EURO Rot Intensifies

The market knows its in trouble when its rumored that the ECB is polling banks on the best way to handle a sovereign default. EU President Van Rompuy has called a special meeting today of senior European officials to discuss a second financing package for Greece. Obviously, the intensification of contagion from Greece into the Italian financial markets is part of what has led to today’s special meeting. Policy makers remain divided in Europe on how to structure aid for Greece, they remain divided in the US on the debt ceiling debate. The longer they remain divided, the more irrational investors will become as they seek to get off the sinking ship. Investors do not see any light down any tunnel, with wave and wave of negativity dousing the last of risk attitude this morning, dragging CHF to new record highs.

The US$ is stronger in the O/N trading session. Currently, it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ session.

The dollar is higher against the EUR -1.01%, GBP -0.68%, CHF -0.16% and JPY -0.17%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -0.51%.

Canada produced another solid jobs report compared to its largest trading neighbor on Friday, with only a few warnings that dent the headline (+28.4k and +7.4% unemployment rate). First, most of the growth was in part-time employment (+21.1k). Second, services accounted for the majority of the gains which distorts the ‘breadth of the gain’.  Third, gains were narrowly focused by region. The final concern, wage growth decelerating to its slowest pace in nine-months. Even with total hours rising slightly, less cash in the hand makes it difficult to increase spending.

Despite the upbeat job print, what matters most for Governor Stevens at the BoC is not the headline print, but any evidence of wage motivated cost-push inflation pressures. Currently, Canada does not have any.

Despite the stellar Canadian data, the loonie was under pressure from the get-go on Friday after a horrid US employment report revealing no job growth and negative revisions for the previous month. This coupled with the PBoC and ECB increasing interest rates, is sapping demand for higher-yielding growth and commodity sensitive currencies.

The market wants to be pro-risk, but there are still a few headwinds out there for that trade to occur. The European story and the US debt ceiling debate continues to impeded the risk trade with nervous investors appreciating less riskier investment strategies for the moment (0.9660).

Domestic Australia data last night was stronger, however, global risk sentiment was not. Australia’s housing finance data rose in May, with the number of loan’s up +4.4%, m/m and their values up +2.2%. Overall, credit growth remains subdued, with banks fighting for market share and looking to boost credit growth, while households remain largely on floating rate mortgages. None of this data will influence the RBA’s way of thinking.

Despite stronger Aussie domestic data of late, investors own risk attitude has the growth, higher yielding currencies underperforming with investors looking to cut further their risk exposure, afraid that China, Australia’s largest trading partner, will take further action to cool growth. Gains have been capped on fear that Greek austerity plans will not resolve Europe’s sovereign-debt crisis. Concerns that global growth is slowing has prompted some investors to bet that the RBA will cut interest rates some time this year.

Currently, the market is pricing a no hike in August unless both inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite (1.0690).

Crude is lower in the O/N session ($95.05 -$1.15c). Oil prices fell on Friday, paring a second consecutive weekly gain, after fewer US jobs were created last month and the unemployment rate climbed (+9.2%), damping optimism for an economic rebound and growth in fuel demand from the world’s largest consumer. Lower payrolls, higher unemployment rate and no wage growth do not bode well for commodity prices in the short term.

The commodity has also been pressurized to back off from its three-week highs after the PBoC raised interest rates and Moody’s downgraded Portugal’s credit rating last week, despite the weekly EIA report showing inventories falling more than expected for a second consecutive week.

US commercial crude stocks decreased-900k barrels to +358.6m last week, but remains above the upper limit of the average range for this time of year. Not to be left behind, gas inventories fell by-600k barrels, after decreasing by -1.4m in the prior week, and are in the lower limit of the average range. Oil refinery inputs averaged +15.3m barrels per day during the week, which were +68k barrels per day above the previous week’s average as refineries operated at +88.4% of their operable capacity.

The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery. This is why the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. This year’s energy spike is being cited ‘as the reason for the global economic slowdown.

Gold prices remain elevated and are preparing to make a new record high this week ($1,556.70) as interest-rate increases heighten concern that the global economy may slow and as the European sovereign debt crisis increased demand for the metal as a haven. A rate hike from China and the Euro-zone put inflation concerns back in the spotlight and as US debt issues lifted the yellow metal’s ‘safer’ haven appeal. The PBoC and ECB are clearly stating that ‘taming inflation is a top priority even at the expense of their economies slowing gently’.

In real terms you are not making any money by just holding cash, so there is demand for gold as a store of wealth. The stronger dollar could stall a prospective rally if there is a persistent flight to safety or the correlation between the two asset classes becomes positive, somewhat similar to the scenario of two-years ago.

Longer term, weaker global fundamentals are expected to support this crowded trade during the second half of the year. The commodities dependency on the buck and the outlook for US rates is likely to remain a supporting factor. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks until proven wrong ($1,546 +$4.80c).

The Nikkei closed at 10,069 down-68. The DAX index in Europe was at 7,335 down-67; the FTSE (UK) currently is 5,975 down-15. The early call for the open of key US indices is lower. The US 10-year eased 12bp on Friday (3.03%) and another 4bp (2.99%) in the O/N session.

Treasuries continue to climb, pushed five-year yields to the biggest weekly loss in more than a year, as risk investors raced to the exit, seeking some surety amid European sovereign-debt turmoil and an NFP release showing the lowest job gains in nine-months. The 10-year benchmark managed to drop the most in three-months after the US unemployment rate ticked up again to +9.2% and after China hiked their lending rate for the third time this year, to contain inflation, spurring concern that economic growth will slow.

The market was lulled into expecting a better jobs print after an improved claims and private payroll report earlier last week. The net result could not have been any worse for all asset classes. Concerns coming from overseas have been exacerbated by concerns in the US economy and their debt ceiling debate. Friday’s release again forces all the bond bears back to the drawing board.

The US government will issue $32b 3’s, $21b 10’s and $13b 30-years this week. With the completion of the Fed’s QE2 $600b program, increases the available supply of debt to the market and may add additional pressure for rates to back up. Previously, the Fed had been the only consistent buyer of product, now, this week’s supply under these conditions, may be well received.

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