Lagarde the EURO before Extinction

It’s a horror show, with market anxiety keeping risk assets defensive. We have politicians pitted against policy makers. The ECB is warning that restructuring is not a solution. If Greece fails to meet the term of it’s bailout, their debt will be ineligible as capital. Europe’s policy options to manage Greece’s debt crisis are narrowing fast.

Politicians are being pressurized into finding an electorate appeasement. The Greek Prime Minister is considering seeking a national consensus on the crisis and is determined to stay in the union. Just what the Euro-zone requires, another referendum.

On the plus side, news that the Finnish government have rubber stamped the Portuguese bailout and that the German banks have passed a second stress test have brought some relief to the EUR. It’s nearly back to the desired level for speculators to short it again. Little of the European positive news is being appreciated, its risk and quantifiable risk that’s associated with the Euro-zone that is driving currency values.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in an ‘volatile’ session.

Sales of new homes in the US yesterday beat market expectations (+323k), despite trumping the March print by +7.3%, sales are still down-23% from last years April print of +420k. It has been a roller coaster of reporting this year and does very little to the underlying ‘flat’ trend. The reporting at the beginning of the year was impeded by weather factors, while the latter focused on beating an increase in FHA insurance premiums in the middle of last month. Digging deeper, sale gains were able to push down the number of new homes available for sale, weighing on the month’s supply, down-10% to +6.5. The medium price of new homes grew +1.6% to $217k, an appreciation of +4.6%, y/y, while ‘existing home sales’ appreciated +4.6% year/year. The reality, the job market and increased affordability may be starting to help underpin a housing market that’s lagged behind the rest of the economy. The one reason for the continued slump is growing interest from investors in buying distressed properties.

To date, both the Richmond Fed’s manufacturing and services index were bad this month. Yesterday, the manufacturing component fell to-6 from +10 (the first negative reading in nine-months), while the service sector revenue index dropped from +28 to +9. The manufacturing print happened to beat the most pessimistic of supply chain disruptions. On the services side, revenue remains positive, however, some of the energy relief in prices has not been enough to overcome gas spikes and low wage growth. Digging deeper into manufacturing, both the shipments (-13) and new orders (-15) plummeted, registering some of the lowest levels during this recession. Somewhat heartening, the number of employees index held steady (+14), while the wages index dropped +6.

The dollar is higher the EUR -0.12% and JPY -0.18% and lower against GBP +0.10% and CHF +0.37%. The commodity currencies are weaker this morning, CAD -0.16% and AUD -0.49%.

This month, the CAD has weakened outright versus the dollar, its longest losing streak in six-months, as crude-oil prices trade heavily amid mounting investor concern that global economic growth is faltering. Weaker domestic fundamental data, like last weeks retail sales and inflation numbers may dissuade Governor Carney at the BoC from boosting interest rates later this month. The Bank next meet on the 31-May to determine their interest rate policy. The market is experiencing risk-on and off again trading, creating volatility within a tight range.

With 0.9850 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9785).

O/N, the AUD felt the wrath of the market, falling to a six-week low versus the greenback and -1.2% against the yen as concern that Europe’s debt crisis is deepening sapped demand for higher-yielding assets. Domestic data is also weighing on the currency, a government report showed construction work completed rose less than economists forecast. It increased +0.7% in the three-months versus a +1.4% gain. Traders are beginning to reduced their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 yesterday.

Until last night, providing support for the currency is the belief that the local dollar was gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0508).

Crude is lower in the O/N session ($98.70 -0.89c). Oil rallied the most in a week yesterday, as the dollar declined, boosting commodities’ appeal as an alternative investment, and after Goldman and Morgan Stanley increased their oil-price outlooks. Already this week, Oil has been pushed and pulled by a gyrating dollar, on the back of European contagion fears and what this may eventually mean for demand. Year-to-date, crude prices are up +39%.

Last week’s weekly crude supplies fell-15k barrels to +370.3m versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. Lower interest rates continue to help the commodity which competes with yield-bearing assets for investors’ cash.

Gold rose to a three week high yesterday, on concern that that Europe’s sovereign-debt crisis may worsen and a weaker dollar spurred demand for the metal as an alternative asset. Strong buying recommendations from Goldman and Morgan Stanley was also good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.

The inability of the dollar to maintain its safe-haven status is currently supporting metals. Last week, the commodity had been moving in tandem with oil and the risk-on-risk-off commodity trade. So far this week that relationship has broken. Expect investors to remain nimble because of the gyrating greenback.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,525 +$2.10c).

The Nikkei closed at 9,870 down-54. The DAX index in Europe was at 7,123 down-27; the FTSE (UK) currently is 5,849 down-8. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.13%) and is little changed in the O/N session.

Treasuries happened to give up some of the weekends gains after an unexpected new home sales data and on the back of Treasury issuing $99b of new product this week. Dealers wanted to cheapen up the curve ahead of this week’s three auctions as yields continue to hold close to three-year highs making it difficult for investors to want to own product at these levels.

‘Rates remain in a tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Expected mixed US data this week has investors remaining better bid on pull backs, providing bullish momentum for the FI asset class, who it seem want to register even lower record yields over the medium term.

Yesterday’s $35b two-year auction was a strong issue and came to the market 0.5bp through, at 0.56%. Indirect bidders too 31.3%, while direct took 19.1%, with 3.46 bid-to-cover ratio. This morning we get the $35b seven year notes. Will the markets appetite be as strong?

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