Fear of Another Financial Flop beats Good Fundamentals!

We get good data in North America, some of it questionable, but everyone and their mother wanted to offload their ‘riskier positions’ and swim to shore. It was a general risk sell-off, where carry trades got sold, whilst funding currencies did well (USD and JPY). Imagine what would happen if we had ‘genuinely bad numbers’? It’s been a 5-month continuous rally in equities with very little pull backs, almost to the point it feels that equities are been held up! World Bank Asian analysts believe that Chinese equities ‘are a bubble about to burst’ and could retreat another 25%! Where will that put North America? Heads up, the SNB is in buying US Treasuries over the last 24-hours, historically, they are know to do this ahead of currency intervention. They have rules all to themselves!

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday, data-wise it was good, however, investors took the opportunity to pare equity positions as the concern for earnings overshadowed positive prints. US ISM manufacturing index beat market expectations and pushed into expansion territory for the first time in 18-months yesterday (52.9 vs. 48.9). It was the surge in new-orders and production which gave the headline backbone. All week, the market has been informed that production is proceeding in the right direction, but, is it sustainable? Some analysts are touting that production will decelerate in the 1st Q of next year and provide very little support GDP growth. The sub-categories of employment and inventories remain in contraction territory. It’s interesting to note that since July the gains have been insignificant despite the aggressive uptick in new-orders! Customer inventories deteriorated last month, falling faster than the pace set in July, probably because consumer spending remains weak amid high unemployment. What are Friday’s NFP orders going to look like? Market consensus has us at a loss of -230k!

US pending home sales continued to beat expectations in July (+3.2% vs. +1.6%). In reality, the headline print has got the backing from improved affordability and perhaps increasing use of leverage (proof is in the pudding-an uptick in MBA purchase applications). The print is the 6th-consecutive monthly increase. Other data showed that US construction spending fell on non-residential projects yesterday (-0.2% vs. +0.1%). That print cannot be much of a surprise to the market. On the flip side, residential spending was up +2.3%, which analysts point out is consistent with other housing indicators (new home sales, starts, etc).

The USD$ currently is higher against the EUR -0.03%, GBP -0.25%, CHF -0.18% and lower against JPY+0.24%. The commodity currencies are mixed this morning, CAD +0.65% and AUD -0.45%. Agh, the loonie does it to us again! When you think you are on to a winner, it takes off in the wrong direction. Yesterday the CAD reversed earlier gains and traded close to its 3-week lows on the back of further declines in stocks and commodities as investors sought shelter in safer waters. Even on good news, Sept. is a tough month to witness sustainable equity rallies. Already this week Canadian GDP disappointed (+0.1% vs. +0.2%, m/m). It’s probably a good bet that the BOC will keep lending rates low a lot longer than what the market has already priced in, similar to what Gross at PIMCO said yesterday (see below). Perhaps Governor Carney is breathing a sigh of relief. Already the BOC has said that a strong CAD is not conducive for strong growth. We can only take our cue from risk aversion attitudes, equities and commodity prices and not from any Canadian fundamentals!

Despite traders previously paring interest rate hike bets after Governor Stevens’s comments earlier in the week, market psychology did a complete u-turn in the O/N session. Australia’s economic growth unexpectedly accelerated in the 2nd Q (+0.6% vs. +0.4%), pushing the currency higher on expectations that the RBA will raise borrowing costs from it’s 50-year low. Earlier this week the RBA kept O/N borrowing costs unchanged for a 5th consecutive month to boost their economy that’s was expected to have ‘cooled’ in the 2nd Q. Governor Stevens left the overnight cash rate target at 3% and stated that ‘the present accommodative setting of monetary policy remains appropriate for the time being’ (0.8309).

Crude is higher in the O/N session ($68.52 up +47). If at first you don’t succeed, try and try again! That what crude prices did yesterday. When they first attacked the $70 level they failed in their attempt, however, buoyed by yesterday’s equity losses, the black stuff renewed their downward momentum. Add this to a stronger greenback, supported by risk-aversion appetites, could only end up undermining demand for commodities. Investors are keeping a close eye on Chinese equities, which technically, entered a ‘bear’ market earlier this week and is managing to pressurize global bourses and heightening investor concerns that a slowdown in lending would impede an economic recovery in their country. China has been the go-to region that the rest of the world has been relying on to drag us out of the worst recession in 50-years. The Shanghai composite index has managed to slip -23% from its highs printed on Aug. 4th. This morning we get the weekly inventory reports. Both last week’s API and EIA reports, with their unexpected gains, have impeded aggressive upward price movements. Last week’s EIA inventories rose +128k barrels to +343.8m vs. a forecasted decline of -1.15m barrels and were supported by the API release a day earlier (+1.3%). On the flip side, gas stockpiles fell -1.7m barrels to +208.1m vs. an expected -800k decline. Even more surprising, US total daily fuel consumed averaged +19.2m barrels over the last month, down -0.9%, y/y. Basically demand destruction remains healthy! It’s expected at the up coming OPEC meeting next week that Algeria will demand that other members comply more strictly with production quotas as global stockpiles climb. Fundamentally, inventories are above the normal level of 61 days’ worth of demand. There is little chance that OPEC will revise quotas is the short term. China of course remains the biggest concern. If their economic activity subsides it will definitely affect future oil prices. It has been alarming that we had shifted away from the demand destruction theme. Despite probably seeing the worst of the recession, global growth should remain subdued.

Gold prices came under renewed pressure yesterday, but managed not to fall too far from the apple tree. It was a 2nd-consecutive day of losses as a stronger USD temporarily reduced demand for the ‘yellow metal’ as an alternative investment ($952).

The Nikkei closed at 10,280 down -249. The DAX index in Europe was at 5,293 down -33; the FTSE (UK) currently is 4,795 down -25. The early call for the open of key US indices is lower. The 10-year bonds eased 5bp yesterday (3.37%) and are little changed in the O/N session. Bonds’ prices managed to achieve what we anticipated yesterday and make a break to the top-side and all this despite reasonably positive US data. Treasuries managed to reverse early morning losses as equities fell on concerns that the recent rally is outpacing the outlook for earnings. It was specifically the financials who led the decline. Gross from Pimco said that the US housing will be incapable of leading the US out of recession and he expects O/N lending rates are expected to stay low for a considerable length of time. Risk aversion strategies will have the FI curve will be better bid on pull backs.

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