To Reprofile or Restructure the EURO?

What’s in a word? A lot apparently. Even European policy makers are finding it confusing this morning. It’s ‘re-profiling’ not ‘restructuring’ of Greek debt supposedly. This is understood to involve exchanging shorter term debt for longer term debt without incurring losses to principle or coupon. Why would investors volunteer to exchange their holdings? The simple reason that they want to eventually get paid, this ‘new’ collateral would be backed by a trust.

EU finance ministers yesterday said that there was no such thing as ‘soft restructuring’ and that re-profiling was different from restructuring. It seems that someone forgot to tell the Commission President, Juncker. This morning on the wires he has been encouraging soft restructuring. This market is as confused as the people who are implementing the changes.

The US$ is mixed in the O/N trading session. Currently, it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ morning session.

US data yesterday was ‘wishy-washy’, leading to most dealers to sit on their hands and watch the screens move on little volume waiting to digest any Euro periphery news.

The Empire State manufacturing index happened to extend they gains for a sixth consecutive month (11.9 vs. 20.7), but at its slowest pace this year. However, one month does not make a trend, especially since the regional reporting has been widely volatile thus far this year. Digging deeper, out of the nine subcategories, two happened to post weaker results, new-orders (-5.15 to 17.19) and shipments (-2.54 to 25.75). These were offset by improvements in the average work week and the unfilled orders subcategories. About pricing, respondents ‘paid for’ inputs rose on average by +8.1%, y/y, largely due to higher prices of commodities. On the flip side, they reported that selling prices rose +1.9%, y/y, down from +2.9% reported last year.  However, they expect a +3.6% price increase over the next twelve months.

Despite a weaker than expected TIC’s data (+24b vs. +57.7b), overseas demand remains relatively strong. In the report, China was seen as a net seller of US treasuries in March. However, investors should be aware that of the country specific data ‘does not necessarily speak to the domicile of the specific owner’. For instance, if China were to buy product through London, then that centre is credited with that purchase, making some of the reported data slightly distorting.
 
The USD is lower against the EUR +0.44%, GBP +0.66%, and higher against CHF -0.07% and JPY -1.08%. The commodity currencies are stronger this morning, CAD +0.28% and AUD +0.40%.

The pressures on commodities has been undermining the loonies’ progress. Last week, the currency dropped for a second-straight week for the first time in four-months, as crude prices continued their slide, one week after plummeting the most since December 2008. Not helping the currency is the market waiting for Canadian inflation data later this week before committing to larger CAD positions. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth.

Yesterday, Governor Carney stated that recent Canadian economic data continues to support the BoC’s near term outlook, noting that employment and inflation numbers were modestly stronger, while auto sales and retail spending were a touch weaker. The Bank next meets on May 31st to determine their interest rate policy.

Already this month, the CAD has retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar. The Euro-finance meetings continues to set the appetite for risk (0.9731).

The Australian dollar rose in the O/N session, snapping a four-day drop against the greenback, after the RBA said it may need to raise borrowing costs ‘at some point’ outweighing concern interest rates won’t be increased as the currency’s strength curbs price pressures. The currency is expected to track the ‘nation’s terms of trade and stay persistently high for some time’.

The RBA minutes released last night look relatively upbeat for the economy, for expectations and for potential rate hike. ‘If economic conditions continued to evolve as expected, higher interest rates were likely to be required at some point if inflation was to remain consistent with the medium-term target’. ‘Members viewed the current mildly restrictive stance of monetary policy as remaining appropriate’.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0586).

Crude is little changed in the O/N session ($97.44 +4c). Oil prices remain vulnerable on worries about Euro-zone debt and on global economic growth. The market fears that China may need to raise interest rates further to rein in ‘stubbornly high inflation’. Last week the PBoC raised banks’ reserve requirements for a fifth time this year to restrain inflation. There is always a concern that investors may doubt US credit worthiness, even more so now that Obama has highlighted the potential fallout if the US debt limit is not dealt with sooner.

A build up of crude inventories is also weighing on prices. Last week’s crude stocks rose +3.78m, much higher than the +1.4m barrels build up expected. Not to be left behind, gas inventories rose +1.28m barrels versus a forecast for a-200k barrel drop. This much larger build has grown because of gas demand being down year-over-year as higher prices at the pump cut into demand ahead of the US peak driving season. Fundamentally, investors should expect further slippage of prices to generate stronger demand and reduce inventories from current levels.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that has forced this drastic easing of oil prices this month. The IEA indicated that they have cut global demand again, as this year’s price rally begins to weigh on consumption. They have reduced its estimates for world consumption by-190k barrels a day.

The dollars rebound this month is eroding the allure of gold for alternative investment purposes. With global equities under pressure from China’s inflationary stance, is bearish for commodities as investors are pressurized to taking profit with gold to compensate for losses in other assets.

Investors continue to unwind that long-commodity, short-dollar trade. Until now, the uncertain macro-economic and political environment has been encouraging investors to want to own their piece of the gold. Unofficially and specifically this year, the yellow metal has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ has further to run. However, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,495 +$5.00c).

The Nikkei closed at 9,567 up+9. The DAX index in Europe was at 7,344 down-43; the FTSE (UK) currently is 5,922 down-2. The early call for the open of key US indices is higher. The US 10-year rose 3bp yesterday (3.16%) and is little changed in the O/N session.

Treasury yields continue to trade on top of this year’s lows amid investors concerns about the strength of the US recovery. Yesterday, New York manufacturing data expanded at a slower pace than anticipated this month as the cost of raw materials surged. Supporting higher prices was Atlanta’s Fed Lockhart stating that it was ‘too early to consider an exit from stimuli’. Treasuries are outperforming bunds as Merkel’s determination to save the EURO unnerve debt holders.

Fundamentally, US yields remain historically low as the economy is finding it difficult to generate enough forward momentum to suggest rising prices will ‘be passed through the underlying rate of inflation’. Because of the US mixed data and the Euro-political situation, investors continue to find value on these pull backs.

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