EU with its ‘shock and awe’ declares ‘all in’

Finally, the Euro-zone has decided to make an impact, and have agreed to offer financial assistance, close to 750b EUR’s, to countries under pressure from speculators. The ECB announced this weekend that they will counter ‘severe tensions’ in ‘certain markets’ by purchasing government and private debt. There will be coordinated Central Bank actions by the Fed, ECB, BOJ, BOE, BOC, and SNB, who will intervene by re-introducing temporary US$ swap facilities. Their objective is to flood the world with dollars to boost liquidity. With respect to the bond purchases, the ECB is to buy sovereign and private debt in the secondary market, with the scope to be determined by the Governing Council. The 750b Euro or $1-trillion Euro-zone ‘fund’ objective is to ‘mop up contagion risk’. 440b EUR’s is to be provided directly by the Euro-zone countries, an extra 60b from the EU budget and up to 250b EUR’s from the IMF. The EU is doing what is necessary to support the EMU and make the EUR currency work. Initial thoughts are that these measures are not to solve directly the sovereign debt problems, but, are intended to ‘keep the system functioning while other long-term steps are made by the individual countries to get their fiscal situations in order’.

Thinking aloud there seems to be many negatives. Where will they get the money from? Is this the end of the ECB independence? Will this massive ‘quantitative easing’ push the EUR lower? The ‘have’s’ again defend the weaker ‘have not’s’. Will these measures potential ‘snuff the glimmer of economic pick up’? What’s ‘the’ back up if this aid package does not work? Where is the regulation?

Already, the market reaction has added to this month’s volatility, are we in danger of seeing the record short EUR futures positions being taken back this morning? One can only expect a wild ride today. Let’s hope there are no more electronic glitches!

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘volatile’ trading range.

The US economy continues to gain momentum at the start of the second quarter as Friday’s NFP beat most analysts expectations, with overall revisions included, ‘private’ payrolls rising to +236k vs. +131k. Even more encouraging was the increase in the average workweek from 34.0 to 34.1 hours, producing a strong +0.4% increase in the index of aggregate hours worked. This increase will support income growth and eventually consumption. On the flip side, the rise in the unemployment rate (+9.9%) will most likely persuade policymakers to ‘check’ their growth enthusiasm for the quarter a tad. However, the reported surge in labor market activity is encouraging, even if the number of active job seekers increased m/m. North American fundamentals continue to head in the correct direction, but it’s the debt burden of one of Europe’s smallest economies that will most likely have the biggest effect on global economies this quarter.

The USD$ is lower against the EUR +1.12%, GBP +0.27%, CHF +0.50% and higher against JPY -0.99%. The commodity currencies are stronger this morning, CAD +1.27% and AUD +1.16%. Fear had been pressurizing growth currencies, just look at the loonies trading pattern last week. Since Friday, the CAD has managed to retreat from its three-month lows as a record increase in ‘their’ employment last month (+108k vs. +24k) has heightened speculation that the BOC will raise borrowing costs as early as next month. Macro views and not domestic micro fundamentals have been dictating the volatile swings in the currency markets. Technically of late the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes. Now that the market is getting support from a European emergency package contagion fears will remain intact. Fundamentally, North America is beginning to produce some stellar numbers and with any dollar rallies the market will want to add to their CAD longs.

The AUD has aggressively rebounded in the O/N session, similar to other growth currencies, as risk again is back on the table with the EU aid package. The currency, at one point, climbed the most this year (+2%-intraday) vs. the greenback as investors again sought yield. Last week it fell to a three-month low vs. the dollar after the retail sales print increased by less than half as much as the market expected (+0.3% vs. +0.8%). 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’, signaling that they may slow the pace of rate advances (+4.50%). For now, with risk warranted, expect the market to want to own the currency on dips (0.9042).

Crude is higher in the O/N session ($78.18 up +230c). Oil surged close to +4% on the European aid package news, its biggest jump in 7-months. With the dollar under pressure, commodities are expected to get a bid. The support package for the EUR has undoubtedly reassured investors. The market is now expecting the commodity to revisit the $80 handle again soon. Prior to last nights rebound, this month alone, the ‘black gold’ managed to shave just under -11% of its value. Global growth concerns, on the back of credit downgrades in Europe, and a dollar in demand sped up the commodity’s downfall. Not helping the cause was last weeks EIA headline print gain of +2.76m barrels, w/w (the highest levels in 11-months). Recent prices have been supported on ‘expectations that demand will climb as economies rebound’, however, the market seems to be relying on fundamentals and the oversupply of the commodity. The increase in crude inventories recorded 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. Will this aid package provide the $80 dollar leg up?

Initial reaction has the market selling gold. The commodity has declined from its five-month high on speculation that ‘this’ emergency fund agreed by European policy makers will be enough to contain sovereign debt risks and help sustain growth in the region. Risk appetite is returning to the market, but, how much of an appetite will North America have? This month, investors have preferred the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target. For now, the market seems to want to off-load some of their ‘surety premium’ ($1,190).

The Nikkei closed at 10,530 up +166. The DAX index in Europe was at 5,927 up +212; the FTSE (UK) currently is 5,327 up +204. The early call for the open of key US indices is much higher. The US 10-year backed up 15bp (3.58%) in the O/N session. Treasury prices have plummeted, similar to other foreign government bonds on the back of Europe’s ‘unprecedented loan package’. The Euro-zone sovereign debt crisis has been holding Treasuries up, and by pushing prices aggressively lower the market is telling us it might be solved as the unwinding of the ‘flight to quality’ continues.

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