Investors have a gluttonous ‘risk’ appetite

The market seems to be sitting on its hands ahead of tomorrows ECB rate decision and Friday’s all important US jobs data. Analysts have been busily revising their NFP headline print down below a net loss of -100k jobs (the fewest in over a year) while keeping the unemployment unchanged (+10.2%). It’s aggressive and optimistic in nature ahead of jobs data today and tomorrow. Trichet is not expected to deliver any major surprises, just maybe their decision on the time horizon over which the ECB continues to guarantee liquidity. Perhaps they need to be more generous? An inexperienced political Japanese government under PM Hatoyama’s continues to verbally talk down the JPY this morning. The market is aware that the BOJ will intervene if the JPY appreciates too much, however, with risk appetite, the dollar remains under pressure as a vehicle currency. Japanese authorities will have to be more innovative in their initiatives!

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range ahead of a plethora of US data this morning.

After expanding in Oct. at the fastest pace in 3-years, the US ISM manufacturing index eased last month, more than the market was expecting (53.6 vs. 55.7). But, more importantly it remains in expansion territory despite production growth and employment moderating. Production fell from a 5-year high of 63.3 in Oct. to 59.9 last month. However, analysts expect Dec. numbers to be stronger on the back of new orders edging higher in Nov. (56 vs. 60.3), which would suggest that there were gains in both domestic and foreign demand. Inventories, the scourge of this recession, declined at a quickening pace (41.3) which may affect 4th Q real-GDP. Despite the inventory levels remaining exceptionally high across all sectors, a decline can only be a plus for future growth. On the disappointing side, the employment sub-category fell back towards the 50 print, no-mans land, neither expansion nor contraction. As indicated by other jobs data, any improvements in the sector remain painfully slow. Finally, the prices paid component fell to 55.0 after recording 60 from Aug. to Oct., certainly no fear of inflation just like the Fed indicated.

It’s not surprising, but the market was not expecting US pending home sales to beat market expectations (+3.7% vs. -1.0%, m/m) and rise for a 9th consecutive month. Logically, the fear of not be able to take advantage of first-time homebuyers’ incentives (which was originally supposed to expire yesterday) combined with low interest rates most likely was the reason for another unexpected jump in the data. We will probably see a retracement in the Nov. headline print as the incentive program was extended mid last month to Apr. of next year. No rush required now!

The USD$ is currently lower against the EUR +0.07%, CHF +0.05% and higher against GBP -0.09% and JPY -0.76%. The commodity currencies are stronger this morning, CAD +0.15% and AUD +0.19%. The loonie managed to record its strongest print in over a month last night vs. its largest trading partner. The ‘buck’ lost ground to most of the major currency pairs as renewed appetite for higher-yielding assets boosted the appeal of currencies tied to growth. Stronger global fundamentals continue to endorse risk appetite. Year-to-date the CAD has appreciated +17% vs. the greenback on the back of risk sensitive securities that by default endorse the CAD. Earlier this week, the Canadian economy officially grew in the 3rd Q with GDP rising +0.4%, y/y. This is the first sign of growth in four quarters and maybe a signal that it’s the end of the worst recession in 50-years. The Canadian government expects to be running a deficit close to $55b while the BOC will keep rates low for an ‘extended period of time’, all in the effort to promote growth and boost employment. The GDP print was lower than Governor Carney’s prediction for +2% annualized growth. Despite this, the loonie is encroaching on support levels where the BOC last time used verbal ‘threats’ to systematically back up the ‘rabid’ currency whose strength they believe could curtail future domestic growth. Canadian Finance Minister Flaherty indicated yesterday that Canadian policy makers are unlikely at this time to use the ‘options’ they have to manipulate the currency value. He said ‘the pressure is downward on the USD, and that has an effect on all the market currencies’. The trend remains the dealers and investors friend.

The AUD remains better bid as demand for riskier assets is robust on speculation that US job data will record the fewest amount of job losses this year later this week. Earlier this week the RBA came and delivered, but hinted of ‘no’ further threats to raising future rates as Governor Stevens hiked rates 25bps to +3.75% on compounding fundamental evidence revealing an economy gaining strength. He also signaled that 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 (0.9283).

Crude is lower in the O/N session ($77.95 down -42c). Crude prices managed to advance yesterday amid speculation that credit losses in Dubai is but a hiccup to global recovery. Stronger Chinese data and a weaker greenback translate into higher commodity prices. Basically the black-stuff if reclaiming the growth insurance premium it lost late last week on the Dubai’s announcement. Constructive talks will do this all the time! Even with a 2% gain yesterday, prices remain range bound ahead of this morning’s inventory numbers. Elevated prices are not supported by last weeks EIA report which showed that inventories managed to advance to a new 4-week high. 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. 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. This morning we expect a small drawn-down of weekly inventories.

Investors got it right, despite technical signals indicating that the gold market is over bought. Any contrarian to this ‘Bull’ run has had little opportunity to exit without cost. We have experienced wild gyrations of $20-$30 price swings over the past few trading sessions and it does not seem to want to take a breather. Gold again recorded new record highs this morning as declines in the dollar and higher commodity prices encouraged investor demand for the ‘yellow metal’ as an inflation hedge. Demand remains robust on any pull backs as the metal trades as it’s the ‘international currency’ ($1,214).

The Nikkei closed at 9,608 up +36. The DAX index in Europe was at 5,769 down -7; the FTSE (UK) currently is 5,303 down -9. The early call for the open of key US indices is lower. The US 10-year bond backed up 5bp yesterday (3.28%) and are little changed in the O/N session. Treasuries have managed to lose ground for the first time in six trading sessions for a number of reasons. Firstly, with Dubai World at the bargaining table trying to restructure $26b of its debt load has convinced investors to shake their surety of funds requirement. In fact, it has promoted an increased appetite for risk. Secondly, stronger US ISM data (see above) is probably one of the best indicators of economic growth, managed to push US equities higher and by default soften FI prices. Finally, next week we have another round of treasury auctions (3’s, 10’s and 30’s-$40b, $20b and $12b respectively), more product to absorb. Also, in the back of dealer’s minds is the fact that the Fed may use reverse repos, pay interest on excess bank reserves and sell securities directly to investors to withdraw or neutralize cash in the banking system. This can only promote higher yields.

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