The European Central Bank announced that it will leave the benchmark lending rate unchanged at 1 percent. It is also expected that the ECB will maintain its liquidity operations first implemented in May which to date, has resulted in the purchase of 67 billion euros (US$88 billion) in government securities.
Source: Reuters
Here we go again. Rumors that the Dubai Group, a conglomerate owned by Dubai’s ruler, missed an interest payment last month, coupled with a medley report on further Greek deficit concerns, sandwiched between doubts about Ireland’s ability to repay its debts is dictating the EUR’s direction. Theses reasons have overshadowed the G20’s attempt to ease currency tensions and secure commitment to more balanced global growth. The corralling of world leaders into one room is only strengthening the lack of confidence in risk positions. Accountability, flexibility, and the lack of multilateral agreements are making Bernanke’s QE2 ‘slight of hand’ release difficult to achieve its objectives. Do not expect the Fed to be fully committed to the buyback if the economy improves. The sudden reversal of the EUR from its lows is on the back of rumors that an Irish bailout is a done deal with a figure of 80b being mouthed.
The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘volatile’ trading range.
It’s always difficult to come in cold to a new trading day after a mid week holiday. The O/N price action tends to cater for two trading sessions. With no data yesterday the market again focused on rumors, innuendo and the ‘talking heads‘ at the G20. This mornings Euro Industrial production fell in Sept by the largest margin in 16-months, on a broad based slowdown (down -0.9% on the month). Proof is in the pudding, states struggling with excessive deficits and credit downgrades is dampening the Euro-zone as a whole. Be on the lookout for a surprising Irish rescue package!
The USD$ is higher against the EUR -0.26%, GBP -0.73% and lower against CHF +0.17% and JPY +0.50%. The commodity currencies are weaker this morning, CAD -0.92% and AUD -1.11%. The loonie has temporarily failed on its lack of follow through parity and weakened vs. its largest trading partner on heightened risk aversion sentiment. With commodity and equity prices paring some of their weekly gains as China’s inflation numbers suggest a tighter monetary policy by the PBOC is directly affecting growth sensitive currencies. Softer trade numbers this week is strong proof that Canada cannot fundamentally rely on foreign demand to buffer the slowdown in domestic activity. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. The market is back to embracing the event risk factor and with Euro-peripheral debt problems expect investors to continue to cash in on their profitable long CAD positions, especially after last nights move.
The AUD dollar took a beating from all corners last night. A plethora of factors have helped push the currency aggressively back below parity again. Risk aversion was evident on the back of rumors that South Korea implementing further capital controls next week and on China’s pending rate hike. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. Some softer jobs numbers this week seems to have justified the unwinding of profitable positions. The Aussie unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record, easing concern that a labor shortage will drive up wages. This week’s sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance has again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. Market players are viewing corrective rebounds as fresh selling opportunities short term (0.9909).
Crude is lower in the O/N session ($85.80 -$2). Oil prices have been unable to sustain two-year highs as global bourses found it difficult to maintain positive traction and on fears that China may attempt to rein in inflation by raising interest rates and curb the commodity demand. The market continues to question the fundamental strength of other economies once the Chinese’s variable is erased from the global growth equation. The commodity found strength this week on the back of disappointing weekly inventory numbers. The report showed an unexpected decrease in stock as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. The ‘big’ dollars value will continue to influence prices despite fundamentals.
Gold prices fell this morning as speculation that China may raise interest rates and a strengthening dollar curbed demand for bullion. However, European debt concerns should continue to boost demand on these pullbacks. The commodity again will be used for a protection of wealth and a hedge against faster inflation in China. There have been times this week that the one directional play felt so overdone and every time this has occurred, global fundamentals provide a reason to own it. The dollar’s strength has tried to erode the metal’s appeal as an alternative asset this week, but in vain. The metal has advanced and fallen on speculation that European governments may struggle to pay debt. That argument depends on what direction the big dollar decides to take. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 26.3% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Any pullback will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,389 -$19).
The Nikkei closed at 9,861 up +31. The DAX index in Europe was at 6,722 up +2; the FTSE (UK) currently is 5,814 -2. The early call for the open of key US indices is higher. The US 10-years backed up 3bp yesterday (2.65%) and are little changed in the O/N session. Dealers had been leaning on treasuries all week, making the US government pay up for liquidity. Now that all the auctions have been taken down, not as successful as expected, the market has been chipping away at the higher yields, buying product on event risk and reduction of risk exposure.
New applications for unemployment benefits for the week ending November 6th fell by 24,000 to 435,000 from the previous week. The total number of people collecting unemployment insurance fell to the lowest level since November 2008, and those receiving extended payments also declined.
“This is further confirmation that the job market is slowly improving,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. “We are now headed in the right direction and may make some progress in breaking free of the range we’ve been stuck in since the beginning of the year.”
Source: Bloomberg
Fears that Ireland’s debt crisis could worsen have forced the yield on 10-year bonds to a record high of 8.16 percent. Analysts believe the likelihood that Ireland will require emergency funding to meet debt obligations has increased and is now all but a certainty.
Source: The Associated Press
It’s no wonder the Chinese are worried about ‘hot’ money after the announcement of their second largest trade surplus this year (+$27.2b). They do not want our cash dollars mixed with theirs, we will never know who owns what. Their record trade surplus will certainly dampen the US’s proposal to curb current account imbalances in Seoul as Geithner will find it difficult to gain support from other major countries. So far this week, higher US yields has allowed the dollar to find broader support ahead of the G20. Lack of data yesterday promoted profit taking and offered less risk as investors continue to readjust their positions for potential event risk. The Euro-zone debt issues will be expected to weigh on their currency until after the release of the Irish budget in early Dec.
The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.
Today is a data laden day, unlike yesterday, where the market had little to chew on. Investors had to be content with Euro-sovereign concerns and record profit taking ahead of the holiday shortened trading week. US wholesale inventories posted its ninth consecutive monthly gain (+1.5% in Sept), after a positive Aug rise to +1.2% from +0.8%. Digging deeper, the inventory print was supported by both durable gains (+0.7%) and nondurables (+2.8%-largest increase in a year). Analysts expect this positive spike to contribute to US 3rd Q GDP revisions. It worth noting that wholesale sales advanced (+0.4%), pushing the inventory-to-sales ratio higher to 1.18, its highest reading in a year.
The USD$ is lower against the EUR +0.18%, GBP +0.04% and higher against CHF -0.07% and JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.01%. Yesterday’s Canadian new home prices headline print was misleading from a CPI perspective (+0.2% vs. +0.1%). The rise was fed by the land component (+0.5%), while the house-only component was flat. It’s the house-only component that flows through to core-CPI and that flat reading would suggest absent price pressures. This has not prevented the loonie from trading at or above parity for a third consecutive day. The higher yielding growth sensitive currency continues to be supported by higher commodity prices and stronger appreciation for risk appetite. However, corporate bids are playing a part in keeping the greenback from moving much lower against its largest trading partner. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies such as the AUD and NOK. Canada’s natural close ties with its largest trading partner will prevent the currency from ‘running away’. The contrarian to a dollar evaluation will look to sell the CAD above parity for ‘the flip’.
The AUD traded briefly below parity for the first time in a week, but happened to regain composure in the O/N session amid signs that the nation’s labor and housing markets remain strong. This evening we get the Australian employment report. Last night’s data showed that Australian home-loans approvals expanded (+1.3% vs. +1.1%). The sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance will again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. To date, the AUD has been this quarter’s best-performing major currency vs. its US counterpart. Interest rate differentials have been a big plus for the currency. Governor Stevens is expected to increase rates further even as the US and Japan leave borrowing costs near zero. Policy makers at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. For now the currency remains in demand on pull backs as carry look attractive to investors (1.0040).
Crude is higher in the O/N session ($86.82 +10c). Oil prices remain close to home despite the whiplash trading activity of the dollar during yesterday’s session ahead of a Muslim holiday. At one point during the session the commodity happened to print a new two-year high as the dollar index temporarily fell, curbing the demand for crude as an alternative investment. Dealers expect prices to inch along as the dollar remains suspect. On the flip side, analysts suspect that this mornings weekly inventories may have increased to the highest level in 18-months, which will threaten this price rally, as refineries idled units because of a lower crack spread. Technically, the lack of physical tightness will leave the market vulnerable to another downdraft. Last week’s EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. OPEC is happy with prices between $70 and $85, although an increase to $90 would not impede economic growth. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to influence prices despite fundamentals.
The one directional gold play came to a mid session halt yesterday afternoon. Earlier, the commodity advanced to another intraday record on speculation that European governments may struggle to pay debt, boosting demand for the precious metal as an alternative to currencies, firmly establishing itself as ‘new’ reserve currency. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 28.2% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Covertly, US policy makers are trying to drive the greenback lower, which by default would boost the demand for precious metals as alternative investment. The commodity has posted nineteen record highs in little more than five weeks. Last week, it managed to rise more than +2.9%. The metal should remain in demand on speculation that steps to support growth through QE and low interest rates will boost demand for the commodity as an alternative to some currencies, the store of value theme. Any pullbacks will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’, hence the reason for the record highs. The debasing fears of the dollar should have investors seeking protection in an asset with a ‘store of value’, but there are better levels to want to enter the market ($1,406 -$3.40).
The Nikkei closed at 9,830 up +136. The DAX index in Europe was at 6,765 down -22; the FTSE (UK) currently is 5,859 -16. The early call for the open of key US indices is higher. The US 10-years backed 15bp yesterday (2.67%) and are little changed in the O/N session. As expected, dealers lent on treasuries ahead of yesterday’s $24b auction to cheapen up the curve and on anticipation of today’s Fed announcement of how much debt it will buy during the next few weeks. Fundamentally, it’s a sell off signal in sympathy with supply. Supply is the overriding factor in the market place and with little room for value in the front end it will be interesting to see if investors are comfortable moving out the yield curve to pick up return in today’s long bond auction. Yesterday’s 10-year auction was initially well received, probably on the Fed’s QE2 help, but prices plummeted by end of day as the dollar became sought after. The $24b notes yielded 2.636% vs. the 2.647% WI’s. The bid-to-cover was 2.80 compared to the four auction average of 2.87.
The number of new claims for unemployment benefits fell to a three-month low of 434,000 for the week ending October 23rd. This is the lowest level of new claims in three months while the total number of people receiving unemployment benefits fell to a two-year low.
“Certainly these are encouraging numbers,” said Brian Jones, an economist at Societe Generale SA in New York, who forecast claims would drop to 430,000. At the same time, he said, “given other labor-market readings you want to be hesitant about saying we’ve turned the corner.”
Source: Bloomberg
Sales of new homes in the US fell by 12.4 percent to an annualized rate of 276,000 units. This is the lowest rate since data was first collected in 1963 according to the Commerce Department and is seen by many as confirmation that the economy is slowing more rapidly than previously thought. Analysts are warning that this could suggest the third quarter could actually see a decline in growth.
“If you don’t get a pick up in the next couple of months, it sure looks like it’s possible the economy could contract in the third quarter,” said Keith Hembre, chief economist at First American Funds in Minneapolis, Minnesota.
Source: Reuters
Orders for durable goods increased by just 0.3 percent in July providing further evidence that the pace of recovery in the US is slowing. Analysts had predicted an increase of 3 percent.
“This overall loss of momentum is noticeable, measurable and it’s cause for concern,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, whose forecast was the lowest among those surveyed. “Manufacturing is still leading the recovery, but not nearly with as much vigor as earlier.”
Source: Bloomberg
An increase in the Ifo Business Climate Index which measures the confidence level of German businesses, caught market watchers by surprise, rising to 106.9, up from 106.2 in July. Most analysts predicted a decrease in the index.
The news of German confidence has strengthened the European currency. The euro is currently 0.2% higher against the dollar with one euro buying $1.26. It also rose slightly against the pound, to 82 pence, making the pound worth 1.2177 euros.
Source: BBC News
Citing concerns that continued government spending to save the banking will prove too great a strain on finances, Standard & Poor’s downgraded the Irish Republic’s credit rating one notch AA-. This is Ireland’s lowest rating since 1995.
In its report, S&P estimated that the Irish government will spend upwards of 90 billion euros (US$101bn) to prop up the nation’s largest banks. This estimate was immediately dismissed by government officials as being “extreme and unrealistic”.
Source: BBC News
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