EUR periphery debt beats Bernanke

The speculation game begins. There is talk that the ECB is buying Irish debt is helping the EUR recover from its lows this morning. Thus far, the market has witnessed a 1-cent turnaround. The reasoning is a tad difficult to digest, as the Irish/Bund spread just hit another record high of +553bps. The EUR has been helped along by a better than expected Eur300m 26-week Greek issue going relatively calmly. On the flip side, the dollar continues to underperform against the JPY as China moves to control ‘hot money’ flows. It’s a breath of fresh air that we have something other than QE2 to blame. Subdued production and inflation numbers from the Euro-zone this week coupled with the peripheral debtor nations potential default problems beats listen to Bernanke for a while.

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Historically, the first trading day after NFP tends to be the least volatile session of the whole month. Yesterday did not disappoint the North American session. With no data to digest, markets had to decipher various Fed’s rhetoric justifying their actions last week. St Louis President Bullard said that the bond buying program will outweigh the risks and that the maximum effect of monetary policy will be seen with a ‘lag of six to twelve months and that the effects should be conventional’. Conventional meaning that real interest rates will fall, inflation expectations rise, the dollar depreciate and that equity prices rise. He reinforced the view that the US pace of recovery has slowed, creating a disinflationary trend that they needed to address. The labor market, again, is expected to lag the recovery. He anticipates rates to remain near zero for an ‘extended period’ of time. All policy makers speak with ‘same tongue’, it’s no wonder that Capital Markets are shifting their focus towards Europe.

The USD$ is lower against the EUR +0.04%, GBP +0.00%, CHF +0.47% and JPY +0.48%. The commodity currencies are stronger this morning, CAD +0.12% and AUD +0.18%. Canadian housing data yesterday disappointed (+168k vs. +185k), and has now retreated back to the beginning of its recovery phase levels. The highlighted miss is skewed towards multiples (-15%) rather than singles (-8%). Because of that, analysts expect the impact on GDP to be material, even with regional declines being widespread. Canadian domestic economic recovery seems to be losing momentum. Friday’s headline employment report was softer than anticipated. The Canadian job market has averaged +6k per month over the last four months, as opposed to the first six-months, when job growth averaged +51k. The uneven profile for employment is occurring as economic growth has downshifted to something closer to trend or slightly below. The unemployment rate falling one tick to +7.9% is for the wrong reason, the decline can be attributed to the drop in the labor force (-4k). Over the last few trading sessions, the loonie has found some sympathy support as the ‘big’ dollar edges higher on the back of a stronger employment report and on the Euro-zone’s periphery concerns. The currency continues to underperform against its major trading partners even as commodity prices seem to be holding their own. Canada’s natural close ties with its largest trading partner will tarnish the currency medium term. However, the market still favors buying the loonie on dollar rallies.

AUD is slightly lower on the back of a mixed NAB business survey. Business confidence is holding up, only falling slightly to 8 in Oct from 10 in Sept., while the employment index rebounded to 6 from 2. Digging deeper, business conditions have deteriorated, falling to 2 last month from 7 the previous month with forward orders down 6bp to -3. Profitability is also down 10bp to -4 as a stronger AUD erodes business margins. The rebound in the employment index suggests another robust employment reading on Thursday. The market remains an AUD supporter, expecting the RBA to remain on a tightening trajectory. To date, the AUD has been this quarter’s best-performing major currency vs. its US counterpart. Interest rate differentials have been a big plus for the currency. Governor Stevens is expected to increase rates further even as the US and Japan leave borrowing costs near zero. Policy makers at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. The currency trades at a strong premium to its US counterpart after Bernanke’s QE2 announcement. The interest rate differential and the issue of dollar liquidation favor commodity growth sensitive currencies. The currency remains in demand on pull backs as the carry look attractive to investors (1.0157).

Crude is lower in the O/N session ($86.85 -21c). Beginning this week, crude has declined from its highest level in more than two years as the dollar strengthened vs. the EUR, trimming demand for commodities. Oil ended last week on a high after last months NFP print convincingly beat market expectations, proof that the US economy is recovering. A positive employment report tends to be good news for the market situation. More jobs leads to increased gas demand and refinery boosting runs. The black-stuff also received support after last week’s EIA report showed that fuel supplies plummeted when refineries reduced operating rates to the lowest level in seven-months. Crude stocks rose +1.95m barrels to +368.2m vs. an expected +1.5m barrel climb. Offsetting all of these gains was the gas inventories headline print. It fell -2.69m barrels to +212.3m, the lowest level in twelvemonths. Providing a leg up was the refineries operating at +81.8% capacity last week, the weakest print in seven-months causing the crack spread (crude into oil) to fall-46% in that period. Technically, the decline in stocks is primarily due to the low production numbers been witnessed. Gas stockpiles were expected to be little changed fro
m the previous report. Distillate supplies (heating oil and diesel) decreased -3.57m to +164.9m, providing the biggest drop in over two-years. OPEC is happy with prices between $70 and $85, although an increase to $90 would not impede economic growth. Technical analysts believe on an RSI basis that the commodities price is trading close to easing. The market remains wary that the underlying fundamentals have not changed. The ‘big’ dollars value continues to push the price about.

Gold managed to record and pare some of its record gains this morning, mostly on the back of a gyrating dollar value curbing the demand as an alternative asset. Year-to-date, the metal is up + 28.2% and is poised to record its 10th consecutive annual gain. Investors have been using the asset class as alternative investment strategy to protect against the debasement of currencies. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Covertly, policy makers are trying to drive the greenback lower, which by default would boost the demand for precious metals as alternative investment. The commodity has posted seventeen record highs in little more than five weeks in Sept and Oct. Last week, it managed to rise more than +2.9%. The metal should remain in demand on speculation that steps to support growth through QE and low interest rates will boost demand for the commodity as an alternative to some currencies, the store of value theme. Any pullbacks will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’, hence the reason for the record highs. The debasing fears of the dollar should have investors seeking protection in an asset with a ‘store of value’ ($1,413 +$10.40).

The Nikkei closed at 9,694 down -39. The DAX index in Europe was at 6,778 up +28; the FTSE (UK) currently is 5,894 +45. The early call for the open of key US indices is higher. The US 10-years backed 2bp yesterday (2.54%) and are little changed in the O/N session. The ‘headless chicken’ syndrome after last weeks ‘week from hell’ has been dealt with. Markets have regained some of their sanity and are logical trying to wade through all the data and rhetoric that has been thrown at us over the past five trading sessions. The front end of the US yield curve continues to hold steadfast their record low yields, after the Fed said it would buy an additional $600b of US debt to keep borrowing costs low and sustain the economic recovery. The tail has backed up after policy makers indicated that they would buy fewer longer-term securities. US Treasury is issuing $72b’s worth of new product this week, starting with yesterday’s 3-years. Today we get 10’s and tomorrow the long-bond. Three year product came in on the screws at +0.575%. Non-dealers took under 50% of the issue, and the auction had a 3.26 bid-to-cover compared to an average cover of 3.19 seen over the last six auctions. Dealers should be making Treasury pay up for the remaining auctions.

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