Bernanke’s ‘Reality Show”!

The bulls are running in the periphery market. People are hunting for high yields and expensive equities after this earnings season beat nearly all expectations. 75% of S&P’s members managed to surprise. It’s no wonder that that investors psyche is changing. There has been a mad scramble to put investor’s cash to work. There is a feeling of urgency as money managers do not want to miss the boat, even if it was the Titanic! Bernanke’s first tenure is coming to an end. The man who probably saved us from a 2nd Depression warrants the nod, but, voices are starting to be heard that says different. Anna Schwartz stood up to Roubini in the NY times this weekend over the matter. The rest of the world will not be happy if he was ‘not’ elected.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ session.

Last week we had little data to sink our teeth into! It was the Bernanke ‘reality’ show which took center stage. However, reports this week will probably show that the worst US recession in over 50-years most likely eased in the 2nd Q. Obama’s government stimulus packages combined with increased trade is expected to have offset the effects of a plummeting US housing market, the inventory problems and hoarding by the consumer and businesses. The recession may be entering its final hours. Stockpiles have had a crippling effect in this recession. However the now depleting stockpiles are set to give way to growth this Q. One must remember that the Fed’s go to variable the consumer, whose spending (accounts for 73% of the economy), may be slower to recover as unemployment is projected to keep rising (10% by summers end) and home values are likely to fall further. But ‘less worse is good’ for equities!

The USD$ currently is weaker against the EUR +0.21%, CHF +0.06% and higher against GBP -0.15% and JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.12% and AUD +0.28%. No one can get enough of the loonie! It’s the same story but different day for the currency. Canadian Finance Minister Flaherty and BOC governor Carney continue to talk up the Canadian economy and by default the value of the loonie, to their own detriment. The currency managed to print its strongest levels in 2-months vs. its southern partner and remains the strongest G10 currency this month (+7% vs. the greenback). Last week’s BOC monetary report indicated that ‘the country’s recession is ending amid rising commodity prices and consumer confidence’. That being said, the pace of recovery will be muted because of the strong currency. Governor Carney does not expect the economy to be back to where it was before the recession was declared until the latter half of 2010. The difference in the currency level from their original projection will however impact the BOC policy. Is there some sort of government intervention on the horizon? Not if the rise is fundamental, however expect speculation not to be tolerated. Bottom line the Canadian economy is far better off than other economies. With equities and commodities both moving in the same direction has only increased risk appetite and by default the loonie will always benefit from that!

The AUD had managed to register a 2nd-consecutive weekly gain vs. both the USD and JPY on the back of rising global equities which has boosted the demand for higher yielding assets. In this current environment it’s possible that the AUD could print new yearly highs vs. the USD (0.8263) by summers end as the market anticipates that the RBA like the BOC will increase its estimates for GDP (0.8226).

Crude is little changed in the O/N session ($68.72 up +29c). Oil remains better bid on the back of global equities finding traction, the USD weakening and an increased appetite for risk. With consumer confidence creeping back into the market place, it can only push commodity prices higher. All of this has occurred despite mixed messages from the weekly inventory reports last week. The API on Tuesday afternoon stated that crude supplies gained w/w (+3.1m barrels to +349.9m). It was the firstly weekly increase since April. On the other hand, the weekly EIA report showed that inventories fell slightly less than expected (-1.8m barrels vs. -2.1m), while gas and distillates showed smaller than expected builds (+1.2m vs. +1.5m). Refinery utilization fell by -2.1% to +85.8% of capacity, more than expected. The crude numbers provided a sharp contrast to the API’s reported crude build. But, the refinery run cut of -2.1% was consistent in both reports and should provide further bearish implications for oil prices. As stated earlier, the market is relying on equities and currency trends to anticipate any directional meaning for crude prices. Technically, demand destruction should not be supporting higher fuel prices. The black stuff has advanced +46% year-to-date as ‘Green shoot’ economics has led to higher equities and higher oil prices. Gold prices have become somewhat deflated as the strength of equities has seen bullion sold and monies redistributed into stocks, investors are shying away from the ‘yellow commodity’ as a store of value($958). Will they be able to maintain this action?

The Nikkei closed at 10,088 up +144. The DAX index in Europe was at 5,259 up +31; the FTSE (UK) currently is 4,573 -3. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 7bp on Friday (3.70%) and is little changed in the O/N session. With global equities advancing, risk appetite growing and a record announcement $115b of new US debt to be issued this week has the long end of the US yield curve on the back foot. It will be the 1st time in 33-years that the US government will have three coupons and a TIPS auction in one week. Traders are certainly getting ahead of this and will want to continue to sell debt on upticks.

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