Up, Up and Up……Bang, Bubble and Burst!

It tough watching these markets, it’s even tougher when it’s less volatile and range bound. One actually gets to second guess themselves. Why am I long dollars? Why am I short EUR? Why am I long cash while these equity markets keep going up, up and up! Little voices remind me to disassociate myself from the noise. Forget the stock analysts and their ‘mid blowing’ recommendations that equities are so under-priced. Of course they have to be, they need a commission! It’s hard to trust the analysts that never saw the ‘bubble about to burst’ actually, they were the ones encouraging us to blow it up bigger! And this morning, the BOC VP Zhu, who also had his hand in the pie by lending +$1.1t in the 1st half of this year so that the consumer can kick start the economy, now see that this ‘ample liquidity has caused bubbles in stocks, commodities and real estate everywhere’! Oh brother! I am taking my lead from what is happening in real terms, the man and the woman on the street!

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 ‘subdued’ trading range.

Forex heatmap

No big surprises in yesterday’s Fed Beige book. According to them, as expected, ‘consumer spending remains soft in most of the nation, and the labor market remains weak across all of the districts’. They went on to say, that even while the worst of the downturn may be past, the economy has yet to show broader growth. ‘Loan demand was described as weak, and many districts reported that credit standards remained tight’. Nothing was going to change that quickly!

Be sure to be sitting when reading this. Reports show that US mortgage foreclosure filings last month hovered near July’s record high! All this has occurred despite the broad initiatives that have been used to keep borrowers in their homes. The report expects it to rise for another year. +3.4m households will get a filing this year (previous expectations was around +3m). Last year we had aprox. +2.3m. How can they keep telling us that the worst is over?

It’s BOC and BOE interest rate day. The horse to watch this Thursday runs in the 7.45am time slot. No one covets Governor King’s position. What a mess! There is a possibility that the BOE could reduce the interest rate that it pays on reserves to ‘zero or even negative’. Markets are currently pricing in around a +25% probability that this will happen this morning and a +50% chance that it will happen next month.

The USD$ currently is lower against the EUR +0.12% and CHF +0.14% and higher against GBP -0.11% and JPY -0.07%. The commodity currencies are weaker this morning, CAD -0.02% and AUD -0.33%. Another surprise, Canadian housing starts beat expectations on multiples yesterday (+150.4k vs. +134.2k). The headline was the strongest pace of seasonally adjusted homebuilding activity this year and by default should end up being a positive contributor to the 3rd Q growth. However, the glass half-full analysts will argue that despite both singles (+2.5%) and multiples (+23.8%) advancing, the ‘volatile’ multiple projects may retreat again next month. Digging deeper, it’s noticeable that more supply is being put into a market that continues to witness a growing number of newly completed but unsold and vacant homes (aprox. +20k sits idle). In reality, this could put downward pressure on Canadian housing starts going forward! It’s worth remembering that with May’s surge in permits all due to the ‘volatile’ multiples variable, a decline in permits in both June and July pretty much concludes that the market should expect a significant drop in starts for both Sept. and Oct.! This morning we have the BOC rate announcement (+0.25%), expect nothing to change. At the last meeting Governor Carney said the loonies’ strength was hampering the country’s economic recovery. Technically, since then the currency has appreciated +2.3%! If he comes out swinging again, will we see the justifiable pull-back?

Stimulus spending begins to slow? The AUD fell for the 1st-time this week after employers cut almost twice as many jobs than the market expected (-27.1k vs. -14k). Combine this with weaker sales data already this week results in less pressure on the RBA to raise interest rates. The futures market tell us that dealers have cut the percentages in half that Governor Stevens will raise rates next month. For now look for dealers to sell on upticks (0.8550).

Crude is higher in the O/N session ($72.13 up +82c). Crude prices strengthened again as the greenback remains under pressure. OPEC held oil production quotas unchanged yesterday as expected, with most members voicing satisfaction with current global crude prices. Interestingly the focus was on persuading members not to sell more oil than their quotas permit. Now, who would ever do that! The decision was already predicted by the Saudi Oil Minister Ali al-Naimi earlier in the week. The member states provide 35% of the world’s oil. Compliance with the output limits, which are designed to support prices, had been waning, signaling an uptick in policing members was a necessity. ‘The price is good for everybody, consumers, producers’, what else can they say? Last week EIA inventory report fell -400k barrels compared with analysts’ projections of a decline of -600k. However, the real eye-catcher of the report was that gas stocks were off -3m barrels, way ahead of analysts’ expectations of a -900k barrel draw down (the bullish element). Distillate stocks rose +1.2m barrels, double the expectation build. Total product demand rose +0.1% over the past month compared with year-ago levels as gas demand increased +0.5% over the same period. Refinery utilization was up +3.1% points to +87.2%. Basically demand destruction remains healthy! Fundamentally, inventories are above the normal level of 61 days’ worth of demand. Let’s see what the weekly inventory reports have in store today. Year-to-date, the black stuff is up +62%!

We came, we conquered the $1,000 print and now we backed off, but not too far! Al ready this week we broke that psychological hurdle. The first time in 18-months and officially a 14% gain for this year. Who is buying all that Gold? Anyone and everyone, with the USD under such intense pressure have naturally increased demand for the ‘yellow metal’ as an alternative investment. Even the threat of inflation has speculators wanting the commodity ($994).

The Nikkei closed at 10,513 up +201. The DAX index in Europe was at 5,610 up +35; the FTSE (UK) currently is 5,016 up +35. The early call for the open of key US indices is higher. The 10-year bonds backed up 2bp yesterday (3.47%) and are little changed in the O/N session. Treasuries stayed close to home despite the US government selling $20b of 10-year notes yesterday, the 2nd of 3-note auctions totaling $70 billion (Today long bond $12b). The Fed Beige book remains ‘bleak’ with slow growth still expected. Conclusion, it remains more positive for bonds than negative. It seems that dips are coveted for now at least!

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