Is Citi insolvent? Playing politics leading us astray?

Pandits e-mail excluded Citigroup’s write-down! Wow, so if Citi does report a negative 1st Q, then whatever shred of confidence we have left in US financials will quickly evaporate and crush equities and probably force the US government to ‘truly’ nationalize both them and BOFA. Global Consumer confidence surveys continue to take a battering. Collectively we are scrapping over any positive indication that a potential bottom is on the horizon. We are starved for something ‘less negative’; alas we may have to wait a wee bit longer.

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

Forex heatmap

US regulators seem to be making progress in dealing with the financial sector. Financial stocks are currently keeping their head above water and received further support yesterday from the Obama administration. They will introduce a slew of innovative plans that will tackle a particular problem from two sides (of course they seem to be rather sketchy on details at the moment). They intend to use capital injections as an incentive to get US banks to sell distressed securities to investors. Apparently at the same time the private investor will also get federal loans to buy the assets, this two-pronged approach is intended to revive trading in MBS’s. Geithner believes it will be cheaper to provide taxpayer financing than have the government buy the assets. But, are they not increasing risk again for the tax payer again? No one has been capable of valuing toxic assets to date, but the government is happy to bankroll this gamble! It’s still rather confusing.

The US$ currently is higher against the EUR -0.74%, GBP -0.27%, CHF -0.51% and lower against JPY +0.88%. The commodity currencies are weaker this morning, CAD -0.48% and AUD -1.04%. Yesterday, the loonie was little changed against its southern rival as a 2nd straight day of weaker crude prices cooled the benefit of higher global equities. Already this week the currency has strengthened from a 5-year low (1.3064) after advances in global equities signaled investors were stepping up their purchases of riskier assets. Is this rally sustainable? The Canadian Finance Minister is already prepping the public for weak employment numbers this Friday. Traders are hesitant to drag the currency to lofty heights ahead of a potential shocking report (expected -50k losses, but -80k is looking like the new consensus). Year-to-date the loonie has declined -5.5%, after a record -18% loss last year vs. its southern partner. It is the 2nd worst performer just ahead of the USD in a pool of the 16 most traded currencies. This global recession has depleted demand for commodities. Nearly 50% of all of Canada’s export revenue is commodity based. Traders continue to look for better levels to sell the CAD$ in the short term.

No surprise last night when the AUD$ pared recent gains on the back of weaker data out of Australasia. The Aussi jobless rate rose last month (+5.2% vs. +4.8%), touching a 4-year high as companies fired the largest number of full-time workers in almost 2-decades. This is further proof that this higher yielding country is in recession. This recession is eroding demand for resources from Australia (coal and iron ore), traders continue to look to sell on rallies (0.6464).

Crude is little changed in the O/N session ($42.74 up +46c). The crude market is caught between concerns over the decline in demand, and the prospect of another reduction in OPEC production levels this weekend. Some investors continue to speculate that they will announce another production cut. This is expected to shore up the price of crude and lower global stocks. This commodity has only one supporter and that’s OPEC. They pump about 40% of the world’s oil and have cut production 3-times since Sept. to slow the slump in prices and prevent a glut on world markets. The weekly EIA report was a surprise, crude stocks increased +0.7m w/w vs. a market expectation of +0.1m. That is the 20th increase in the last 24-weeks. Global economic data does not lend support to crude prices. China yesterday said that their oil purchases have dropped to +11.73m metric tons. Year-to-date their imports have fallen -13% to +24.55m tons, or +3.12m barrels a day. Combine this with a horrid German manufacturing order number collapsing -38% in Jan. y/y, clearly a stronger indication that demand destruction is alive and kicking. OPEC’s Secretary General said that they must remove another +800k barrels a day to reduce output by -4.2m since their objectives were established last Sept. If they do decide to reduce production targets this month, the technical charts indicate that prices may rise to $55 a barrel. However, the world is awash with the black-stuff, it’s the storage problems that are causing concerns. This will lead to prices remaining under pressure in the longer term. With gold eroding close to 5% over the last 2-trading sessions and equities finding it difficult to remain in positive territory, investors are drawn to the ‘yellow metal’ as a safer heaven asset class ($913).

The Nikkei closed 7,198 down -177. The DAX index in Europe was at 3,836 down -77; the FTSE (UK) currently is 3,650 down -43. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 8bp yesterday (2.92%) and another 5bp in the O/N session (2.87%). As anticipated, Treasury prices fell going into yesterday’s 10-year auction, but quickly rallied as ‘hot’ money was attracted to yields been north of 3.00%. The Treasury will auction $11b in 30-year bonds today finishing this week’s quota of $63b. With global equities finding it difficult to maintain the week’s earlier rally one should expect the market to absorb today’s issues handily.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell