There is no backing down from ‘this’ persistent EUR decline. The market risk premium that was aggressively applied last week feels in danger of giving it all up and then some. Sentiment remains vulnerable allowing event risk to dominate on a disappointing of potential ‘under delivery’ at the Brussels Summit this weekend.
Overnight brought a host of further stress indicators to the fore. What’s bad for China is bad for Europe. Data revealed that Chinese growth figures fell short of expectations coupled with some disappointing earning from Euroland is again boosting market volatility. With Germany trying to manage market expectations, Moody’s is offering to do the same by putting France on a three-month notice. They have indicated that ‘pressure from debt metrics’ could leave the country with a negative credit outlook, even a downgrade, and this only months ahead of important elections.
Also getting traction this morning is Nouriel Roubini believing, pragmatically so, that the Eurozone requires the dollar to fall below $1 for a EU crisis solution and that the ECB needs to slash rates. None of these are new ideas, it’s perhaps the sensitivity of timing in such an important week for the vulnerable asset classes.
It goes to show how much rhetoric affects sentiment, as the weekend approaches expect this rhetoric to intensify.
US data continues to send out mixed signals. Yesterday’s US September industrial production advanced +0.2%, bang on market expectations, despite the net revisions being marginally negative at -0.1%. August was revised down from +0.2% to unchanged, while July was revised higher by +0.2% to +1.1%. The negative print came from June retreating -0.1%. Analysts use this to explain why capacity utilization fell short of consensus at +77.5% by -0.1%. Digging deeper, there was “moderate” underlying growth in the manufacturing sector (+0.4% and ex-autos +0.3%). Thus far, manufacturing growth has shown three consecutive increases and has produced an annualized growth rate of +4.3% in Q3. Overall, IP with a +0.2% rise managed only half the pace of manufacturing due to the weather sensitive utilities sector falling by -1.8%. Mining maintains a firm trend with a monthly rise of +0.8%. Investors seem more concerned about the lack of confidence than about market fundamentals. They are beginning to worry themselves into another recession.
Empire State Manufacturing Index contracted this month (-8.5) at a faster pace than forecasted (-3.9), reflecting a lack of confidence in the recovery, even as measures of orders and sales improved.
The dollar is higher against the EUR -0.48%, GBP -0.24%, CHF -0.42% and lower against JPY +0.10%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.26%.
After printing its highest price in three weeks, the loonie did an about turn, inline with investor panic liquidation, as comments from German officials that there’s no quick fix for Europe’s sovereign debt crisis eroded appetite for higher-yielding assets. With commodities prices ambushed, the dollar on an uptick, no fundamental data yesterday would help the CAD. Risk-off sentiment is back, and as equity markets sell off, the safer haven big dollar looks attractive. Despite the CAD appreciating +2.8% outright this month and beating its commodity peers (AUD and BRL), on speculation that the US able to avoid another recession, the CAD is expected to retest its recent lows being the US’s largest trading partner.
The CAD, like any risk or interest rate sensitive currency, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front. The market is a good buyer of dollars on dips after strong corporate interest ahead of parity kept the line at the beginning of the week (1.0253).
The market got the RBA minutes and the final verdict seems to be neutral. The minutes mirrored the tone of their policy statement and failed to give any additional information. Digging deeper, the key sentence “an improved inflation outlook, if confirmed by further data, would increase the scope for monetary policy to provide some support to demand, should that prove necessary”, could end up being a possible teaser, as a weaker third quarter inflation report released next week would/could trigger a cut, however, EU holds the key, as the RBA is not expected to be pro-active ahead of the G20 meeting at which Europe is due to reveal its comprehensive policy package.
The currency has backed off somewhat from its earlier highs on the belief that this rally has come ‘too far too fast’. It’s only natural to take some profit off the table in a one directional trade ahead of some key releases. Risk aversion and weaker commodity prices continues to put this growth and interest rate sensitive currency under pressure.
Aussie domestic data remains robust, and coupled with Chinese inflation being well contained, provide compelling ingredients to own this growth currency. However, investors need to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. At current levels and similar to other growth and commodity sensitive currencies, the market’s bias prefers to be better sellers of the AUD on these rallies, until the panic flows have abated (1.0136).
Crude is lower in the O/N session ($85.78 down-$0.56c). Oil prices slipped from its highest level in a month yesterday after Germany said EU leaders would not provide a complete fix to the region’s debt crisis by week’s end, damping hopes for a quick rescue plan. Disappointing Empire Manufacturing Index data did not help commodity prices either. Certainly not helping the black-stuffs cause was the Japanese government downgrading its assessment of their economy for the first time in five months, as the strengthening yen and slowing global growth weighed on the prospects for an export-driven recovery. This morning’s data revealed that China’s growth is slowing, and anything that bad for China is bad for commodity prices.
Last week’s EIA report was somewhat neutral for prices. It showed crude stocks rallying +1.34m barrels to +337.6m. The market had been expecting a +300k average build. Crude imports rose +386k barrels per day to +9.05m. On the flip side, gas stocks fell by -4.13m to +209.6m, more than market projections for a-100k barrel fall. Average gasoline demand in the last four-week’s fell by -0.7%, y/y. Distillates (heating oil and diesel), fell by -2.93m barrels to +154m, compared with an average forecast for a-600k barrel draw. Refinery Utilization fell by -3.5% to +84.2% of capacity. Finally, stockpiles at the Cushing rose +532k barrels to +30.6m barrels.
Are we back to a market traveling “too far too fast”? Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technical selling on some of these steeper rallies.
The bulls and the bears continue to ‘duke it out’ over gold. Price appreciation, is it risk aversion or risk appreciation? Is it a store of value, a hedge against inflation? Eventually the yellow metal is expected to climb as the European debt crisis spurs safe haven demand. Now that the market is beginning to believe that EU leaders will not be able to apply the quick solution, it can only promote instability and fear again. Last week, the market over extended that risk premium bull pricing, this week we can expect to see some of that reversed. Momentum should again return to the metal’s side despite the dollar uptick.
After last months rout, investors remain very cautious about this trade. The metal rose +2.5% last week for a second weekly gain. Demand for ‘physical’ gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August.
The yellow metal has moved in line with other commodities and assets seen as higher risk, like equities, in recent weeks, despite moving in an inverse relationship with them earlier in the year as buyers sought the metal as a haven from risk. In fundamental terms, gold is trying to find a balance ‘between the two opposing forces’, a risk investment or a safe haven ($1,695 up+$12.20c).
The Nikkei closed at 8,741 down-137. The DAX index in Europe was at 5,826 down-33; the FTSE (UK) currently is 5,380 down-56. The early call for the open of key US indices is lower. The US 10-year eased-15bp yesterday (2.14%) and another-3bp in the O/N session.
Treasuries have rallied from their seven week high yields, as concerns that Europe may take longer to contain its sovereign debt turmoil boosted demand for the safest assets. In technical terms, the ‘stability’ road map plan being implemented now rather than later was aggressively over priced and the market, rightly so, is giving back some of that extra premium. The German Finance Minister stated that “dreams” of an imminent resolution to the crisis are not likely to be fulfilled this weekend in Brussels. This has dealers willing to flatten the US yield curve even further.
Currently, the market remains susceptible to Euro rhetoric, and any negativity towards a Euro solution will have investors wanting to bank more of last weeks risk profit before losing it entirely.
