.1000 level to begin again buying the loonie.
The AUD fell for a third consecutive day as investors sold higher yielding assets on concerns that the European debt crisis will worsen and on reports of escalating tensions between North and South Korea. Currently the currency is heading for its worst performing month in nearly two-years as investors shy away from growth currencies. Plummeting equity markets in the region and potential War rhetoric apparently from Kim Jong has pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -12% on declining equity and commodity prices. It’s not surprising with the doubt that the markets are experiencing in the EU/IMF accord that growth currencies have retreated from their initial euphoric highs recorded earlier this month. Thus far, the AUD longer term support levels after the weekend sell off remain intact, the market prefers to be a better seller on rallies (0.8297).
Crude is higher in the O/N session ($70.44 up +166c). The fear that the European debt crisis will persist, and affecting global growth, had crude prices again under pressure yesterday. The commodity managed to register a 5-month low as the EUR slid vs. the USD, thus reducing the investment appeal of the asset class. In the O/N session prices have rebounded aggressively on the back of an API report showing that US gas stocks falling and on global bourses paring most of this week’s earlier loss. This morning we get the weekly inventory report. Prices seem to be trying in vain to rebound on oversold indicators. Last week’s EIA report managed to record a ‘smaller positive print’, showing that crude stocks gained +200k barrels vs. a market expectation of +1m. On the other hand, gas stockpiles fell -300k barrels. Interestingly, again inventories at Cushing (the delivery point for benchmark WTI) rose +917k barrels to a new record of nearly +38m. Not helping the crude’s price is refinery runs dropping to 87.9% of capacity, from 88.4%. With global equities under pressure is only fueling concerns that the region’s debt crisis will worsen, and by default it may affect global demand. The US economy and the dollars strength and not oil fundamentals have driven the market to date.
Last week the story line was the EUR appreciating, equity losses mounting and inflationary fears ‘none’ existent had speculators heading for the exits. Now that the EUR has lost some of that firm footing, equity losses continuing, has again revived the demand for the commodity as a ‘safer heaven’ asset class. Over the last five trading sessions, the yellow metal managed to depreciate -4.2% as investors liquidated positions to supplement losses in other asset classes. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,209). Soon we will have to be using an excuse of inflation if the equity market can remain firm!
The Nikkei closed at 9,522 up +63. The DAX index in Europe was at 5,766 up +96; the FTSE (UK) currently is 5,037 up +97. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.16%) and another 7bp in the O/N session (3.23%). Treasury yields managed to print yearly lows on the back of plummeting global bourses and on fear that Europe’s fiscal crisis will slow economic growth. Even in these trying times dealers have cheapened up the curve to absorb Government supply. Yesterday, Treasury’s two year auction came in at a yield of +0.769%, the lowest auctioned yield for a two-year note sale. The bid-to-cover ratio was 2.93, compared with 3.12 from the past four auctions. On a macro level, treasury prices should remain bid as demand for the ‘safest assets’ intensifies. Today we have $40b 5’s and $31b 7-year notes tomorrow to contend with. Technical analysts are looking for a 3% print in 10-years.
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