The next kill-joy, ‘Commercial Property Loans Go Bad’!

The next dirty words are ‘Commercial Property Loans’. The number of future bad loans being thrown about is horrendous. In the UK we are talking about 50 to 85% being bad! Why are so few of us talking about it? Do we again believe if we ignore them they will go away? That’s what happened on the first go around, financiers and investors suffering from ‘Ostrich Syndrome’. Enthusiasm is being rewarded if you are long equities. It’s all one way traffic, up! No pull back’s, no relief and no fair value opportunity to own any. This may end in tears once again, there is no denying that green shoot economics is taking root, but future expectation is being over stated in the medium term.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ session.

Forex heatmap

Quelle surprise! Not only did Lance make the podium at the w/d, but US New home sales advanced the most in 8-years yesterday, m/m (+384k vs. +346%, +11%). The head-line print increased 4xtimes more than expected. It was supported by a drop in medium prices and low mortgage rates. Analysts will once again argue that a small change in the number of units will distort the % perception given the low volume of sales (we saw this in last weeks re-sales data). But, despite the potential hiccup in the % changes, the trend is gaining upward momentum after printing record lows in Jan., with month supplies falling to the lowest level in nearly 2-years (8.8-months vs. 10.2). Inventory issues have been the curse of this recession. It’s not surprising to see that new home prices also dipped in June, similar to re-sale prices, as builders continue to increase incentives to shift stocks. Median prices fell -5.8%, m/m, to +$206k while the mean prices remain left of center. Digging deeper, geographically the Midwest leads the way with sales up +43%, m/m, although Northeast (+29%) and West (+22.6%) also posted double digit gains with the South posting a 2nd –consecutive decline.

This morning we have US Conference Board Consumer confidence numbers. Despite most sentiment indices falling this month, there is hope that this morning’s data will actually surprise us. Some analysts are expecting a +50 reading (neither contracting nor expanding). Last months numbers where much weaker than the industry counterparts, paring some of the negative headline should benefit the market again.

The USD$ currently is weaker against the EUR +0.31%, GBP +0.26%, CHF +0.34% and JPY +0.02%. The commodity currencies are stronger this morning, CAD +0.47% and AUD +1.22%. The CAD seems to be getting ahead of its fundamentals. This morning the loonie managed to print its highest level in 9-months on optimism that the worst of this recession may be over. Future expectations are dominating reality. Have we come too far too quickly? The BOC would love to think so! The trend remains your friend, fighting this market is a losing battle at the moment. Technical analysts believe that if we close below 1.1785 today it will bring new fresh selling of the ‘big dollar’. The risk reward play would be to sell the loonie with a tight s/l. Last week Canadian Finance Minister Flaherty and BOC governor Carney continued to talk up the Canadian economy and by default the value of the loonie, to their own detriment, it remains the strongest G10 currency this month (+7% vs. the greenback). This month’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. 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. But beware of a backlash!

The AUD managed to print a new yearly high in the O/N session on the back of Governor Stevens at the RBA stating that Australia’s recession ‘may not be one of the more serious one’s’. The last time we saw these levels was back last Sept. The market will now begin to interpret his comments and assume the RBA may be the 1st Cbank to hike interest rates. This can only be AUD positive. For now all pull backs continue to be bought (0.8320).

Crude is little changed in the O/N session ($68.65 up +27c). Oil remains better bid on the back of global equities finding traction, the USD weakening and an increased appetite for risk. Yesterday the black stuff managed to print its highest level in a month. Commodities have advanced on future expectations and not on fundamentals. US equities managed to advance +7% last week as Hedge Funds and money managers perform like a rabid dog afraid of missing out. It seems that any relief of equity markets is being quickly snapped up. 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. The API on Tuesday afternoon stated that crude supplies gained w/w. It was the 1st weekly increase since April. On the other hand, the weekly EIA report showed that inventories fell slightly less than expected, while gas and distillates showed smaller than expected builds. 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, however the market seems to be ignoring the fact! As stated earlier, investors are 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 +47% so far this year. ‘Green shoot’ economics has led to higher equities and higher oil prices. Gold prices are little changed despite good two-way business. The strength of equities has seen bullion sold and monies redistributed into stocks, while other are speculating that expanding economies and demand for jewelry will support ‘yellow metals’ prices even further ($957).

The Nikkei closed at 10,087 down -1. The DAX index in Europe was at 5,266 up +15; the FTSE (UK) currently is 4,593 +7. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 3bp yesterday (3.72%) and is little changed in the O/N session. Better than expected fundamental data out of the US showing that US Home sales increased by +11%, m/m, coupled with a record announcement $115b of new US debt to be issued this week continues to pressurize the FI asset class. The US auctioned $6b 20-year TIPS yesterday and we will have 2’s, 5’s and 7’s for the remainder of this week. The 10-year benchmark happened to print its highest yield in over a month yesterday.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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