The International Monetary Fund (IMF) today urged Italy get on with its austerity measures to reduce the government’s deficit. The IMF also highlighted its concerns that Italy’s tax reform plan lacked detail and the growth projections included in the recovery plan were too optimistic.
Source: BBC News
Mario Draghi who will assume the mantle of European Central Bank President later this year said today that the debt crisis is entering a “new phase” and requires a strong response from the ECB.
“It’s now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available,” Draghi said today in a speech in Rome. “It’s a necessary step to ensure the stability of the euro area and its currency.”
Source: Bloomberg
Positive Chinese and Japanese data surprise overnight is supporting the markets and trumps Moody’s downgrade of Ireland’s sovereign rating to sub-investment grade Ba1 or junk.
All eyes will now be on Bernanke who will be stepping up to the plate at his Humphrey-Hawkins testimony. Ben is not expected to give too much away in his prepared statement but when asked is a different matter. If pushed in questioning expect him to hint that policy makers have ‘the capacity and will to do more to support the economy’ following discussions of possible further easing in the Fed minutes.
What will this do? Potentially, the market will begin pricing out the ‘rate of longer term growth’. An absence of any indication of ‘new’ future support or rhetoric that QE is dead would have capital markets ‘further pricing the downside scenarios for growth’, both in the US and Europe.
So far, Capital markets have gotten the support from the IMF after Lagarde’s U-turn on her comments. They are willing to work with European and Greek officials to develop a bigger package to tackle the country sovereign debt crisis, to help stem contagion in Europe. Euro-sentiment is improving slightly on speculation of the ECB buying some Euro-zone government bonds, signs of the Italian parliament pushing for passage of an austerity package and some commitments from Euro officials on providing a backstop to banks that would fail a stress test. ECB has said that ‘All Europe will safeguard financial stability in the Euro area’. However, capital markets are mightier than Europe!
The US$ is weaker in the O/N trading session. Currently, it is lower against 14 of the 16 most actively traded currencies in a ‘volatile’ session.
US trade deficit certainly surprised the market yesterday, and it was not at the top of most investors agendas because of all the other periphery action going on. US’s overall deficit widened nearly +$5b more than expected, pushing the deficit up to its highest level of -$50.2b in nearly three-years. Digging deeper, the ‘surprises’ were split between exports and oil imports.
Total exports fell by -0.9%, with the biggest surprise occurring in industrial supplies, where nominal energy exports declined, and in capital goods, which grew only modestly. The market had been expecting the total reverse. Imports of capital goods climbed faster than exports, which will boost the official estimate of domestic business investment for the second-quarter.
Analysts note that nominal oil imports rose by more than +$4b (twice estimates). The price factor increase took the market by surprise (+4%) and investors should be expecting the impact is likely to be reversed next month, contributing to a pullback in imports. Meanwhile, non-oil imports were broadly in line with expectations with a +0.9% increase, consistent with ongoing expansion in global trade flows. The composition of the data offsets the surprise in the headline number. Depending on what US retails sales are like this week, this set of data should have only a modest impact on the second quarter GDP estimates (+1.5%).
The Fed minutes leaves open the possibility of further ease. Another positive development for markets is that the Fed minutes released contained discussion by FOMC members ‘of a willingness to consider further measures to ease US monetary policy if the economy remains weaker than the Fed desires’.
The dollar is lower against the EUR +0.69%, GBP +0.27%, CHF +0.01% and higher against JPY -0.03%. The commodity currencies are stronger this morning, CAD +0.50% and AUD +0.63%.
Canada’s trade deficit narrowed in May, but only slightly (-$0.8b). Digging deeper, export volumes rose +1.5% with prices decreasing -0.3%, while import volumes decreased-1% and prices increased +2.1%. Exports were led by higher volumes in machinery and equipment while imports saw all sectors recording gains. The increase in exports, despite a strong currency, is paramount to an export dependent economy. May was the fourth consecutive month with a trade deficit.
The loonie continues to trade within a confided trading range as investors hum and haw over risk and aversion trading strategies. Depending on who is speaking on the Euro-zone or on the US debt ceiling at that moment does the currency again become in vogue. The market has been taking it cues from investors risk appetite and ignoring most of the good domestic data like last week’s Canadian employment report. Until policy makers can take a firm grip on the contagion fears that continue to reoccur and on the US reluctance to find a solution for their debt ceiling debates, uncertainty will breed volatility. On stronger dollar rallies the CAD is in demand (0.9607).
The AUD gained O/N for the first time in four days after China reported that economic growth (+9.5%) and industrial output increased more than the market had been predicting. Any rally in Asian bourses and commodities tends to support a demand for higher-yielding currencies. However, gains have been tempered after a report showed consumer confidence fell this month. The sentiment index dropped -8.3% to 92.8 in July from a month earlier, the lowest since May 2009 and the biggest decline since October 2008. The market seems to be taking it as justification for the RBA to do nothing with monetary policy for several months.
Fundamentally, Governor Stevens will wait for actual evidence that the consumer is back in play before he considers hiking rates rates.Weaker confidence and slower consumer spending add to the pressure on Governor Stevens to keep its key interest rate unchanged (+4.75%) until December.
Despite stronger Aussie domestic data of late, investors own risk attitude has the growth higher yielding currencies underperforming, with investors looking to cut further their risk exposure, afraid that China, Australia’s largest trading partner, will take further action to cool growth. Currency gains have been capped on fear that Greek austerity plans will not resolve Europe’s sovereign-debt crisis. Concerns that global growth is slowing has prompted some investors to bet that the RBA will cut interest rates some time this year.
Currently, the market is pricing a no hike in August unless both inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite (1.0690).
Crude is higher in the O/N session ($97.67 +$0.69c). Oil prices rebounded from its lowest levels so far this week as the dollar pared some of its gains yesterday. Uncertainty over Europe’s debt crisis continues to keep a lid on prices. Up to now, oil prices have been under pressure from a decline in Chinese imports, on a horrid NFP release and on Cbanks hiking rates. All these good reasons have damped optimism for an economic rebound and growth in fuel-demand from the world’s largest consumers.
Today we get the new weekly inventory report. Last week’s EIA data showed inventories falling more than expected for a second consecutive week. US commercial crude stocks decreased-900k barrels to +358.6m, but remains above the upper limit of the average range for this time of year. Not to be left behind, gas inventories fell by-600k barrels, after decreasing by -1.4m in the prior week, and is in the lower limit of the average range. Oil refinery inputs averaged +15.3m barrels per day during the week, which were +68k barrels per day above the previous week’s average as refineries operated at +88.4% of their operable capacity.
The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery. This is why the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. This year’s energy spike is being cited ‘as the reason for the global economic slowdown.
Gold prices remain elevated and are preparing to make new record highs again and again this week, as the European sovereign debt crisis increases demand for the metal as a haven. A rate hike from China and the Euro-zone has dragged inflation concerns back into the spotlight. The PBoC and ECB are clearly stating that ‘taming inflation is a top priority even at the expense of their economies slowing gently’. Investors have been demanding the metal as a protection of wealth.
In real terms you are not making any money by just holding cash, so there is demand for gold as a store of wealth. Even a stronger dollar has found it difficult to stall the metals rally. Longer term, weaker global fundamentals are expected to support this crowded trade during the second half of the year. The commodities dependency on the buck and the outlook for US rates is likely to remain its biggest supporting factor. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks until proven wrong ($1,571 +$9.00c).
The Nikkei closed at 9,963 up+37. The DAX index in Europe was at 7,201 up+27; the FTSE (UK) currently is 5,877 up+9. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (2.92%) and is little changed in the O/N session.
Big picture, Treasury yields remain under pressure as the Euro-zone debt crisis intensifies. As expected, and ahead of this week’s three auctions, dealers having been trying to cheapen up the curve somewhat. It’s difficult in this environment with investors briefly embracing risk or welcoming aversion trading strategies.
Yesterday’s $32b three-year issue was a decent auction, with the US selling at the lowest yield in nine-months (+0.67%). The sale was 3.22 times subscribed, just below the four auction average of 3.25 bid-to-cover. There was a direct bid of +16.5%, above the +11.4% average, while the indirect took down +34.5% in total.
The US government will issue $21b 10’s today and $13b 30-year bonds tomorrow. Previously, the Fed had been the only consistent buyer of product. Now, this week’s supply under these conditions may be well received.
The number of new claims for unemployment benefits last week caught market watchers by surprise. Instead of dropping to 404,000 new claimants, the number increased by 10,000 t0 424,000 new claims.
The result show the volatility in the employment market clearly confirming that the US employment outlook remains weak. Total unemployment is still at nine percent and little headway has been made in reducing this number in the past six months.
“Claims are still unfortunately seeing some upward pressure from state and local government job cuts,” said Russell Price, a senior economist at Ameriprise Financial Inc. in Detroit. The first-quarter growth figures show “a modest soft patch to the recovery,” he said.
Source: Bloomberg
Trichet reinforced his roles disclaimer this morning, noting that his ‘primary mandate is to maintain price stability’. The market acknowledges that they are ‘carefully monitoring’ the situation amid increased inflation risks and bow to the fact that he stands ready to do whatever is necessary. Certainly defiant words from a ‘man of action’ -European politicians should take note.
Policy makers have to avoid commodity price increases becoming entrenched in longer term inflation expectations. They continue to stand by their use of nonstandard measures to fulfill its mandate on price stability, relying on the liquidity provisions and bond purchase programs-it’s good to hear, as global confidence in the Eurozone continues to wane.
The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in an ‘orderly’ session.
The market was prepared for a weak April US durable goods number, however a -3.6% was much worse than the perceived -2.2% decline. The broad based nature of the decline suggests the US manufacturing sector has lost significant momentum for the beginning of this quarter. This moderately weaker than expected report, has core-durable goods orders on a weak year-to-date profile (-1.5%).
Digging deeper, elevated inventories relative to sales, suggests further production weakness that is consistent with other reports like softening regional manufacturing surveys. Weakness was widespread, with every major component except for computers posting a contraction in durable goods orders on the month. Non-defense aircraft orders plunged-30%, m/m, the first decline in two months, followed by vehicles and parts (-4.5%), electrical equipment (-4.9%), machinery (-3.4%), primary metals (-1.6%) and fabricated metals (-1.1%). The inability of the report to break out domestic and foreign orders inhibits one to tell how much of the weakness is related to Japan. However, the broad based nature of the decline suggests there is more to it than the temporary Japan related supply disruptions. Higher energy prices may have also taken some momentum from the economy, setting us up for an impressive second quarter.
The dollar is lower the EUR +0.45%, GBP +0.05%, CHF +0.13%, and JPY +0.24%. The commodity currencies are mixed this morning, CAD -0.14% and AUD +0.42%.
The loonie was little changed yesterday, a day after triggering some hefty stop-losses above a psychological option related target of 0.9800. The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. For much of this month, the CAD has weakened outright versus the dollar, as crude prices trade heavily amid mounting investor concern that global economic growth is faltering. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9785).
The AUD has risen from its six-week low in the O/N session. With investment still ‘booming’, the currency still looks set to rally. Reports released this morning show that private capital expenditure grew +3.4%, q/q, in March, much stronger than the +2.7% expected. This came on top of an upward revision to fourth quarter from +1.3%, q/q, to +1.5%. Perhaps what is more important for the currency was the Australian Bureau of Statistics having revised up its estimate for growth in capital spending over the next year to +31%. According to analysts ‘this would be one of the fastest private investment growth rates of any OECD or emerging market economy, coming from an already very high base for total investment of +28% of GDP’.
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 (1.0582).
Crude is lower in the O/N session ($100.74 -0.58c). Oil rallied for a second consecutive day after the weekly EIA report showed that US inventories of distillate fuel (diesel and heating oil), plummeted to the lowest level in more than two-years as consumption increased. Earlier this week Goldman and Morgan Stanley increased their oil-price outlooks, providing an undertone bid. Year-to-date, crude prices are up +39%.
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. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. Lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.
Gold rose to a three week high yesterday, on concern that that Europe’s sovereign-debt crisis may worsen and a weaker dollar spurred demand for the metal as an alternative asset. Strong buying recommendations from Goldman and Morgan Stanley was also 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 inability of the dollar to maintain its safe-haven status is currently supporting metals. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.
The metals bull-run is far from over with speculators continuing to look to buy gold on these 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 ($1,519 -$8.10c).
The Nikkei closed at 9,562 up+139. The DAX index in Europe was at 7,159 down-21; the FTSE (UK) currently is 5,884 up+15. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.13%) and is little changed in the O/N session.
Dealers have wanted to cheapen up the curve ahead of this week’s three auctions as yields continue to hold close to three-year highs, making it difficult for investors to want to own product at these levels. However, after two auctions, product remains in demand.
‘Rates remain in a tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Expected mixed US data this week has investors remaining better bid on pull backs, providing bullish momentum for the FI asset class, who it seem want to register even lower record yields over the medium term.
Yesterday’s $35b five-year auction was a strong issue and came to the market 1.45bp through, at 1.813%. Indirect bidders too 47.5% (largest takedown in 2-years) while direct took 38%, with 3.20 bid-to-cover ratio (largest in 14-years). This morning we get the $29b seven-year note. Will the markets appetite be as strong?
A survey of industry analysts suggests that unemployment in the US could reach 10% if growth in the economy does not improve over the next few months. So far this year, a total of only 723,000 new jobs have been created; an estimated 8.4 million jobs were lost during the recession and at the current rate of growth, it will take years for the job market to recover.
“Growth is too sluggish to successfully bring down the unemployment rate,” said Michelle Meyer, a senior economist at BofA Merrill Lynch in New York. “At this stage, about one year into the recovery, this was still quite feeble job growth.”
Source: Bloomberg
Our Summer hiatus is over’ it’s back to cracking them books, back to stroking our ‘egos’ as we spin the wheel and try and figure out what policy makers next moves will be. Governor Stevens last night was a slam dunk. He was PM’less up to their interest rate release. The BOJ’s Shirakawa said that they are ready to take more action and are watching the effect of their strong currency on the nation’s economy. Them is fighting words! Let’s hope they do not have the same impact as last weeks futile attempt to weaken the JPY. Tomorrow, Governor Carney will be the hottest ticket in town. It’s probably the toughest rates decision to predict in a decade, do not be surprised to see a hike and then see the policy makers head straight for the hills. Lastly, what can I say about the BOE, they are the BOE.
The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range in the O/N session.
The dollar is King this morning after a WSJ article suggests that European Banks underestimated their exposure to sovereign debt, pushing the EUR to record new recent lows. Now its anybody’s guess if we are capable of recovering the recent appetite for risk after this Labor holiday? Oh, I bet not!
The USD$ is higher against the EUR -0.90%, GBP -0.17%, CHF -0.09% and lower against JPY +0.28%. The commodity currencies are weaker this morning, CAD -0.60% and AUD -0.76%. Now that the loonie is coming off its first winning streak in over a month, this week will be a big week for the CAD. Starting with tomorrows highly anticipated interest rate announcement by the BOC and ending with the release of the monthly jobs report on Friday. The BOC call is a spilt vote amongst analysts. Fact, futures are pricing in a +60% chance of a BOC tightening. It’s probably one of the toughest calls over the last decade. A string of disappointing Canadian data and a darkening global outlook have weighed heavily on the market’s conviction for a Sept. hike. Last month, the CAD happened to post one of its worst performing months in over a year, falling -3.5% vs. the dollar. The dollar has now capped a triple top at 1.0675 and will prove a formidable support level for the currency again. Canada is not immune to weaker data reported south of its borders. It is only natural that growth and interest rate sensitive currencies would experience some volatile moves on changing risk attitudes. Friday’s US employment report gave us a change in risk attitude, the market embraced risk somewhat and has temporarily pushed the loonie into overbought territory as commodities continue to underperform
Not unexpected was Govenor Glenn Stevens at the RBA keeping rates on hold ‘for the time being’ (4.25%) as concern that the global economic recovery may falter trumped evidence of an accelerating expansion domestically. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. The currency was also hindered on concerns about the health of European governments and banks. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal terms may increasingly rest on the RBA’. The currency has underperformed against all of its major trading partners. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally (0.9100).
Crude is lower in the O/N session ($73.40 -150c). Crude prices fell for a second consecutive day as the labor holiday signified the ending of the peak consumption season in the US. Historically, traders will start to sell gas short anticipating an increase in inventories over the next few weeks. Stronger economic growth data happened to provide a leg up for the ‘black-stuff’ earlier last week. Aiding the commodity was the weekly EIA report revealing an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. On the face of it, the weekly report should have been market bearish, but investors happily ignored the data as they found solace in Chinese and US manufacturing data showing new signs of growth. How long is this sustainable? The market is wary that the underlying situation has not changed, the fundamentals remain weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term.
Gold prices continue to advance on its record high print recorded earlier this year as investors seek to protect their wealth. The uncertainty of recent data has had investors contemplating boosting their demand for the commodity as a safe heaven. Last month, bullion appreciated +5.2% alone. The market would not be that surprised to see some sort of technical pull back supported by profit taking selling if investors embraced more risk. Consumers are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Sentiment for the yellow metal remains bullish The opportunity costs of holding gold are low due to falling interest rates ($1,250 -70c).
The Nikkei closed at 9,226 down -75. The DAX index in Europe was at 6,121 down -33; the FTSE (UK) currently is 5,407 -32. The early call for the open of key US indices is lower. The US 10-year backed backed up 9bp on Friday (2.70%) and managed to half of this u in the O/N session (2.65%). Treasury prices plummeted after the surprising NFP report and its revisions last week. Fixed Income was temporarily piggybacking on its highest yields in over a month, as gains in global equities had diminished the demand for the safety of the debt asset class amid optimism that the US economy will avoid a double-dip recession. Technically, the curve had become too rich and the overbought asset class was due for some sort of correction. The curve 2’s/10’s spread had widened 8bp to +219bp after flattening sub +200bp a matter of days ago. Treasuries had also been trading heavy ahead of this weeks US $67b three debt sales (3’s, 10’s and long bonds). However, in the O/N session, treasuries have managed to give up half of their losses as concerns over European fiscal issues has once again increased the demand for safety.
The monthly ADP Employer Services survey shows that US employment fell by 10,000 during the month of August, the first monthly job loss since January. This flies in the face of a survey of economists that forecast a gain of 15,000 jobs.
“The labor market is really in peril as businesses are just being very cautious,” said David Semmens, an economist at Standard Chartered Bank in New York, the only economist surveyed to accurately forecast the loss in private jobs. Today’s figures “will drag down expectations for the Friday payrolls report. The stability surrounding the recovery is declining.”
Source: Bloomberg
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
Powered by Efacilitators Hosting