Capital-Markets Cannot Have Long Boring Summer Days!

It seemed to be the usual, a long boring summer afternoon with a tight trading-range day! Desks were content on ending this week as a non-event, so that half-staffed holidaying trading desks can regain some normalcy as personnel returned next week. First rule of thumb, be aware! For 20-mins out of no-where, late afternoon, a once-off $3b LHS (left hand side) USD/CHF caught the market flatfooted. Like any Guy Ritchie themed movie, this transaction triggered EUR to spike and a wave of S/L activity being triggered. Coupled with news that the last of this week’s auction (7-yrs) was well received and that equities were capable of keeping their heads above water encouraged risk indicators like EUR/JPY to remain very well bid. Yesterday, for the inexperienced, it was a classic example of how one deal executed at the most inappropriate time with little liquidity can cause so much havoc. On the other hand I was hoping to watch paint dry!

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

Yesterday’s US GDP headline came in better than expected. The 2nd Q real-GDP was unchanged in the preliminary report at -1.0%, q/q, vs. expectations for a downward revision to -1.5%. Policy makers expect real-GDP to return to positive territory for the 3rd and 4th Q’s on the back of a reversal of inventory levels and an increase in production (specifically in the auto sector).There is a fear that the support will only give temporary relief, if so, it will push us back into Roubini’s double-dip scenario. Digging deeper, personal consumption came in better than expected at -1.0%, q/q. Exports also deteriorated at a slower pace, while government consumption rose to +6.4%, q/q, vs. +5.6% last time out. Residential investment was revised up to -22.8%, q/q, from -29.3% in the advance report. However, offsetting these upward revisions were downward revisions to non-residential investment and inventory investment.

The reality is that the drop in continuing claims has beneficiary’s migrating into other categories (+6.13m vs. +6.24m), this lower print is negated by further increases in the emergency and extended benefit claimants (+2.916m vs. +2.877m). Despite continuing claims coming in better by -119k, emergency and extended benefit recipients jumped by +103k! Are people dropping off the extended list? It is difficult to tell. However, this scenario does not paint a rosy picture!

Finally, food for thought, the $3b ‘cash for clunkers’ program has had a few positive effects. It has managed to clear some inventories, increased production levels and so on. But, when one analyzes the data, one notice that Toyotas were the most bought in the program and that the Ford Focus was the ‘only’ American model in the top 5 purchased! Despite all the inducements, consumers would have required additional/new loans, another burden for monthly cash outflows. Maybe Roubini ‘W’ shaped graph could come to pass!

In amongst the usual comments about the economy and inflation, Richmond Fed Representative Lacker suggested that the Fed will be evaluating whether they need to buy the full amount pledged under MBA/Agency purchase plan. It’s worth noting that this program is ‘much’ bigger than the current Treasury purchase plan, one which has an original target of a over +$1.2t (to-date only 50% done). What are the implications of a cutback? An underhanded exit strategy that would have billions less to use for their quantitative easing strategy-and by default a plus for the ailing greenback eventually!

The US managed to add another 111 lenders to its list of ‘problem banks’ in the 2nd Q (a whopping +36% increase, now a new 15-year high). That’s a total of 416 institutions with combined assets of +$300b. Bring on the commercial defaults……..!

The USD$ currently is higher against the EUR -0.18%, CHF -0.26% and JPY -0.42% and lower against GBP +0.03%. The commodity currencies are mixed this morning, CAD -0.24% and AUD +0.00%. The loonie initially weakened for a 3rd-consecutive day and managed to print a weekly low as investors speculated that the recent rally for higher-yielding currencies may be overdone. During the morning session, falling oil prices managed to lend a hand to drag the CAD lower. However, in the afternoon session, the currency managed to reverse its course after oil and equities erased their losses. The loonie, thus far, has had the poorest performance vs. the greenback this month compared to the 16 most-traded currencies. Month-to-date it has fallen -1.7% vs. its largest trading partner. The BOC Deputy Governor Timothy Lane and his contradicting comments about ‘maybe’ seeing growth this quarter and at the same time seeing significant upsides and downsides to the economy has tried to cap this months gains. Earlier this week he was definitely talking the BOC book and reinforced that the ongoing strength of the CAD is detriment to Canadian economic growth. His rhetoric has done little to influence the currency. Take your lead from commodities, as that’s what is dictating the direction!

Its official, the AUD is about record the longest stretch of monthly gains vs. the JPY in 20-years. With improving liquidity, good data, proactive central-bank policies and more fiscal policy, has investors coveting the higher yielding currency. The theme remains the same and so does the AUD actions. Like clockwork, up one day and sidewise another! Stronger fundamental data coupled with a tighter monetary policy debate pushed the currency +0.15% higher vs. the USD (0.8438). But, with China looking to limit the capacity of some of its industries should put pressure on the commodity currency. Expect resistance at 0.8500 and investors wishing to sell on upticks.

Crude is higher in the O/N session ($73.09 up +6c). Crude prices again came under renewed pressure in yesterday morning session as the USD strengthened, dissuading investors from using commodities as a hedge against inflation. Oil had managed to fall over -1% on rumors that China may implement various strategies to curb over-capacity. This naturally would affect the pace of global economic growth. Both the weekly API and EIA inventory reports, with their unexpected gains, had impeded upward price movements. The EIA weekly inventories rose +128k barrels last week to +343.8m vs. a forecasted decline of -1.15m barrels. This bearish report was supported by the earlier API release that showed that oil supplies climbed +1.3% (the most in 4-months), to +346.7m barrels. On the flip side, gas stockpiles fell -1.7m barrels to +208.1m vs. an expected -800k decline. Even more surprising, US total daily fuel consumed averaged +19.2m barrels over the last month, down -0.9% y/y. Fundamentals reveal there is a lot of supply in the market with little demand. Technically $75 was always going to be difficult to breach and the $70 support offered tough resistance yesterday. By the afternoon session speculators fuelled by a weakening greenback defended the supported level and purchased the commodity as a hedge. China of course remains the biggest concern. If their economic activity subsides it will definitely put a cap on this market in the medium-term. It has been alarming that we had shifted away from the demand destruction theme. Speculators have bullied crude prices higher. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth should remain subdued. So why are prices higher? Gold prices advanced as investors took this week’s earlier decline as a buying opportunity. The questionability of sustaining economic growth continues to increase the ‘yellow metal’s’ appeal as an alternative investment ($952), mind you a weaker greenback also helps commodity prices!

The Nikkei closed at 10,534 up +60.17. The DAX index in Europe was at 5,552 up +82; the FTSE (UK) currently is 4,921 up +52. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp yesterday (3.46%) and another 3bp (3.69%) in the O/N session. Dealers have managed to keep yields close to their lows despite all this weeks supply as the market debate the inflation question. Some investors are speculation that this 5-month equity rally is overdone and not sustainable. Will policy makers keep rates low for an extended period of time or will all this stimuli create rapid inflation? Again yesterday’s 7-year $28b US auction was well received with a 2.74 vs. 2.44 bid-to-cover ratio.

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