Global equities get the ‘green light’!

Uncertain times have investors second guessing; even Trichet cannot be straight forward about rates. Fed Fund futures supposedly are not a reliable indicator for interest rate direction. To date they indicate a 100% chance of 50bp move by Bernanke, what’s wrong with that? Iceland raised rates this morning by 6 points (+18%), reason unknown just yet, but perhaps afraid of hyperinflation after recent events. It’s good to see some green on the indices boards for a change!

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

FX Heatmap October 28th, 2008

No one has been looking at fundamental analysis; instead hedge funds would rather liquidate causing lemming investor panic mentality. But yesterday US housing data did provide a surprise to the upside. Sales of new houses unexpectedly rose before the credit markets froze this month (+464k vs. +452k or +2.7% in Sept). They managed to rebound from an 18-year low on the back of deep cut in prices. Median prices are now registering a 4-year low down -9.1%, y/y. But, this month credit issues will surely register poorer future numbers as the ability to get a mortgage became more difficult. Builders have cut inventories at a record pace (m/m down -7.3%). The number of homes for sale fell to +394k also the lowest in 4-years, which optimistically over time should stabilize prices. The US government continued its hand outs yesterday and provided an additional $31b for 14 regional banks as a part of their ‘temporary nationalizing policy’ and offering investors some sort of optimism. They will not let the financial system fail; if the cash injection fails to stimulate anything then another plan will be suggested until we get a winning formula. ECB’s Trichet is to cut next week, yesterday he said ‘that they may cut’, Euro translation-they are cutting. This will only provide further support for the rampant safe heaven greenback.

The US$ currently is higher against the EUR -0.07% and JPY -1.95% and lower against CHF +0.66% and GBP +0.15%. The commodity currencies are stronger this morning, CAD +0.80% and AUD +2.31%. The loonie depreciated 8% last week and just under 2% yesterday, the beginning of a 5th weekly drop and is closing in on the worst month in half a century on speculation that the economic slump will deepen and oil will decline further. Yesterday was no different, investors managed to push the currency to its lowest level in 4-years. Crude oil, which accounted for 10% of Canada’s export revenue last year, fell -11% last week and a further -1% yesterday. It’s anticipated that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth. Expect them to follow what they Fed does tomorrow next time around. Last week Governor Carney reduced overnight borrowing costs by 25bp (2.25%), less than the market had anticipated, but added that it will probably need to act again to fend off the effects of a credit crisis and global recession (less than 2% by year end). The market continues to see position covering and repatriation back to the US, which is driving the greenback higher across the board. The BOC MPR last week said that the global credit crisis will be ‘deeper, more persistent’ and more widespread than the policy makers had anticipated and signaled they will cut borrowing costs again as the economy teeters on the edge of a recession. Governor Carney said ‘that these financial headwinds will take time to dissipate, even with the extraordinary recent policy actions just announced’. Previously the BOC justified their less aggressive move in the context of how much action that has been taken since its last meeting (75 bps) and the cumulative cut in rates since Dec (225 bps). Looks like a good bet that borrowing cost could break the 2% mark by year end. Some analysts have stuck their neck out and foresee the loonie sliding to 1.40 by Christmas. For now the trend remains your friend, do not expect to find resistance from investors, who continue to better buyers on pull back.

The threat of intervention by the BOJ and the actual intervention by the RBA caused the AUD to appreciate for the first time in a week vs. JPY and USD (0.6187). Over the past month alone the currency has depreciated 35% vs. JPY and 26% vs. the greenback. One expects the AUD to underperform in recessionary times, thus expect investors to be better sellers on rallies.

Crude is higher O/N ($63.89 up +67c). Crude oil managed to print a new record 17-month low yesterday as plunging equity markets heightened concern that a global recession will slash further fuel consumption. OPEC’s decision came and went and crude prices continue to trade heavily overall. Their decision to curb production by -1.5m barrels a day has failed to ease concerns that the global economic slump is curbing fuel demand (m-to-date the black stuff is off 37%). Analysts believe that OPEC should have recorded a deeper cut to prevent further easing, but politically that would have been a difficult ‘pill to swallow’. The cut in production will commence at the beginning of Nov. Do not expect crude prices to bottom out until other markets find some stability. The greenback continues to climb against the EUR (highest level in nearly 3-years) and further pressurizing commodity prices. Growth fears continue to outweigh any cut in production; this will continue to keep the black-stuff under pressure again. They still produce over 40% of the world’s oil. Last weeks EIA report showed that crude oil stocks rose +3.18m barrels to 311.4m, w/w, and again another bearish weekly. The market was expecting an increase of +2.6m barrels. Analysts continue to aggressively pare their future price estimates, down from $90 to a year end price of $60. Sluggish demand continues to be the catalyst for rising inventories. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gold eased yesterday as the ‘big dollar’ strengthened vs. the EUR, thus eroding the appeal of the ‘yellow metal’ as an alternative investment ($745). Investors continue to want to raise cash and are comfortable in selling the ‘yellow metal’ on rallies.

The Nikkei closed 7,649 down -811. The DAX index in Europe was at 4,114 down -181; the FTSE (UK) currently is 3,701 down -182. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 2bp yesterday (3.69%) and have finally backed up O/N as equities advance (3.80%). Traders began cheapening up the short end of the yield curve ahead of today’s 2-year $34b debt auction. Medium to longer term debt had remained better bid as global equities came under renewed pressure. The 2-10’s spread remains at 215 and investors should expect this to tighten over the week down to 195. It’s a foregone conclusion that the Fed will ease a minimum of 25bp on Wednesday; futures have also priced a 100% chance of 50% and a 32% chance of 75%. Let the fun begin!

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell