Are we Dubai or Du-Sell?

Cyber Monday took the sting out of Dubai World’s troubles in the North America trading session yesterday. Internet traffic congestion spawned investor apathy. Action, for a second consecutive session, has been left up to the Asian markets. Dubai World has announced a restructuring plan involving ‘only’ $26b in debt. This lesser number has reduced ‘some’ of the panic that has built up after the Dubai government said it was not responsible for their debts. Golden rule, creditors beware! Trumping all this, the BOJ announced at an emergency meeting that they are to set aside $115b in emergency credit to aid PM Hatoyama’s fight against deflation. After going through the charade of an emergency meeting, the market should be disappointed with the BOJ’s solution. At the very least dealers would have expected them to buy JGB’s. Go JPY Go!

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘volatile and illiquid’ trading range.

Quelle surprise! Chicago PMI flatfooted most analysts predictions yesterday. It advanced to 56.1 (the highest level in 15-months) vs. market expectations of 54.2 as orders climbed (62.8-highest level in 2-years) signaling growth potential for 2010. Reality thus far shows us that increased sales have been heavily influenced by the Obama administration incentive programs and growing foreign demand. This has resulted in drawdowns to inventory levels in the US (the scourge of this recession) that should boost future production and promote sustainable growth. On the flip side, job losses and the fear of losing one’s job will continue to curtail consumer spending. That’s why the Fed needs to promote low interest rates for an ‘extended’ period of time. They walk a fine line as Cbanks are in danger of creating new asset bubbles if they mis-time hiking rates! This Friday’s NFP will surprise, analysts and dealers continue to revise their numbers to ‘less bad is good’, and consensus is predicting a loss of 120k.

Phew! China keeps on growing so we are led to believe. Last night, the official government PMI (55.2) and HSBC’s index (seasonally adjusted 55.7) managed to print an 18-month and 5-year high respectively. Again it’s strong evidence that Chinese manufacturing continues to lead Asia out of this economic slump. Our designated ‘white’ knight is showing no signs of cooling as ‘rising new orders and production, plus export orders will generate new jobs’. Premier Wen is committing his government to ‘moderately loose’ monetary policy and at the same time ignoring Trichet’s and Obama’s calls to let the Yuan strengthen. The currency being pegged to the weakly USD goes someway in protecting their exporters from slumping global demand. It’s a sure-fire sign that all the growth action occurs over there!

Now that’s how you make a currency move like the old Bundesbank days. Bully the market without actually spending anything. The BOJ last night called for an ‘extraordinary’ meeting after the JPY managed to slip to a 14-year low on Friday. Perception and controlling your own domain is everything! The JPY fell to a seven week low on speculation that Japanese policy makers would limit the currency’s future gains and step up quantitative easing. The move also happened to drag the Nikki higher. Last month the new Japanese government called on the BOJ to prop up growth since declaring the economy was in deflation. BOJ Governor Shirakawa has pledged to act ‘promptly and decisively’, but alas, similar to other CBankers, with O/N lending rates so low (+0.1%) and already purchasing government and corporate debt he has little room to maneuver. Technically, with USD/JPY under 85 the market should expect the MOF to intervene directly, however without the BOJ absorbing JPY from the market the desired weakness will only be a temporary 2 or 3 yen before the currency commences its upward trend. It would not be surprising to see the currency at sub 80 USD/JPY. Now, that would bring back memories!

The USD$ is currently lower against the EUR +0.18%, GBP +0.16%, CHF +0.19% and higher against JPY -0.75%. The commodity currencies are mixed this morning, CAD +0.38% and AUD -0.10%. Officially Canada grew in the 3rd Q. GDP was less than expected at +0.4%, y/y. But it was the first sign of growth in four quarters and maybe signaling the end of the worst recession in 50-years. Certainly not without it problems, the government expects to be running a deficit close to $55b, BOC’s Governor Carney will keep rates low for an ‘extended period of time’ (where have we heard that before!) and all in the effort to promote growth and boost employment. The headline print was lower than Governor Carney’s prediction for +2% annualized growth. Last month he managed to prepare the markets for any surprises by stating that growth may come in ‘softer’ than their predictions. The loonie is threatening to burst out of it tight trading range as commodity prices stabilize after last week’s collapse on the back of weaker global equities. The 3c trading range is in danger of being breached. Lack of liquidity, but no lack of direction has caused currency markets to be rather volatile. Dealers and investors can assume more of the same today as we have a busy US data day.

Three in a row and are we are still counting? The RBA came and delivered, but hinted of ‘no’ further threats to raising future rates earlier this morning. Governor Stevens hiked rates 25bps to +3.75% as compounding fundamental evidence reveals an economy gaining strength. Buying the rumor and selling the fact was evident after the Governor signaled that he may now pause, stating that the board’s ‘material adjustments to borrowing costs are enough to keep inflation within policy makers 2-3% target range’. Rising consumer confidence, higher house prices and China’s demand for commodities continues to drive the ‘new upswing in the economy that will last several years’. On the face of it, the RBA statement is very bullish in respect to other Cbanks, but at the same time distancing them from any aggressive tightening cycle. The currency and commodities will continue to go hand in hand (0.9160).

Crude is lower in the O/N session ($77.12 down -16c). Crude prices advanced yesterday after positive reassurance from U.A.E’s Cbank on Dubai Worlds woes and stronger fundamental data out of the US gave the commodity support. Crude continues to trade within its tight range despite oil fundamentals not supporting the underlying product. Elevated prices are not supported by last weeks EIA report which showed that inventories managed to advance to a new 4-week high. Demand destruction is alive and kicking! The report met with analyst’s expectations as stocks rose less than expected as imports gained. Inventories advanced by +1m barrels to +337.8m vs. market expectation of a +1.2m gain. On the face of it, the build up was consistent with the weekly API report, where inventories advanced +3.3m barrels as imports also rose. Analysts said that daily imports added +371k barrels a day as imports and the Gulf of Mexico output rebounded from the disruptions caused by ‘Ida’. Gas inventories advanced +1m barrels to +210.1m, w/w, vs. market expectations of only +300k. Distillates stocks (those that include heating oil and diesel) declined by -500k vs. expectations of -100k. Refinery utilization managed to advance +0.9% to 80.3% of capacity, vs. analyst forecasts of only +0.3%. Repeatedly over the last few weeks the $80 handle remains a stubborn resistance point, again the market attempted and again it has failed.

RSI levels for gold indicate that the current market is over bought, however investors anticipate an assault on the $1,200 this week. We have experienced wild gyrations of $20-$30 price swings over the past few trading sessions. To witness some month end profit taking yesterday is certainly not out of the norm. Year-to-data, the yellow metal has gained +37% as investors and central banks increased their holdings of the commodity to preserve wealth. The commodity remains a strong psychological store of value and an asset for expression for ‘no’ confidence by investors. Last week’s Dubai Worlds jitters required some aggressive selling for investors to raise potential capital for margin purposes. Despite all this, demand remains robust on any pull backs ($1,182).

The Nikkei closed at 9,572 up +226. The DAX index in Europe was at 5,653 up +28; the FTSE (UK) currently is 5,234 up +44. The early call for the open of key US indices is higher. The US 10-year bond backed up 2bp yesterday (3.23%) and are little changed in the O/N session. Stronger fundamental data out of the US, coupled with assurance from U.A.E’s Cbank that they would back lenders as they face losses from Dubai World’s possible default briefly pressurized the ‘surety aspect’ of the FI asset class. A plethora of debt was consumed in last week US auctions despite yields being close to record lows. Now that month end index extensions are out of the way, where to from here? It will probably take a few days for investors to comprehend the potential knock on effect from Dubai World’s intentions. Next week we have another round of treasury auctions (3’s, 10’s and 30’s-$40b, $20b and $12b respectively), but for the remainder of this week we have to get through ECB rate announcement and North American employment data.

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