EURO month end requirements are early

What else do you expect China to say? Nah, we don’t like Europe let’s sell. This would only create havoc and plunge us into a deeper recession. It’s just another reason for the risk appetite appreciating bulls to hang onto as we enter the long weekend that is been driven by early month-end positioning. To date, the month-end moves in equity markets have been considerable and usually trigger substantial re-balancing of currency positions. Yes, the rebalancing has been mostly dollar positive. However, we have seen risk assets recovering somewhat on the back of funding concerns easing. The bullish rhetoric from various CBankers this week, supporting their own EUR exposure, certainly promotes more two-way rebalancing needs as opposed to being top heavy dollar requirements. Be wary, some of today’s moves will become overextended as the models favor EUR support.

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

Yesterday’s US data on the face of it disappointed Capital Markets. A weaker than expected set of revisions to 1st Q GDP received a mild reaction, but, certainly played second fiddle to China’s cryptic support for their European investments. Against expectations for a small upward revision from +3.2% to +3.4%, GDP growth was instead revised down to +3.0%. Digging deeper, all sub-categories (consumption, investment, government spending and net exports) were revised down, apart from inventories being the exception. Personal consumption was revised down +3.6% to +3.5%, bringing the contribution to real GDP down as well, but, remains the strongest contribution to growth in two-years. Investment was down a touch on the headline although fixed investment dropped from +0.1% to +0.01%. Even government consumption, both federal and state side pared gains. The only surprise, inventories, managed to add +1.65% to the bottom line. Finally, net exports had a slightly bigger drag on GDP (-0.66%), despite exports being revised higher the import component was also revised higher.

Weekly US jobless claims remains range bound (+460k). Analysts note that the weaker headline print is somewhat inconsistent with other labor market indicators. Initial claims have been stuck in the mid +400k range for most of this year since dropping aggressively last spring. Digging deeper, both of the emergency’s benefit programs managed to record another weekly decline, however, the bulk of the improvement was in the emergency unemployment compensation category (+5.059m vs. +5.101m), while the extended benefits posted another gain (+278k vs. +240k).

The USD$ is higher against the EUR -0.08%, GBP -0.53%, CHF -0.14% and JPY -0.41%. The commodity currencies are mixed this morning, CAD –0.06% and AUD +0.34%. It was another day and another win for the loonie yesterday. The CAD has aggressively backed up from its six-month lows printed earlier this week as concern eased that Europe’s debt turmoil will worsen. Perhaps the BOC can breathe a sigh of relief ahead of its rate decision on June 1st. Earlier this week, the futures market was beginning to price out all chances of a rate hike. Interestingly there was a Medley report supporting this ‘no move’ by Governor Carney next Tuesday. Currently the market is pricing in a 50% chance of a hike. On the other hand, if there is no hike, the market should expect some ‘hawkish’ rhetoric from policy makers. With China reaffirming its European investment commitments and Spain trying to shore up its austerity plans has benefited both commodities and growth currencies. Month-to-date the currency has lost -3%, while year-to-date it has appreciated +3.5% vs. its largest trading partner. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency, but, if commodities remain true, then intraday traders will be happy buyers of the currency on ‘any’ upticks.

The AUD is officially heading for its first weekly advance in more than a month as Asian equities extended a global rally, boosting demand for higher-yielding growth assets. The AUD’s new found support has managed to print a one week high, as advancing regional bourses is convincing investors that ‘down under’ can withstand the pressures from a European debt fallout. This week the currency has also found favor amongst investors on rumors that the Australian government is contemplating altering the rate at which its proposed mining profit tax would take effect. Up until yesterday, the currency had been heading for its worst performing month in nearly two-years as investors shied away from growth currencies. Plummeting equity markets in the region and potential war rhetoric from North Korea had pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -7.4% on declining equity and commodity prices. Speculators are better buyer on pull backs as longer term support levels remain intact (0.8536).

Crude is higher in the O/N session ($72.54 up +100c). Crude prices advanced for a second consecutive day yesterday and have maintained their upward momentum in the O/N session as the dollar has snapped a three-day rally vs. the EUR, boosting the investment appeal of commodities. Over the past two trading session oil has appreciated 6%, the most in nine month. On the flip side, the black stuff has fallen -18% from its month high print on May 3. This week’s weekly EIA report has helped the rallying equity market to drag crude prices away from this week’s oversold lows on European fiscal issues. A report released from the US Energy Department showed that the total fuel demand gained +0.6% to +19.7m barrels a day and with stronger US data has the bulls breathing a sigh of relief. The weekly EIA report revealed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Finally fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing.

Gold pared some of this weeks gain as a rallying EUR eroded the appeal of the commodity as an alternative investment. Earlier, during yesterday’s session, the commodity managed to rise to a one week high as the asset alternative of choice amid Europe’s sovereign- debt crisis. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,216).

The Nikkei closed at 9,762 up +123. The DAX index in Europe was at 5,971 up +34; the FTSE (UK) currently is 5,228 up +33. The early call for the open of key US indices is higher. The US 10-year backed up 7bp yesterday (3.33%) and is little changed in the O/N session. After treasury yields managed to print yearly lows on the back of plummeting global bourses earlier in the week, new found belief in US growth has investors willing to add some risk to their portfolio when treasuries were technically in over-bought territory. Rallying equities and commodities has fuelled increased risk appetite again. With China’s backing and the EUR rallying, has persuaded investors to pare some of their risk aversion trading strategies that pushed treasury prices to new low yields earlier in the week. Yesterday, Treasury’s 7-year auction came in at a yield of +2.815%. The bid-to-cover was 2.88, compared with 2.82 from the past four auctions. The indirect bid (proxy for foreign demand) was 51% vs. 48.2% average. The direct bid was 11% vs. an average of 12.3%. Now that the market has absorbed all of this weeks issue’s with ease and that rates have backed up aggressively from the lows, dealers expect 10-year support at 3.35% to hold first time around.

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