‘Depth with little Volume’!

Little depth and perception is gyrating global equity markets. A stock advance on little volume is always a concern. Yes, we do have a plethora of earnings to digest over the next 2-weeks and yes the greenback could come under temporary pressure as demand for a ‘refuge’ may subside if stocks advance. Over the next month it’s historically the most illiquid and volatile trading period. Global desks are half staffed and manned by juniors, most large movements are an illusion of reality, and actions are mostly noise without substance. This morning’s US Retail Sales will get the ball rolling for this week, surprises are welcome!

The US$ is weaker in the O/N trading session. Currently it is lower against 8 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Is a second bubble in housing about to happen? Yesterday, the co-creator Robert Shiller, of the S&P Case-Shiller index, said that the rate of decline of US house prices is likely to continue and that the market remains entrenched in an ‘abysmal situation’. He believes that the market could ‘languish for many years’, all because of a huge inventory overhang (inventories are the scourge of this recession). An interesting concept is the ‘shadow inventories’, which are the supplies of homes purposely being kept off the market by Banks and other potential sellers. If one couples this with credit and financial problems, the future truly looks bleak. Shiller is even floating the idea of a second housing bubble appearing after all the inventory is worked off. Areas like Boston seemed to have artificially kept prices high, a general volatile region where prices remain well above other ‘bubbly’ regions. As people have become more speculative with their attitudes towards housing, certain regions may play catch up to the ‘downdraft’!

The USD$ currently is higher against the EUR -0.06%, CHF -0.17%, JPY -0.17 and lower against GBP +0.42%. The commodity currencies are stronger this morning, CAD +0.13% and AUD +0.48%. The loonie got a jab in the arm yesterday after the BOC survey showed that the nation’s businesses are the most optimistic about their prospects for future sales in almost a decade. Analysts point out that cautious optimism continues to rule with only a gradual recovery expected ahead and excess capacity keeping a lid on production. Investment intentions remain weak as firms are more cautious on the outlook and still have some excess capacity. An intriguing sub-category was employment and future hiring intentions. Last week employment on the face of it was positive, but, the details were poor. The positives were camouflaged by ‘self employment’. Yesterday, firms expect to increase their employment levels over the next 12-months. Of late and similar to other G8 currencies, the currency had faltered vs. the USD. However, with equities and BOC survey sentiment surprising, dealers were tired of being short the currency and managed to buy especially on the crosses. The commodity based currency will continue to feel threatened if commodities remain under pressure, especially oil. Some investor’s will continue to trim bets on riskier assets and carry trades on signs that a global economic recovery may take much longer than originally anticipated. The market wants to buy USD on dips!

Last night the Australian business sentiment index for last month revealed a positive print, the 1st in 6-month (+4 vs. -2), which will probably convince RBA’s Governor Stevens to keep borrowing costs unchanged at their 50-year lows of 3%. With both equities and commodities finding some traction in Asia, higher yielding currencies will remain better bid. Risk aversion sentiment has shifted slightly, for it to remain we have to see how this mornings North American numbers bring us (0.7877).

Crude is higher in the O/N session ($60.61 up +92c). Crude managed to print a 2-month low yesterday as investors speculated that both the economy and consumption would not recover this year. This morning on the back of equities she gyrates around the $60 a barrel mark and in a tight range. Already last week industry reports showed an increase in US fuel inventories. Gas inventories rose +1.9m barrels to +213.1m, w/w, vs. expectations of an increase of +900k distillates (which include heating oil and diesel), jumped +3.74m barrels to +158.7m barrels. Crude on the other hand came in very close to expectations, falling -2.9m to +347.3m. The market had expected a -2.8m decline. Recent fundamental data have led to concerns that the US stimulus program may not be working. Oil has retreated 18% from this month’s high. Technically, prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ comes higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices down towards that $55 a barrel level. Last week OPEC released a report cutting its 2013 forecast for global oil demand by -5.7m barrels to +87.9m barrels a day and expects developing countries consumption to drop -1% next year to +45.5m barrels a day and remain at that level through 2013. Gold prices have been under constant pressure over the last few trading sessions as a stronger dollar and lower oil prices curtailed demand for the ‘yellow metal’ as an alternative investment. However, prices have managed to reverse themselves as Asian equities rebounded dragging most commodity prices along with them ($921).

The Nikkei closed at 9,261 up +211. The DAX index in Europe was at 4,764 up +42; the FTSE (UK) currently is 4,228 up +26. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 9bp yesterday (3.37%) and is little changed in the O/N session. With no data to drive the FI market yesterday, investors should not be surprised to see yields back up from here. It is expected that government and Fed reports this week will show that retail sales gained and declines in factory production slowed. If true, this should take the shine off bonds temporarily. Of course, this is dependant on how global equities will trade!

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