Trichet leads traders into the ‘black-hole’

The lack of ‘overt or covert’ actions by Trichet and Co. yesterday only promoted further divesting of investors European interests. The DJ posted its biggest intraday loss in a year, the EUR plummeted to an intraday 14-month low and all the while yields on Greek, Spanish and Italian bonds surged on concern that European leaders are not capable of doing enough to stem the region’s debt crisis. Unknown territory and clerical equity input errors have us confused on the technical front in respect for the ‘once and recently promoted reserve currency’, the EUR. Traders yesterday peddled their wares in a ‘black hole’ similar to the Asian currency crises dark hours in 1997. Despite various economies showing signs of strength, one has to adapt to market conditions, as witnessed yesterday liquidity can disappear. We have German lawmakers voting on Greece, NFP and a Government-less UK to keep us occupied throughout the weekend.

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.

US Data yesterday was an appendix to other global events, despite the upbeat prints. Initial jobless claims fell by -7k to +444k last week, the third consecutive decrease and in line with weekly analyst’s expectations. The number of people receiving unemployment insurance decreased (-59k to +4.594m) and those getting extended payments rose (+5.2m to +5.35m). Technically, claims are edging lower, but, are still at ‘stubbornly very high levels’. Below +400k is normally associated with a payroll increase and with claims remaining elevated the correlation seems to have broken down despite improvements reported by other labor markets. The four-week moving average (less volatile measure) fell to +458.5k from +463.2k. Other data showed that US productivity rose +3.6% in the 1st Q, after a +6.3% jump in the 4th. The market had been expecting an increase of +2.5%. Even more of a pleasant surprise was the dip in unit-labor costs (-1.6% vs. -0.7%). The increase in productivity implies rapid growth of output, which seems to be outpacing the rate of increase of hours worked. This improved efficiency implies that companies may not have to hire new workers at a quick pace as the economy improves. Whispers for this mornings NFP print remains the same at +100k to +150k.

The USD$ is lower against the EUR +0.70% and higher against GBP -0.89%, CHF -0.26% and JPY -1.99%. The commodity currencies are mixed this morning, CAD -0.24% and AUD +0.04%. Harbored fear is pressurizing growth currencies. The loonie remains on the back foot vs. the greenback and contained vs. its other major trading partners as global bourses and commodity losses encouraged traders to reduce positions in currencies related to economic growth. For a third consecutive day the currency fell against its southern partner. It managed to print a 3-month low on contagion fears. The weak long CAD positions, placed on expectations that the BOC will hike rates sooner rather than later, are been squeezed out as global sentiment turns on Europe and on the fact that Governor Carney may not be in a hurry to hike. Weak domestic currency long’s are been trumped by risk aversion strategies. Technically, the dollar wants to continue to grind higher despite interest rate hikes wanting to provide some sort of ceiling. Until the market gets some clarity on the contagion fears, the trend will remain intact. Fundamentally, North America is beginning to produce some stellar numbers, for now, it’s difficult to want to add to CAD longs with the current sentiment. Medium term cash positions are looking for a 1.06-1.07 as an entry trigger point. Let’s see what Canada’s employment data prints this morning.

The AUD rebounded somewhat in the O/N session and managed to gain against 14 of the 16 most traded currencies on investor speculation that this mornings employment reports are expected to add the most jobs in three years. The AUD fell to a three-month low vs. the dollar in the previous session after the announced headline retail sales print increased by less than half as much as the market expected (+0.3% vs. +0.8%). Now that the RBA has got the expected rate hike out of the way earlier this week and despite capital markets focusing on ‘surety of funds’ strategies, the deep discount in the AUD looks favorable. For most of the past two sessions the currency bore the brunt of market sentiment, trading at its lows on concerns that global growth may falter and on market speculation that the RBA will cool the pace of future interest-rate hikes, thus dampening the demand for riskier assets. The currency has been trading under pressure since Governor Stevens said borrowing costs are around ‘average’, thus signaling that it may slow the pace of rate advances (+4.50%). Also providing pressure to the currency is softer global bourses coupled with weaker commodity prices. By owning some AUD, the market at a minimum, is expecting a commitment from the G7to restore stability. Any positive signals and it would increase risk appetite (0.8888).

Crude is little changed in the O/N session ($77.42 up +31c). Oil has extended its downward spiral as the EUR plummeted against the greenback on concern that Greece’s bailout may have to be extended to other nations. It managed to print a 2-month ‘intraday’ low yesterday. This month alone the ‘black gold’ has shaved just under -9% of its value. Global growth concerns, on the back of credit downgrades in Europe, and a dollar in demand continue to contribute to the commodity’s downfall. Not helping the cause was the weekly EIA headline print gain of +2.76m barrels, w/w (the highest levels in 11-months). Up until this week, prices have been supported on ‘expectations that demand will climb as economies rebound’. Finally, the market seems to be relying on fundamentals and the huge oversupply of the commodity. The increase in crude inventories left supplies +5.4% higher than the five-year average. At Cushing, where West Texas crude is stored, rose +4.9% to +36.2m barrels (the highest level in 6-years). Increased stored supplies, at these rates, can only but depress medium term prices. Refineries operated at +89.6% of capacity, up +0.7% w/w. On the flip side, the oil spill in the Gulf is beginning to raise concerns about the long term production effects in the region. Analysts remain concerned that the European contagion issues will dominate risk aversion and push crude even lower. Now that the market has breached the psychological $80 handle certainly open the gates to test $75.

Fear of financial turmoil continues to push commodities higher. The ‘yellow metal’ extended its 5-month rally on investor demand for a safe heaven asset. Gold is wanted despite the dollar’s rally and questionable global growth as investors seek an alternative to slumping equity and currency markets. With the EUR continuing to trade under pressure on fears that the bailout package for Greece will not win support from the region’s governments has managed to push the commodity to record new highs in both the EUR and CHF. Contagion fears are expected to provide a floor for the commodity in the short term. Last month the commodity climbed +5.9% as investors sought surety to hedge against financial turmoil in Europe. In reality, investors continue to prefer the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target. Downgrades and fear of defaults will continue to have investors wanting an alternative to an ‘on going weakening’ of the EUR ($1,198).

The Nikkei closed at 10,364 down -331. The DAX index in Europe was at 5,829 down -78; the FTSE (UK) currently is 5,195 down -65. The early call for the open of key US indices is higher. The fixed income market has its ‘foot to the floor’ just like all the other asset classes. The US 10-year eased another 12bp yesterday (3.44%) and is little changed in the O/N session. Treasury prices remain steadfast on concerns that a rescue plan for Greece has not been contained. This European debt crisis continues to promote trading strategies that seek ‘surety of funds’ and all this despite employment reports in North America expected to reveal further job growth this morning. However, any pull-backs remain well supported after yields temporarily printed 4-month lows. Other factor’s also supporting FI prices is the fear that Moody’s is on the verge of cutting Portugal’s Aa2 rating and that the US treasury announced that it will sell only $78b in notes and bonds next week, the first reduction in coupon sizes in three-years. The ‘flight to quality’ remains the trading theme for the moment as contagion equates to lower yields.

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