Greece and the “troika” consisting of the European Union, the European Central Bank, and the International Monetary Fund, announced that a deal had been reached to provide support for the debt-laden country. Once the final approvals are provided, Greece will be cleared for the next payment in the initial rescue payment scheme.
Source: BBC News
On Wednesday, the Bank of Montreal released an advisory suggesting the Canadian dollar could fall to 93 cents U.S. within the next three to six months. According to BMO, the dollar will continue to depreciate on weaker global commodity prices expected to persist over the next two quarters.
Read More: Huffington Post
Well it looks like the markets this morning are growing tired of the “chicken little” scenario and are looking to put their fear aside and take on some risk. At least that’s what happened in the Euro session after S&P downgraded Italy’s credit rating one notch last night.
Asian markets followed yesterday’s risk aversion and pushed the Euro lower overnight, only to watch it rebound in the European session. News was that Greece was in “productive” talks with the troika in regards to receiving their next tranche of bailout funding. Yet not much has changed for the positive, as there still is no resolution to Greece and remains to be seen whether or not they can avoid a default. Greek citizens have taken back to the streets in protest of the austerity measures required to receive the next bailout, so political will in waning to say the least.
Also to note is that German economic data came in worse than expected, with PPI data showing a monthly decline of .3% vs. an expected no change, pushing the YoY number down to 5.5% vs. the expected 5.8%. While lower prices are not necessarily a bad thing, growing concern of a declining economic picture in concert with the debt crisis is alarming. ZEW economic survey figures were lower than expected across the board which should come as no surprise unless you think Europeans are happy that their monetary union may be on the verge of collapse.
In Switzerland, the SECO economic forecasts came out and growth figures were adjusted lower, citing recent Swiss franc strength as an impediment to exports. Trade balance figures were reduced as indeed exports fell from last month as imports gained.
Overnight in Australia, the RBA released the minutes from its rate policy meeting and stated that they were “well placed” to deal with a global economic slowdown or inflation. This essentially is a neutral stance that gives them the flexibility to either raise or lower depending upon the health of the global economy.
Tomorrow will bring the release of the BOE rate policy meeting minutes and any perceived dovish ness could push the Pound lower.
This comes ahead of tomorrow’s FOMC meeting where the market is expected some sort of further monetary easing. The most popular guess is that “Operation Twist” will be unveiled, whereby the Fed will now purchase Treasuries of longer durations to keep rates low for an even longer period of time. However, the market impact of such a move is unclear at this point, and some are starting to think that the Fed may do little.
It is always a tightrope that Fed walks, and the balance between a fundamentally weak Euro and a declining economic picture is one that must be balanced carefully. The Fed got little help yesterday from the President, whose speech about deficit reduction was more campaign rhetoric than anything credible.
At this point, it is painfully obvious that the President lacks any concrete plans to fix the US economy and is just setting the table for the blame game come the next election in 2012. This means things may get a lot worse before they get better, as the economy flounders toward stagnation.
Housing starts and building permits figures came in lower than last month here in the US, though the latter did come in better than expected.
Until the fiscal side of the ledger improves, there is little the Fed can do so essentially this is a crisis of confidence here in the US, with the President playing the role of “Debbie Downer”.
Unless he can come up with some pro-growth policies and not job-killing, wealth re-distributing ideology, things will continue to worsen. Add in the debt crisis in Europe and now you have a recipe for disaster. Unless the Europeans can get their act together, contagion could put the EMU in survival mode, with the outcome (outside of major risk aversion) unclear.
See what I mean about risk-taking today? Confounding, isn’t it?
What have we got this morning that going to keep us from falling into another stupor? A trifecta of US data. The markets gets to be updated on the US manufacturing outlook, employment and CPI. Consensus has the Philly Fed manufacturing survey falling to 2.0 from 3.2 in July. Jobless claims look to be a safer bet to report a negative print (+420k) to reverse some of the ‘falls’ witnessed in the last couple of weeks. Further proof of slowing activity. Finally inflation, analysts expect July’s CPI inflation to reverse the prior months drop and rise to a +0.4% headline print, with the core again expected to expand. Certainly not strong enough reason to start a QE3 implementation!
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 ‘whippy’ session.
It was only last week that the Fed promised to keep its benchmark short term rates close to zero for the next two years. Yesterday’s PPI (+0.2%) and core-prices (+0.4%) could constrain the Cbank from taking further action if producers pass on higher costs to consumers and inflation stays above the informal target of close to +2%. The rises were fueled by higher costs for food (+0.6%-second consecutive gain), trucks and pharmaceuticals. The report comes amid mixed signals for the economy and worries about a weaker US outlook. A small blessing was fuel costs falling (-2.8%). However, energy continues to have a minimal affect on core-prices (+0.4%), which jumped for the eight consecutive month. Market gets to see if CPI paints a similar picture this morning.
The dollar is higher against the EUR -0.28%, GBP -0.28%, CHF -0.45% and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.51% and AUD -1.00%.
The loonie continues to range, bound by safe heaven appeal and risk appetite, depending what day and what hour it is. The market is trading tired after what we have witnessed over the last ten-trading sessions.
Yesterday’s data showed that foreigners reduced their holdings of Canadian securities for the first time in more than a year in June, as the value of bonds maturing exceeded new purchases. Foreign investors sold a net -$3.5b of Canadian securities, the first reduction in 15-months. Also weighing on the loonie was US equities yesterday paring their gains and a market anticipating that tomorrows data will reveal that Canadian inflation slowed last month. With governor Carney speaking along with CPI should provide for an interesting end to the week.
Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside stabilized, reducing the demand for the buck as a refuge. This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. In the O/N market, investors have been better sellers of dollars on rallies (0.9848).
The AUD fell from a two-week high yesterday outright as Asian stocks declined o/n, curbing demand for higher-yielding assets. This week’s Cbank’s August minutes showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Investors have been paring bets of an interest rate hike any time soon.
The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0438).
Crude is lower in the O/N session ($86.28 down -$1.30c). Crude prices pared most of their initial gains yesterday, fueled by an equity rally and after the weekly EIA report showing an unexpected increase in inventories.
Oil stocks rose +4.23m barrels to +354m versus an expected inventory decline of-500k barrels, and are above the upper limit of the average range for this time of year. In contrast, gas inventories fell by -3.5m barrels, a week after dipping by -1.6m barrels in the prior week, but are in the upper limit of the average range. Oil refinery inputs averaged +15.4m barrels per day during the week, which were-205k below the previous week’s average as refineries operated at +89.1% of their operable capacity. Over the last four weeks, imports have averaged +9.30m barrels per day, which were-606k below the same four-week period last year.
Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term. However, markets appetite is telling us different in the short term.
The gold bulls have now found another reason to own the commodity, inflation. The commodity climbed for a third day yesterday as investors bought the metal as a hedge against inflation, after US data showed that wholesale costs rose more than forecasted last month. Already for most of this week the commodity has rallied as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows in times of uncertainty.
Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,796 +$3).
The Nikkei closed at 8,943 down-114. The DAX index in Europe was at 5,769 down-180; the FTSE (UK) currently is 5,242 down-90. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (2.18%) and another 7bp (2.11%) in the O/N session.
Yesterday’s US wholesale prices initially pressured the US yield curve with longer dated securities baring the brunt. The data confirms that the US economy is showing a little bit more inflation pressure than in recent months. The spread between 10’s and their equivalent maturing TIPS shrank to +2.15%, the least in a week when it reached this year’s low of +2.14%.
Now that the short end of the yield curve is resigned to trading on top of or close to o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year product to help stimulate the economy. For the near term, bond investors are likely to continue to keep a close eye on equities as they are dictating treasury moves.
Now that the SNB has failed to live up to investors expectations of introducing the CHF to a new pegging system, there will be pressure on the Cbank to intervene in FX to weaken their currency as speculators again balk at the introduction of a fresh liquidity boost.
Governor Hilderbrand, for the third time in three weeks, has boosted sight deposits +66% to CHF200b. The markets reaction to a ‘no’ temporary Euro peg or a floor to limit the damage to the country’s strong export industry is failing to dampen the market demand for the currency as a safer heaven bet. Since the announcement, the currency has appreciated +2%. Analysts estimate that the franc’s overvaluation currently stands at +13% and would require a series of FX interventions to get the franc back to trading at 1.28 EUR, its current fair value.
If anything, the Cbank is remaining flexible, the use of draconian measures in this time of heightened uncertainty could push whats left of consumer confidence into full on panic.
The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘whippy’ session.
Most US data yesterday was a pleasant surprise, if nothing else it kept investors occupied ahead of the Sarkozy and Merkel news conference. US industrial production rose at its quickest pace in seven months in July (+0.9%) as motor vehicle output rebounded strongly, further easing fears that the US economy could be sliding head-first into another recession. The report suggests that the recovery may have regained some momentum over the last few months. The underlying figure, a +0.3% rise in manufacturing ex-autos, shows only moderate growth. It remains to be seen if this can be sustained this month given the financial markets disruptions. Capacity utilization of +77.5% in July is well above the +0.76.9% estimate, with June revised up by +0.2% to +76.9%. It is the highest print in three-years.
Other data showed US residential construction, while still depressed, was not a drag on the economy as the second-half of the year got under way. Data showed housing starts slipped a less-than-expected -1.5% last month, to a seasonally adjusted annual rate of +0.6m units as builders broke ground on new multifamily units to meet demand for rental apartments. On the face of it, housing starts remain somewhat range bound at these historically low levels as homebuilders continue to reduce existing inventories against a backdrop of elevated foreclosures. Data earlier in the week showed that sentiment among home builders was steady at low levels this month, but they were pessimistic about future sales over the next six-months. Other data showed that new building permits fell -3.2% to a +0.597m unit pace last month. Digging deeper, permits were dragged down by a -10.2% drop in the multifamily segment, while permits to build single-family homes rose +0.5%.
There was much said but noting ‘really’ conclusive in the Merkel/Sarkozy summit. They unveiled wide-reaching plans for closer Euro-zone integration, including deficit limits and biannual summits, but said joint Euro bonds could only be a longer-term option. Apparently, they are potentially harmful to the healthiest economies. Yesterday’s surprisingly soft German GDP release will have many question this decision. By day’s end, the two-leaders are not the voice for ‘the’ union. Their objective of the meeting was to shore up some much needed market confidence that has taken a good hiding in August. Their proposals will be considered as a welcome ‘step forward in a common effort to strengthen the governance of the Euro-area’. Both leaders focused on the longer term governance issues and new taxes rather than on measures to spur growth. The leaders seem to be heading in the right direction, but little new is being offered!
The dollar is lower against the EUR +0.09%, CHF +1.36% and JPY +0.28% and higher against GBP -0.40%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.46%.
Canadian data yesterday (backward looking) added nothing positive to the Canadian landscape. Weaker manufacturing sales (-1.5%) will only pressurize Junes GDP further. Digging deeper, most of the details are as bad as the headline itself. Inflation adjusted manufacturing shipments fell -1.6%, month-over-month. This adds to the risk of a an outright contraction in the Canadian economy in the second quarter. The data will only re-enforce expectations for the BoC to remain on hold for the next couple of quarters by putting growth well under Governor Carney’s forecast of +1.5%, q/q annualized growth.
The preliminary evidence for the third quarter (forward looking data) is a touch more encouraging thus far. Hours worked expanded sharply in July (+1.1%, m/m) and manufacturing new orders surged in June. Looking beyond this timeline is more difficult due to the ongoing changing nature of global economies, especially in Europe, as they adjust to sovereign risk concerns. Analysts note that with the ‘rise in unfilled orders and new orders, manufacturers may sell down high inventory positions rather than add to production and employment volumes in the near-term, choosing instead to buy time and see what the order book looks like later in the year’. The largest losses in the month were concentrated in the petroleum and coal shipments category (-6.6%). Machinery shipments also plunged (-4.2%), followed by primary metals shipments (-1.6%) and transportation equipment shipments (-0.6%). Auto shipments were unchanged on the month. This was the first quarterly contraction of shipments in two-years.
Over the past three trading sessions, the loonie has managed to advance from almost its lowest level in seven-months as equities stateside stabilize, reducing the demand for the buck as a refuge. The CAD, despite last week’s turmoil remains one of the better behaved currencies, even with weaker domestic data. This month, the loonie has dropped -3.1% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse. The CAD, seen as a barometer of risk, closely tracks oil, equities and macroeconomic data from the US, which consumers about +70% of all the country’s exports. Yesterday’s disappointing data had the loonie underperforming against the other major crosses because of the depth of its economic ties with its largest trading partner.
There is a flip-side, because of the yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorbs all of last weeks Cbanks actions or lack of, there will be an appetite from investors to own a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket. The focus this week is likely to remain on broader risk aversion, however, there may be a shift back to fundamentals as investor sentiment starts the week on a calmer footing.
Uncertainty around Eurozone’s austerity measures and debt management issues along with overall global growth forecasts will have investors treading lightly. In the O/N market, investors have been better sellers of dollars on rallies (0.9802).
The AUD trades tentatively against all its major trading partners this week after the release of the Cbank’s August minutes on Monday which showed policy makers are concerned that turmoil in financial markets could slow global economic growth. Investors have been paring bets of an interest rate hike any time soon.
The RBA’s August minutes were largely in line with the post-policy meeting statement, however, concerns over developments in Europe and the US continue to overshadowed the RBA’s robust medium term domestic outlook. Many now expect Governor Stevens to remain on hold for the remainder of the year, as ‘risks for the RBA have become more evenly balanced and the outlook remains conditional on the strength of the global economy’. If global turmoil continues, it could temper domestic inflation over time and ease pressure on the RBA to raise interest rates. Some futures traders now expect the RBA to reduce its key interest rate by-128bp over the next 12-months. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite. Currently, investors are better sellers of the currency on rallies (1.0538).
Crude is higher in the O/N session ($87.22 up +0.57c). Crude prices fell yesterday after Germany, Europe’s largest economy, almost stalled in the second quarter (+0.1% vs. +1.3%), bolstering concern that global fuel consumption will diminish. Sarkozy and Merkel considering Eurobonds as a longer term option does not help market confidence.
The weekly inventory report is expected to show that US oil supplies fell to a five-month low this morning. Last week’s EIA release had been bullish for the commodity, dragging prices up from their ten-month low. The report showed that oil stocks fell -5.2m barrels after the market had projected a +1.5m barrel build. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%
Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.
Now that the CME margin rule change has been priced out of the equation, gold prices have been allowed to rally for a second consecutive day as European sovereign debt concerns bolster demand for the yellow metal as an investment haven. Earlier this week, the commodity gained for the first time in three sessions as a weaker dollar revived demand for the metal as an alternative investment. Apart from the administration side effects of owning the commodity, the metal continues to be a recipient of safe-haven flows in times of uncertainty. This is one of those times. Gold’s prices have more than doubled since the recession began in late 2007. The metals climb has accelerated on the back of the European debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven and by default, support commodities.
Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. The commodity is heading for its eleventh consecutive annual gain. In this trading environment, $2,000 is very much in the realms of possibility over the next six months ($1,795 +$10.30).
The Nikkei closed at 9,057 down-50. The DAX index in Europe was at 5,904 down-91; the FTSE (UK) currently is 5,299 down-58. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (2.22%) and is little changed in the O/N session.
Treasury prices rallied late afternoon yesterday as French and German leaders dismissed calls for the issuance of euro bonds that would allow borrowing on behalf of all 17 euro states, encouraging demand once again for a safe heaven asset. Investors were looking for more urgency from leaders to tackle the Euro crisis, lack of it and US bonds again set to retest this months low yields.
With the short end of the yield curve resigned to trading on top of o/n fed funds, dealers will expect longer-dated product to trade more volatile as investors reach for yield and on speculation that the Fed may extend bond buying away from shorter-dated notes and towards 10-year notes to help stimulate the economy. Month-to-date, treasuries prices have surged, pushing 10-year yields down more than-50bp. For the near term, bond investors are likely to continue to keep a close eye on equities as they dictate Treasuries’ moves.
The Canadian housing market has “lost touch with fundamentals” according to a report by research firm Capital Economics. In the report released on June 29, the authors suggest that the Canadian housing sector has become an asset bubble nearing the point of bursting. The prediction is for a 25 per cent decline in property values over the next three years.
That’s the question that needs to be answered today as the current Greek government faces a confidence vote today, where the results are to be released at 5pm EST (midnight Greece time, probably intended to mitigate protests). This is coming after the cabinet was changed last week, with the intention to provide more unity.
An affirmation of the current government will be seen as positive as it would then appear likely that they would vote for the further austerity required to receive the additional funding from the EU and the IMF. The markets appear confident that this will happen, as risk appetite has increased with global stocks and commodities higher across the board to start the morning.
Despite the risk-taking in the market, the Aussie is lower after the release of the RBA rate policy meeting minutes which showed that they were comfortable with current rates as the Euro debt crisis has the ability to get worse.
In the UK, a BOE policy-maker came out ahead of the release of the BOE minutes tomorrow and said that further easing, and not tightening, may be the next move. Tomorrow’s release will confirm or deny, and it must be remembered that inflation in the UK is more than twice the BOE target rate.
Lastly, retail sales figures in Canada and existing home sales in the US round out the major news expected for the US session.
In the forex market:
Aussie (AUD): The Aussie is mostly lower despite the risk appetite in the market as the RBA minutes revealed that current policy was “prudent” given the state of the Euro debt crisis and despite rising inflation Down Under.
Kiwi (NZD): The Kiwi is responding more favorably to the risk sentiment in the market ahead of this evening’s release of the current account balance figures.
Loonie (CAD): The Loonie is trading higher as oil prices have rebounded ahead of this morning’s release of the retail sales figures and leading indicators. The former is expected to have risen .4%, the latter is expected to have risen .5%. (Click chart to enlarge)
Euro (EUR): The ZEW economic surveys came out earlier this morning and were lower than expected, as confidence is beginning to wane in the EU. However, we can essentially throw the fundamentals out the window as all eyes are on the Greek debt crisis. The markets appear highly confident that the current government will pass the confidence vote, however, it remains to be seen whether they will vote for the additional austerity measures.
Pound (GBP): The Pound is mostly lower after a BOE official suggested that further monetary easing could be the next move and not a tightening to help manage the declining growth prospects of the economy. While inflation is twice the BOE target, the bank may be content to let inflation die on its own, if possible. (Click chart to enlarge)
Swissie (CHF): The Swissie is mixed today as risk appetite has abated this morning, though money flows could pick up as the trading day moves forward.
Dollar (USD): The Dollar is lower across the board as risk themes cause less demand. Existing home sales due out later this morning are expected to be weak, and tomorrow’s FOMC meeting could reduce economic growth forecasts for the remainder of the year.
Yen (JPY): The Yen is mostly lower as carry trades are resumed and the All Industry Activity Index came in lower than expected.
It will be interesting to see how this day shakes out ahead of this Greece confidence vote. When looking at the overall market, I am inclined to sell rallies in risk sentiment as I think we are hardly out of the woods. One of the interesting aspects of this vote today is that the market sees a passing vote of confidence in the same light that Greece will accept whatever austerity measures are put to them.
Frankly in my opinion, Greece is holding the cards. If they don’t consent to the EU demands and default, this could set off a chain reaction throughout the Euro zone. So in that regard, who has more to lose? The Greeks who are already in trouble, or the banks of the Germany and France who could potentially be taken down if contagion causes the Euro to fail.
Seems like a major risk for the Euro, and not the other way around. This situation is far from over, so think twice before you put on that risk!
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Is this false hope? Germany softening its stance on restructuring demand is helping the EUR. While the market focuses its attention on the Germans, its the Greek’s ability to do or not do that we should be honing in on.
No demand of an early rescheduling of Greek bonds is certainly good news, paving the way for the Euro-zone to put together another rescue package to aid Greece in meeting its repayment objections over the next few months. However, this does not mean that an eventual restructuring of their debt will not go ahead.
What if Athens fails to keep up its end of the bargain? The need will become more urgent. The EU requires all party support in Greece and continue to press for ‘vigorous international supervision’, in other words, a greater say in how Greece is run.
The reality is that the Euro-zone will spend the next few weeks putting together another aid package to stave off restructuring while internally the Greeks will continue to drag their feet on introducing structural changes, then we are back to square one!
The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘volatile’ session.
The Kiwi is again leading the rally in risk-sensitive currencies now that European reports confirm that Germany is softening its stance on the Greek finance issue. The Yen bears can breath easier after Japan’s sovereign credit rating was put on review for downgrade by Moody’s, allowing the dollar to push north of 81 again to breath life into that trade.
The dollar is lower against the EUR +0.93%, GBP +0.19%, CHF +0.13% and higher against JPY -0.70%. The commodity currencies are mixed this morning, CAD +0.62% and AUD -0.01%.
Canadian GDP data disappointed yesterday (+3.9% versus +4.1%). It was not the headline but the meat of the data that was disturbing. Analysts noted the ‘heavy role played by inventory accumulation while several other key sectors like consumers and government were flat all serve to put a strong dent in the headline’. Consumer spending was flat and so was government spending such that neither sector contributed to growth. Net trade was a drag, as import growth of +2.2% out stripped a +1.6% rise in exports. Growth was recorded in inventory investment, soaring to +$10.5b in the first quarter from +185m in the last quarter. With growth, inventories added +2.6% to the headline, business investment +2.1%, while consumer spending only added +0.1%.
The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. The BoC is likely to maintain its neutral policy guidance at this morning’s rate meeting. The two main upside risks to inflation cited at the April meeting, commodity prices and strength in household spending, have both moderated recently. With the lagged effects of the CAD’s strengthening beginning to show up in the bank’s measure of financial conditions index, there is little reason for a more hawkish posture from Governor Carney. The currency will again be subjected to the pull of either risk or risk aversion trading strategies until we get to see NFP data this Friday (0.9715).
Australian data was on the weaker side of expectations earlier this morning, allowing the AUD to underperforming its closest trading partner the NZD. The current account deficit widened to AUD10.5b in the first quarter, driven by a -2.4% fall in net-exports. Analysts note that this reading points to a possible negative GDP print this evening. It has been clearly highlighted that that the fall in export volume in first quarter, especially of coal, was largely due to production disruptions from the Queensland’s floods. Other data showed that private sector credit was flat on the month, driven by still weak demand for personal and business credit, while building approvals fell -1.3%, m/m in April, following a downwardly revised +8.6% rise in March.
The market does not seem to down beaten by the data releases, especially after the RBA had signaled recently in the Statement of Monetary Policy that an anticipated fall in the first quarter growth is likely to be temporary and forecasts a strong rebound to +4.25% in the fourth quarter. Traders have reduced some of their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 last week.
Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0679).
Crude is higher in the O/N session ($101.84 +1.25c). It’s not surprising to see commodities temporarily stall after the US growth numbers last week. However, some investors expect the commodity to be supported on these pull backs as speculation that fuel demand will increase with the start of the US summer driving season. Mind you, Friday’s NFP numbers will also be able to dictate the short term price direction.
Last week’s weekly crude supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.
Technically, the report could be seen as overall bullish because of the distillate number. However, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.
Gold prices are holding steady, supported by the ongoing debt crisis in the euro-zone boosting demand for the metal as an alternative asset. Short term immediate pressure can be seen coming from the Shanghai bourse, which plans to temporarily increase margins on commodity futures to dampen a surge in volumes. Apart from that, investors continue to buy bullion to protect themselves against economic and currency uncertainties.
Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.
The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,540 +$2.40c).
The Nikkei closed at 9,93 up+189. The DAX index in Europe was at 7,297 up+136; the FTSE (UK) currently is 5,999 up+60. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.09%) and is little changed in the O/N session.
The FI asset class has been able to push yields to a new yearly record low for this year, after a disappointing US GDP and weekly claims report last week encouraged investors to seek shelter in a safer asset class. It seems that global investors have turned increasingly bullish on US paper, as weakening economic data points to sluggish growth, tepid inflation and the likelihood monetary tightening is still a long way off. All of last week’s $99b US issue’s were strongly received, despite yields piggy backing yearly lows. Until the market begins to get some bad news on inflation, investors should remain bulled up!
The dollar has given up all of its hard earn gains and then some this week. Investors seem to be happy selling the ‘mighty buck’ on the back of weaker US data. The lack of a rally in US benchmark yields combined with ‘this’ weak dollar ‘implies a market presumption that the weak US recovery will lead the Fed to stay easy for longer’. China too has done its bit this week. It’s reported that they are expected to represent a ‘strong proportion’ of buyers of EFSF issuance in the June auctions. Supposedly this will fund the Portuguese bailout. Analysts note that the depth and liquidity of the sovereign AAA market in EUR is growing, adding to the EUR’s attraction as a reserve currency. Liquidity now becomes a premium as we head into the US memorial long weekend. Below are some of the highlights of the week:
EUROPE
Americas
ASIA
Thank Medley, market rumors of a Euro-positive research report have dragged and supports a higher EUR ahead of tomorrows rate announcement. It’s believed that the group indicated that the ECB is comfortable with a stronger currency and is not too concerned with the ongoing periphery sovereign debt crisis. Nor is the rest of the market its seems. It’s unfazed by Portugal’s EFSF EUR87b program, despite being the third Euro-zone country to succumb to the sovereign debt crisis after Ireland and Greece.
The market is looking for some clear indication of when the next ECB hike is coming. Recent inflation data has markets betting that Trichet’s communique could indicate July, however, a signal for June would show more urgency, justifying Trichet’s hawkish credentials and even more positive for the EUR. Can policy makers be moving too fast?
The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.
US factory orders climbed for a fifth consecutive month in March (+3%) yesterday. A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain. Manufacturing is helping to carry the economy from the depth of this recessions low in 2009. However, rising energy costs are a concern for factories and raising the challenges for companies to turn a profit. Digging deeper, durable goods orders rose by +2.9%, while ex-transportation also climbed +2.6%. The report showed that March Factory shipments rallied +2.7%, while unfilled orders (a sign of future demand) rose +0.8%.
The USD is lower against the EUR +0.27%, GBP +0.09%, CHF +0.03% and higher against JPY -0.10%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.21%.
PM Harper got his majority and the loonie finally found some support, not so much on Canadian political or fundamental reasons, but on the back of a market that has sent investors into classic safe heavens. The loonie has been underperforming against most of its major trading partners, except outright against the dollar. Similar to most other major currencies, the currency managed to print a new three-year high last week, on speculation that the Fed will trail the BoC in raising interest rates.
This week’s general election is a CAD-positive result, with the probability that the loonie could revisit its multi-decade low (0.9059 in 2007) if the dollar negative sentiment persists over the next few months. Investors are looking to own the currency on any dollar rallies (0.9520).
The Aussie dollar had been trading under pressure outright after the PBoC said in a report yesterday that taming inflation is its highest priority. Earlier this week the RBA were not as hawkish as feared when it came to rates, but hawkish nonetheless. As expected, they left their rate policy on hold (+4.75%). Their statement was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation.
Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. Policy makers replaced the ‘stance of monetary policy remained appropriate,’ with ‘in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation’, another nugget for possible rate hikes. Why add this warning now if you think it might only apply in 2012?
On AUD pull backs sovereign names continue to covet the currency. The market is now pricing in a +52% chance that the RBA will raise its benchmark rate to +5% by October, down from +62% earlier in the week.
Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0880).
Crude is weaker in the O/N session ($110.84 -0.21c). If anything, the news of bin Laden’s death has only increased the volatility in the crude market. Initial reaction was dollar supportive and black-stuff negative, however, his death does not alter the facts that have pushed the buck to a three-year low against most of its major trading partners and does not end the geopolitical concerns in MENA. The market has been leaning on the black-stuff’s prices ahead of this morning’s inventory report as dealers anticipate another build up of stocks.
Last weeks EIA report had inventories rising +6.16m barrels to +363.1m, the biggest one-week advance since July 2010. Crude imports rose +1.21m barrels to +9.23m. In contrast, gas inventories fell for the tenth consecutive week, -2.51m barrels to +205.59m, compared with expectations for a -1.1m drawdown. It’s worth noting that gas inventors fell in spite of domestic demand falling by -1.6% last month on a year over year basis. Finally, distillates (heating oil and diesel) dropped -1.81m barrels to +146.53m. Refinery utilization rose +0.2% to 82.7%. In reality, it looks like refiners have got to convert more of the oil into gas in the coming weeks.
The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth. OPEC have stated that there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA. It’s all about the dollar’s inverse relationship with commodities. The market is back to the drawing board until we can break this volatile intraday range.
Gold prices have been dragged lower by the liquidating of silver position after the CME hiked initial margin requirements for the third time in over a week. Silver prices have been able to surge to 31-year high in recent months. Fundamentals are now supporting some sort of correction. The uncertain macro-economic and political environment will continue to attract investors to gold, as does the continuing weakening of the dollar on the back of US policy makers being slow to tighten their monetary policy.
Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. The precious metal has become the currency of choice with the dollar underperforming against its G10 trading partners. Investors have been trimming some of their risk exposure on the back of terrorist reprisal fears.
The metals bull-run is far from over with speculators continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunity for investors to continue to diversify into safe-haven assets, as the combination of a weak dollar and higher US inflation expectations support demand for inflation hedges ($1,537 -$2.80c).
The Nikkei closed at 10,004 up+154. The DAX index in Europe was at 7,531 up+31; the FTSE (UK) currently is 6,070 down-12. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.26%) and is little changed in the O/N session.
Investors have pared riskier assets as they assess the potential affect of reprisals from bin Laden’s death. Also providing support this week is the Fed buying back product for their debt-buying program.
Yesterday, the Treasury announced that they have halved its original forecast for net issuance in the second quarter from $198b to $142b. They attributed the decline to higher receipts and lower outlays. It’s a necessity to slow its approach to the debt-ceiling. With the coupon issuance to raise nearly $360b, the decline in issuance will come from a further decline in the bill supply, which will obviously affect money market liquidity.
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