What we are witnessing this week begs the question. What does +5.7m US jobs losses in 17-months and a housing market under constant pressure, mixed in with a Ã¢â‚¬Ëœtemporary relief of CreditÃ¢â‚¬â„¢ adding that Japan has just suffered a record GDP fall (-15.2% 1st Q), HP announcing another 6000 job losses and the perception that 16 from the 19 stress tested US banks seem not able to repay their TARP money give us? Higher equity markets, demand for riskier assets, renewed optimism! They are all good things, but beyond the curve and ahead of time. Cash makes the world go round even with it being free, fear of unemployment prevents the consumer of investing. Conclusion, we need to break the individualÃ¢â‚¬â„¢s pessimistic psyche, and then we can Ã¢â‚¬Ëœdeliver from evilÃ¢â‚¬â„¢!
The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a Ã¢â‚¬ËœsubduedÃ¢â‚¬â„¢ trading range.
The glass-half full approach to economics probably interpreted yesterdayÃ¢â‚¬â„¢s US housing data as being horrible, with new home construction printing an all time low in April (485k vs. 520k-down -13%,y/y). However, some rosy glassed economists would say it should be interpreted as being positive, itÃ¢â‚¬â„¢s the only way we will burn off the excess housing inventories. Even though the headline will be a drag on GDP, we are slowing the flow of near completed homes and reducing any rising stock of complete home. This will enable builders to get back to basics and start all over. The decline in the headline was attributed to the sharp drop in the multi-family units. It was no surprise that Permits also came in lower than expected (494k vs. 530k). Some concrete proof that construction intentions will fare no better in the months ahead and her too the largest loss was in the multi-family category.
Already this week we have noticed that tension is easing in lending circles. The spread between 3-month LIBOR and OIS (Overnight index swap) continues to tighten (57bp) as increasing confidence and record low interest rates are helping the financial institutions to unlock credit. Analysts believe with the cost of borrowing dramatically declining and volume increasing, itÃ¢â‚¬â„¢s strong evidence that confidence is returning slowly to the financial sector. The Ã¢â‚¬ËœspreadÃ¢â‚¬â„¢ is still above pre-crisis levels, but, the ongoing improvement depends on Cbanks and government support programs. They cannot take the foot off the gas at any point! Even though we are witnessing some easing we must understand that an eventual recovery any time soon Ã¢â‚¬Ëœwill be fairly modestÃ¢â‚¬â„¢. Intuitively we can expect the demand for credit to remain low for the foreseeable future, fear of job security will convince people to hoard or even save more. ItÃ¢â‚¬â„¢s for this reason why Government stimulus programs have to be ongoing, they need to break the cycle and eventually convince the consumer that itÃ¢â‚¬â„¢s OK to come out and play!
The USD$ currently is higher against the EUR -0.05% and CHF -0.09 and lower against GBP +0.09% and JPY +0.04%. The commodity currencies are mixed this morning, CAD +0.07% and AUD -0.45%. With Canadian equities playing catch up after MondayÃ¢â‚¬â„¢s national holiday and commodities in demand, the weaker greenback pushed the loonie to its highest level in over a week yesterday. Investors have been gravitating towards riskier asset classes and higher yielding currencies as risk appetite finds new momentum. This renewed optimism is on the back off the belief that some US banks wish to repay TARP monies sooner. By default, it has led to renewed faith in equities and commodities and aggressive paring of safer heaven positions. An optimist would say that the CAD looks like a strong bet to improve dramatically vs. its southern partner with commodities so sought after. A portion of its recent strength has been attributed to excessive optimism rather than on fundamentals. One should expect global euphoria to dampen and with that better levels to own this commodity currency. The countryÃ¢â‚¬â„¢s fundamentals are strong when compared to other G7 partners, but it exports 70%+ of its goods and services south and 50% of that revenue is commodity based. The currency becoming too strong too quickly is not a good thing!
The AUD dollar fell for the 1st- time in three trading sessions after a consumer confidence report dropped (-4.3% m/m to 88.8 points in may), thus fueling speculation investors will sell higher-yielding assets. Analysts believe that the market will see better buying on pullbacks (0.7721).
Crude is higher in the O/N session ($60.60 up +50c). We have already mentioned this week why the black stuff was propelled to these lofty heights, the Nigerian militant groups (MEND) threats and a fire at a north eastern US Sunoco refinery. However, prices were little changed in the O/N session as dealers and investors speculate that this morningÃ¢â‚¬â„¢s weekly EIA report will show that both US inventories and demand dropped w/w. Fundamentals for the commodity are bleak. Last weekÃ¢â‚¬â„¢s IEA report forecasted that world oil consumption this year will fall the most in over 28-years. The underlying fundamentals warrant a much deeper pull back. The IEA cut their daily estimates to +83.2m barrels (down -3%, y/y). Last weeks EIA report revealed an unexpected decline in inventories as imports plunged to the lowest level in 8-months. Crude supplies fell -4.63m barrels to +370.6m vs. an expected increase of +1m barrels (imports fell -12% to +8.71m). Despite it being a bullish headline, a 19-year record high inventory level continues to be the negative variable in the price equation. Year-to-date, crude prices have advanced +33%, mostly on the back of a high percentage of OPEC members conforming to production cuts. They meet again at the end of this month. Gold prices are edging higher as the greenback comes under renewed pressure, thus boosting the appeal of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative asset ($929).
The Nikkei closed 9,344 up +54. The DAX index in Europe was at 5,007 up +48; the FTSE (UK) currently is 4,488 up +7. The early call for the open of key US indices is higher. The 10-year Treasury backed up 1bp yesterday (3.25%) and are little changed in the O/N session. ItÃ¢â‚¬â„¢s the same old story, Treasury vs. the Fed., supply vs. demand. YesterdayÃ¢â‚¬â„¢s housing data surprisingly dropped to a new record low for April, indicating a further reduction in housing is warranted before we can see any uptick in new purchases. Next week we will have the US treasury resuming its debt auctions. This will be the biggest single factor that will force FI rates to remain high in the long end. Currently the Fed is losing its battle with its buy-back program to keep rates low. Because of the vast amount of debt that the US government needs to issue, the Fed will have to increase the amount of buy-backs (+300b buy-back vs. some estimates of +3.25t borrowing requirement).
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