Bernanke’s minutes include disclaimers! Markets will not be happy.

Investors are a fickle bunch. It seems that someone has just realized that this global equity rally has been led, not by blue chip companies, but by the lower-priced, highest-risk, least profitable companies! Marketing perception and little volume can paint a bourse green these days. Now, this fickle bunch is second guessing the Fed’s minutes from yesterday. Investors are expected to pressurize ‘the highest valuations for equities in 3-years’ after Ben and Co. lowered their growth forecast for the US economy. S&P cutting UK’s ratings outlook, will not help global confidence. Yesterday, it was noted amongst Irish economists and policy makers that the Emerald isle, once the darling who experienced the Celtic Tiger and the envy of many as it sat atop of the OECD list of countries, has technically entered a ‘Depression’. The periphery countries in Euro-land will become the cancer-clusters of their recovery process!

The US$ is mixed in the O/N trading session. Currently it is higher against 7 of the 16 most actively traded currencies in a ‘subdued’ trading range.

There were no major surprises in yesterday’s Fed minutes. As to be expected, especially after witnessing FI yields backing up of late, they discussed the potential of boosting their buy-back program ($1.75t) to secure a stronger economic recovery, however it was unanimous that they would remain on hold for the time being. ‘All members concurred with waiting to see how the economy and financial conditions respond to the policy actions already in train’. They cited a slower pace of contraction, due to ‘improved financial conditions, stronger sentiment from businesses and households and expectations of an increase in industrial production to replace inventories’. They do foresee ‘a deeper contraction in 2009 and a weaker recovery in 2010, with the unemployment rate projected to remain at 9% or higher through next year’. With the current pace of claims, it’s projected to hit 10% by mid summer. All policy members also saw ‘some signs pointing toward economic stabilization’. A firming in consumer confidence, industrial production and other areas of the economy indicate the worst of the recession ‘may’ be easing. However, there is always a disclaimer in fine print! Because of other economies mounting problems, participants agreed that ‘the global financial system remained vulnerable to further shocks’.

The USD$ currently is lower against the EUR +0.08%, GBP +0.18% and CHF +0.08 and higher against JPY -0.02%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.18%. The loonie continues to take its cue from increased global risk appetite and a floundering greenback. The higher yielding currencies are back in vogue, with commodities making them even more enticing. Yesterday the currency managed to print a 7-month high vs. its southern counterpart. Fundamental data revealed that Canadian CPI headline seems to be falling in line with BOC Carney’s expectations, which is further proof that policy makers will want to keep rates low for the foreseeable future. Analysts correctly predicted that global inflation readings would eventually show up ‘in the red’. However, the market expects this scenario to be reversed by year end. This may be a tad optimistic. Unadjusted headline CPI fell -0.1% m/m and seasonally adjusted headline prices fell -0.3% m/m (the BOC core-CPI reading ticked up +0.1% m/m and increased +0.2% seasonally adjusted). Digging deeper and looking at some of the sub-components food prices were up +0.2% m/m, clothing and footwear prices rose +0.5%, health and personal care prices climbed +0.2%. Ex- food, prices fell -0.2% in April while ex-food and energy prices were flat. As analysts quite rightly point out, ‘diminished inflation helps to maintain the value of money invested in a country’. For the time being, the trend is your friend, look to own CAD on any USD rallies.

The AUD advanced vs. the US currency as ‘gold’, the countries 3rd most-valuable export, climbed to the highest level in over 2-months. The yellow metal has advanced 7% this month. So far, month end requirements and carry trades have dragged the currency higher. For now, investors remain happy to buy some AUD on pull backs (0.7706).

Crude is lower in the O/N session ($61.25 down 75c). Crude managed to temporarily breach the $62 a barrel yesterday for the first time in 6-months after the weekly EIA report showed that US inventories declined more than forecasted. Stocks dropped -2.11m barrels to +368.5m last week vs. an anticipated decline of -0.4k, w/w. Even more eye popping (just ahead of US memorial holiday which is the bench-mark for the beginning of the US driving season), gas supplies plunged -4.34m barrels to +204m-this decline was 3-times more than expected! Technically and fundamentally this could be opening the flood gates for the black-stuff rapidly gain another $10 a barrel and pose a threat on the $70 mark. Even thought this weeks API report prepared the market for the surprising data (-4.47m), the magnitude of the fall off was still an eye opener. Refineries are operating at +81.8% of capacity, which is down -1.9%, w/w and is the lowest utilization rate in a month and a half. One can conclude that refineries are nervous about increasing production as global demand remains weak. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. Other variables continue to promote higher prices. The Nigerian militia (MEND) fighting Government troops threaten the transportation of their much sough after rich crude. OPEC is unlikely to reduce output at next weeks meeting in Vienna. If anything, these elevated prices will likely encourage some members to increase production once again! Getting back to basics with demand so low, oil prices are still getting ahead of themselves. Gold prices are edging higher as the greenback comes under renewed pressure, thus boosting the appeal of the ‘yellow metal’ as an alternative asset ($942).

The Nikkei closed 9,264 down -81. The DAX index in Europe was at 4,938 down -100; the FTSE (UK) currently is 4,354 down -135. The early call for the open of key US indices is lower. The 10-year Treasury eased 3bp yesterday (3.20%) and is little changed in the O/N session. Prices were little changed as the Fed began buying notes maturing in 7 to 10 years yesterday and investors continue to speculate that policy makers may adjust the size of the Fed’s purchase program. Trading FI has been a profitable range trade, pitting the Treasury vs. the Fed and supply vs. demand. Next week we will have the US treasury resuming its debt auctions. This will be the biggest single factor that will push FI rates higher in the long end. Currently the Fed is losing its battle with its buy-back program to keep rates low. Because of the vast amount of debt that the US government needs to issue, the Fed will have to increase the amount of buy-backs (+400b buy-back vs. some estimates of +3.25t borrowing requirement).

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