Capital Markets are having a positive start to this New Year. Global equities are advancing and dragging commodities higher. US Treasury yields have backed up aggressively since last week, very much in line with what with more of an optimistic view on the world. It is evident that we will see more rate cuts from the BOE and ECB over the next two weeks. Fed officials are calling for greater government spending to help revive the US economy. Nice and dandy, but no-one has mentioned an exit plan after we see further deflation followed by aggressive inflation!
The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies, in another Ã¢â‚¬ËœvolatileÃ¢â‚¬â„¢ trading range, signaling the end of the holiday season.
On Friday, US data revealed that US manufacturing has stepped up its pace of retreat. The Dec. ISM manufacturing index came in even weaker than expected (32.5 vs. 35.5), digging deeper there is little positives provided by any of the details. Analysts expect the pace of production and job hits to quicken by even more than was originally expected. The data was the weakest set of numbers in nearly 3-decades and backs up the Dec. retreats in Chinese, UK, French, and German manufacturing activity last week. Manufacturing production, new orders, new export orders, the backlog of existing orders, employment, and prices paid all fell at a quickening pace compared to conditions in Nov. Manufacturers are selling down inventory levels, but at a pace that is not keeping up with the retreat in sales, which is allowing the inventory-to-sales ratio to climb. Customer inventories, however, continue to expand which will be the next shoe to drop as they unwind inventories and put a further stop to new orders. It is shaping up to be a horrid 1st Q for retailers, manufactures and the worried consumer who is battling to remain gainfully employed somehow!
The US$ currently is higher against the EUR -1.61%, GBP -0.51%, JPY -0.98% and CHF -2.01% The commodity currencies are weaker this morning, CAD -1.27% and AUD -0.46%. Last week the loonie appreciated 1% against its southern neighbor; all this was achieved on the back of commodities. Lack of fundamental data and lack of investor participation due to the shortened holiday week saw large illiquid pockets overvaluing and undervaluing the currency. This week with participation back to normal we will get to see a fairer value of most currencies. Last year the loonie posted its biggest annual decline on record as crude oil plunged and investors sought refuge in other currencies from the deepening global recession. At the beginning of the 2008 the currency was trading at or close to parity with its southern neighbor. Since crude has pared 55% this year the loonie has depreciated 17% vs. the greenback and 33% vs. JPY.
The AUD$ remains better bid on pull backs as the rally in global equities has increased the risk appetite for higher yielding assets. Robust commodity prices of late have also lent support to currencies down under. Traders continue to speculate that further global interest-rate cuts this week will revive investorsÃ¢â‚¬â„¢ risk appetite even more (0.7120).
Crude is higher O/N ($46.51 up +17c). Geo-political issues saw oil prices have its biggest weekly rally in over 2-decades last week. The conflict in Gaza increased concerns that the Middle East supplies could be curtailed while Russia limited natural-gas shipments to Ukraine. Crude has rallied 14% on the back of Middle East and European concerns. Crude prices are battling with global demand deterioration and tensions in the Middle East escalating. Last weeks weekly EIA report showed that inventories had gained less than anticipated allowing the non-holidaying dealers to push the illiquid market aggressively. US fuel consumption for 4-weeks on a y/y basis has fallen -3.7%. It was not fundamentals that push the black-stuff prices aggressively higher last week, but the lack of dealer participation. Now with dealer desks expected to be fully manned we will get to witness how strong this energy market truly is. Both global equities and a heightened investor risk appetite lent much needed support to the commodity that pared 54% of its value last year. Analysts expect crude futures to remain better bid throughout this week as OPEC implements its record announced productions cuts. The Middle East tensions has provided support on deeper pull backs, as there remains concerns that supply from the worldÃ¢â‚¬â„¢s largest producing region may be disrupted. Hamas is backed by Iran and are considered a terrorist organization by the US. Iran physically holds the 2nd largest oil reserves and any involvement by Iran will send the black-stuff prices much higher. China last week has publicly stated that they will supplement their Ã¢â‚¬ËœemergencyÃ¢â‚¬â„¢ oil reserves while prices remain close to these low levels. This stockpiling mentality will surely impede some of the Ã¢â‚¬Ëœdemand destructionÃ¢â‚¬â„¢ that we have witnessed from this global economic meltdown. OPECÃ¢â‚¬â„¢s cohesive support should provide further traction for commodities in the short term. The gold prices fell on Friday as the greenback rallied vs. the EUR, thus eroding the appeal of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative investment ($864). Expect heighten tensions in the Middle East to provide support on deeper pullbacks.
The Nikkei closed 9,048 up +183. The DAX index in Europe was at 5,027 up +55; the FTSE (UK) currently is 4,555 +40. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 17bp on Friday (2.37%) and another 9bp in the O/N session, as investors become concerned about the influx of new issues to finance the growing US budget deficit. The long end of the US yield curve moved the most in nearly 3-months as global equities and the greenback rallied with limited participation by investors due to the holiday thatÃ¢â‚¬â„¢s was in it. Financial markets have seen some improvements with credit issues last week, now we will see if this is sustainable into the New Year. This will be an important week for employment data, as we edge towards that psychological +1m mark. The dismal holiday sales figures will not made it any easier for businesses in this 1st Q.
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