With President Obama winning, Is Fixed Income, Forex and equities hung over?

The pressure is on. Now that the world got what was predicted, investors have been able to ‘sell the fact’ in the O/N trading session. President Obama optically will have to appease markets, consumers and world leaders even before he enters office, as global economies hang in the balance. Let’s see what North America wants to do after last nights late festivities.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

Yesterday’s US factory orders did not surprise the market. Global fundamental data is weak and will continue to be for many a quarter. Capital markets price action suggests that the world is a better place from last month at least, endorsed by libor rates continuing to come off hard. The USD got smacked as traders believed it was a temporary relief rally for the ‘carry trade’ that had been black- balled for so long. No one believes yet that the current euphoria will find permanent traction, but in this environment, who known’s. All of the weakness in factory orders was due to a large drop in non-durable goods orders (-5.5%), while durable goods orders actually rose +0.9% (usual suspects defense and aircraft). Core-orders fell -1.0% and new orders fell -2.5% in Sept., but, even worse, ex- transportation, total new orders fell -3.7% (largest decline in 16-years), as firms continue to trim investment due to persistent economic uncertainty. Durable and non-durable goods shipments fell in Oct. while non-durable inventories declined for the first time since April largely due to a drop in petroleum and coal products (-8.3% m/m). Fed’s Fischer said yesterday that ‘the impetus for rising prices has come to a grinding halt as the credit crisis took grip and confidence evaporated’. This can only be good for the Fed, further ammo to keep rates low for some time and eventually boost growth.

The US$ currently is higher against the EUR -1.15%, GBP -0.95%, CHF -0.49% and lower against JPY+1.36. The commodity currencies are mixed this morning, CAD +0.08% and AUD -0.24%. The loonie managed to print a three week high yesterday, as a positive move in equities managed to convince investors to ‘strap on more risk’. Psychologically, investors are happy to have left Oct. and have entered a new month. Combining last weeks gain, the loonie is now only down 9% this quarter. With the credit markets continuing to unclog themselves, renewed optimism is favoring the loonie after printing last weeks technically oversold levels (1.3014). Commodities printing new weekly highs of course will favor any commodity currency. Interest rate differentials (ECB and BOE), global equities and commodities are expected to provide further support for the currency this week, despite the slew of weaker global fundamental data. Talk of the Teck- Cominco/ Fording Canadian Coal Trust being covered piecemeal also provided some temporary support for the currency. The theme of last week, too far, too fast was definitely a concern, traders continue to see better levels to own the currency despite the strength of the one directional play. Now that the Fed eased 50bp, it’s anticipated that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth.

The AUD dollar, like most high yielding currencies managed to print two-week high yesterday as US equities posted their biggest Election Day rally in a couple of decades. As in most cases, the advance has been too far too fast. In the O/N session, with global equities retreating on earning announcements, investors have been happy to unwind some of the carry trades entered yesterday. Investors continue to be better buyers on pull backs and will wait to see what both the ECB and BOE have in store for the market (0.6874).

Crude is lower O/N ($67.70 down -283c). Yesterday, crude jumped as the greenback struggled vs. the EUR and investors with new found enthusiasm bought both commodities and equities. The market sought ‘hard assets’ as an inflation hedge. US fundamentals remain weak, the variable that has dominated demand and pressurized prices of late. Traders will tell you that uncertainty is probably the biggest factor that required investors to want to own the ‘big dollar’ and avoid commodities. All of this has been a temporary blip as the black stuff has managed to pare some of this weeks gains; woeful global economic news will again pressurize crudes prices in the medium term as destruction of global demand will continue. Euro-land has already declared the region’s economy has probably already entered a recession and will stagnate next year (They consume 17% of the global energy). Despite the run up in prices yesterday, the commodity continues to trade close to its 17-month low print achieved last week. Fundamental data combined with the recent greenback strength had investors selling oil contracts on rallies. Rate cuts last week by the three biggest oil users, the US, China and Japan, has failed to inspire confidence that a recession can be avoided. It’s a foregone conclusion that both the ECB and BOE will trim rates tomorrow. With global equities advancing and OPEC wanting to meet again before Dec. has been able to provide temporary support. OPEC indicated that they may call a new meeting if prices fail to react to the -1.5m barrel-a-day output cut it announced last month. To date we have not been able to remain above the $70 a barrel level (last month crude fell 33%). Growth fears will continue to outweigh any cut in production (OPEC produces 40% of the world’s oil and cannot cut too deeply due to consent issues by various members). Gold has climbed ($756) as the greenback eased against the EUR, boosting the appeal of the ‘yellow metal’ as an alternative investment. Despite the big dollar gaining momentum O/N, investors prefer owning the harder asset for the time being.

The Nikkei closed 9,521 up +406. The DAX index in Europe was at 5,162 down -115; the FTSE (UK) currently is 4,517 down -122. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 15bp yesterday (3.76%) and are little changed O/N. Traders aggressively unwound steepening trades causing a strong rally at the long end of the US yield curve. While the short end of the US yield curve backed up and flattened the curve even further as gains in global equities curbed demand for the safer assets. The pending US government debt-sale announcement may show that its borrowing requirement are much great than anticipated and provide further pressure on FI.

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