Restructuring is Verboten in EURO

It’s not a market surprise that the Euro-finance meeting did not provide a definitive solution to Greece’s debt issue. However, consensus appears to be moving closer, albeit slowly, to the idea that some form of ‘voluntary’ restructuring of Greek debt will be needed.

Europe will now consider ‘reprofiling’ of Greek maturities. A word that most of the market never heard of before Greece entered the sovereign debt fold, a word like austerity. Using the term ‘restructure’ is VERBOTEN. The Greeks are being corralled towards more spending cuts and asset sales.

The ability of the EUR to trade higher this morning suggests that the market is at ease with the Euro policy makers ‘to manage this process in a systemically friendly way’. This confidence will end up stinging the bears.

Weaker than expected US housing data yesterday from the long depressed sector is again trying to sap risk sentiment. US home construction fell unexpectedly in April, an indication that the troubled housing sector will remain a drag on ‘the’ recovery. Construction of homes plummeted -10.6% from March to a seasonally adjusted annual rate of +523k. March figures were revised upwards to an annual rate of +585k. Building permits also came in weaker, falling to +551k from a downward revision of +574k in March.

Other data showed that US manufacturing production fell for the first time in ten-months (+0.0%) last month, as Japans natural disaster disrupted the auto industry. Industries used +76.9% of their capacity vs. a +77% reading in March. However, manufacturing capacity utilization dropped -0.4% to +74.4%. If we excluded autos, then factory production gained +0.2% in April.
 
The USD is lower against the EUR +0.16% and JPY +0.41% and higher against GBP -0.24% and CHF -0.02%. The commodity currencies are mixed this morning, CAD +0.02% and AUD -0.18%.

The pressure on commodities has been undermining the loonies’ progress of late, allowing risk lovers to go walk about. The commodity and growth sensitive currency tried to penetrate option barrier resistance during yesterday’s session when the currency touched its lowest level since March. With 0.9800 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. The rate market continues to push out BoC hikes and making the top side even more vulnerable.

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.

Earlier this week, 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. Investors are better buyers on these pull backs (0.9731).

In the O/N session, the AUD had a few negatives thrown at her, however, she has survived the scare as commodities get a boost and advance from their monthly lows.

Australian consumer confidence declined this month to the lowest level in almost a year after the government announced a budget that will end 23-years of inflation-adjusted spending growth. The Westpac sentiment index fell -1.3% to 103.9 from a month earlier. The result continues to send a ‘subdued message about the state of the Aussie consumer’.

The AUD erased earlier gains outright after an uptick in risk when Moody’s downgraded the long-term, senior unsecured debt ratings of some of its leading domestic banks. Finally, the currency even held up to a weaker than expected wage cost growth in first quarter of +0.8%, q/q (vs 1.1% expected) in the O/N session.

This week, the currency has garned support from the released RBA minutes as they look relatively upbeat for the economy, for expectations and for a 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 (1.0607).

Crude is higher in the O/N session ($98.52 +$1.61c). Oil prices remain vulnerable on worries about Euro-zone debt and on global economic growth. Crude prices slipped yesterday after US housing starts dropped and industrial output stalled in April, temporarily damping optimism about the economic and fuel-demand outlook. The market also fears that China may need to raise interest rates again to rein in ‘stubbornly high inflation’. Last week the PBoC raised banks’ reserve requirements for a fifth time this year to restrain inflation. During the O/N session, the commodity has found a reprieve in pricing.

This morning we get weekly crude supply data and the market anticipates another build like the last report. 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 grew 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.

Soros is out, but Paulson remains in ‘the’ gold trade. The two tend to be bellwether indicators for this specific commodity trade and their actions are canceling each other out it seems.

The yellow metal fell to a one-week low yesterday as signs that the US economy is slowing eroding the appeal of commodities, as is the dollar rebounding this month. With global equities under pressure from China’s inflationary stance is also bearish as investors cash out and take profit to compensate for losses in other asset classes.

However, 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’ still has room to run ($1,493 +$13.70c).

The Nikkei closed at 9,662 up+95. The DAX index in Europe was at 7,336 up+80; the FTSE (UK) currently is 5,919 up+59. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.12%) and is little changed in the O/N session.

Treasury yields traded to new lows yesterday amid investors concerns about the strength of the US recovery after weaker than expected housing and industrial output data. Moving further down the curve, T-bill rates remained close to record lows as the Treasury reduced sales to ‘conserve borrowing capacity after the US exceeded its borrowing limit’ earlier this week.

The mix of slowing economic data, the unnerving European debt crisis, and market concerns about the US budget battle continues to provide bullish momentum for the FI asset class who wants to register even lower record yields. Because of this, investors continue to find value on these pull backs.

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