This is not a result for Euro 2012, but the final round, now first leg vote, to ratify the amended EFSF program, from the only country in the 17-nations that uses the currency that has yet to vote ‘yes’. An unanimous ‘yes’ vote by all member states is required. Slovakia’s approval of enhanced powers of the EFSF is crucial for adopting the key elements in the strategy to prevent contagion.
The result lacked the intensity of all out failure. There is a political will in Slovakia to approve the fund, however, ‘it was used as a power tool amid a coalition crisis and the whole of Europe was taken hostage’. A second vote is expected by week’s end.
The market rallied hard after the Merkel-Sarkosy meeting when they implied they have ‘a plan to create a plan to solve the crisis’. This morning, a proposal by an a group of insurance companies to turn EFSF into an institution that protects investors against a portion of losses has garnered support from other major European insurers and banks in the region, but, not countries yet, is seen as the savior and that’s why risk is on. Investors seem to be happy to put the ‘cart ahead of the donkey’!
Europe has taken a look at a plan by giant German insurer Allianz to turn the EFSF fund into a bond insurance program and they like it, risk is on. Will North America follow through? The market continues to hit pockets of short selling stop-losses and option barriers. The belief that Slovakia will follow through and ratify the EFSF and its amendments by week’s end is also aiding to push the EUR higher. With EUR450b invested in European assets, Allianz is the continent’s largest investment institution and any shouting from them has to be heard!
Trichet did no hold back at the weekend stating that sovereign stress has moved from smaller economies to some of the larger countries. The crisis is systemic and must be tackled decisively. So, the first thing EUR leaders do is to postpone the EURO summit by five days to October 23. European Union President Van Rompuy sought extra time to pursue a ‘comprehensive’ package including a solution for Greece, aid for banks and a further strengthening of the rescue fund.
Some of Greece’s international creditors cleared the way for Athens to receive another tranche of aid needed to stave off default. The Troika committee stated that aid will be forthcoming as early as November. Greece will receive EUR +8b, the next installment on its EUR+110b rescue package. Earlier this month, the country said it would not reach this month’s deficit target, and pledged another round of austerity measures, EUR+6.6b to bring its budget back on track for 2012.
The dollar is lower against the EUR +0.95%, GBP +0.67%, CHF +0.1.09% and JPY +0.16%. The commodity currencies are stronger this morning, CAD +0.89% and AUD +1.43%.
With Canadian thanksgiving over, the market gave thanks to the robust housing starts released yesterday. Starts rose an impressive +7.3%, seasonally adjusted, to an annual pace of +205.9k, mainly due to an increase in multiple starts. The loonie paid little heed to the data, the currency depreciated outright, after Mondays’ limited trading activity as concern that European officials may fail to halt the region’s sovereign-debt crisis before it spreads to banks, has cut the demand for higher-yielding assets. On the holiday Monday, the loonie took flight after the Sarkozy and Merkel’s meeting on the weekend as both vowed to deliver a plan to support the region’s banks.
The loonie, like any risk or interest rate sensitive currency, remains vulnerable to following the broader trends, especially what is transpiring in Europe. To date, the probabilities of a Greek default and weaker commodity prices have been capable of keeping a lid on risk rallies.This morning’s a plan by giant German insurer Allianz to turn the EFSF fund into a bond insurance program is gaining traction, allowing the market to apply the ‘risk on trade’. The market continues to look to buying dips just under last Friday’s low (1.0175).
The AUD has maintained its six day old rally on optimism that European policy makers are moving to insulate banks from the region’s sovereign debt crisis, increasing demand for higher-yielding assets. European official’s and policy makers are stumbling about and at long last seem to be stepping up and taking ownership of the European debt crisis. The market is expecting the ‘creation of a new Euro rescue plan that will be even more positive for risk’. In the O/N session, the AUD surged above parity outright as Asian stocks rebounded, boosting demand for riskier assets. The Aussie gained against the yen after data showed that home-loan approvals rose for a fifth month, adding to signs the domestic economy remains resilient. Lower consumer confidence is getting support from lower mortgage rates, as evidence, the number of new home loans rose +1.2%, m/m in August.
It’s not a surprise to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. An increase in risk and RBA interest rate cuts again will be off the table and visa versa. However, similar to other growth and commodity sensitive currencies, the market bias prefers to be better sellers of the AUD on these rallies, until the panic flows have abated (1.0106).
Crude is little changed in the O/N session ($85.86 up+0.05c). Oil rose for a fifth day as global bourses gained, extending the biggest rally since August. Euro hope that policy makers are getting to grips with their own financial debacle has temporarily provided support for the market. Yesterday, OPEC again cut its global oil demand growth forecast for a fourth consecutive month, citing an economic downturn in developed countries and efforts by China and India to curb fuel consumption. ‘The economic downturn is taking its toll on the world oil demand’ and ‘the decelerating US economy, high unemployment rate and feelings of uncertainty among consumers, has damped oil demand. Similarly, debt problems in the euro zone are causing EU economies to lose some of their estimated growth this year’. The organization which pumps a third of the world’s oil, now sees 2011 demand growing by just +0.88m bpd to +87.8m bpd (the first time below a +1m bpd benchmark).
Last week’s EIA report showed, in support, that the US commercial crude inventories decreased by -4.7m barrels from the previous week. At +336.3m barrels, oil inventories are above the upper limit of the average range for this time of year. Total motor gas inventories decreased by -1.1m barrels are above their upper limit of the average range. Analysts were expecting crude gain by +2.5m barrels and gas stocks to move up by +1.30m barrels last week. Oil refinery inputs averaged +15.1m barrels per day during the week, which were +73k barrels per day below the previous week’s average as refineries operated at +87.7% of their operable capacity.
The old support levels now become the new key resistance points. Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technical selling on some of these rallies.
Gold prices yesterday stayed close to home despite the toing and froing rhetoric from Global policy makers. Are we to trade the commodity as a safe haven? Are we to cash the profitable trade for margin requirements? Will the QE policies require a hedge against inflation? These are some of the question on why the commodity has been behaving in such an erratic manner this week. After a +2% rally in thin markets on Monday, it was only natural that some profit would have been booked first thing yesterday. This morning its the dollar’s turn, trading under pressure versus the EUR has given the metal a bid first thing.
After last months rout, investors remain very cautious about this trade. In the last two weeks, gold has had one of its “steepest corrections in history, weighed down by a sharp margin increase, the fourth hike this year and heavy liquidation by hedge funds in a technically overbought market”. Demand for ‘physical’ gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August. Analysts expect the yellow metal to continue to trade inversely with risk, especially if it is driven by credit issues. The Fed’s efforts to drive interest rates lower to support lending should, by default, support commodity prices in theory ($1,681 up+$20.50c).
The Nikkei closed at 8,738 down-35. The DAX index in Europe was at 5,911 up+47; the FTSE (UK) currently is 5,399 up+5. The early call for the open of key US indices is higher. The US 10-year backed up +19bp since Friday (2.18%) and is little changed this morning.
Treasuries fell, pushing 10-year yields to a one-month high, as the Treasury department prepared to sell +$66b in notes and bonds this week and on the back of global pessimism may tentatively be easing, as leaders seem to be to containing the Euro-region’s debt crisis. With Troika clearing the way for Greece to receive another ‘handout’ or aid to stave off a default has also pressured the US curve, but, for how long?
Losses by Treasuries may be limited as there’s still a chance US GDP will contract and because of Operation Twist. Under the $400b program, the Fed has been purchasing long dated securities financed by selling the short end (yesterday they sold $8.75b Treasury coupons and had bids for +$242b). The Fed is expected to lower longer term rates and hopefully kick start growth again in a stagnant US economy. Analysts guesstimate for 10-year yields is 1.50%.
Higher yields lured buyers into yesterday’s $32b US 3-year auction. The issue was taken down at +0.544%. The bid-to-cover ratio was 3.3, the highest in 14-months, compared to 3.24 of the previous four sales. The indirect bid was +37.8%, versus the +38.4% average. There are buyers happy to buy on these pullbacks.
