It feels like the perfect storm is brewing. Speculation that 3rd Q earnings will hit the jackpot has pushed global equities to lofty heights without so much as taking a breath. Irrational behavior is consuming and contagious! What the markets are experiencing is unique, we have deflation vs. inflation, not just any inflation but Ã¢â‚¬ËœassetÃ¢â‚¬â„¢ priced inflation. FI yields and CPI indicators tell us that theses are deflationary times. At the same time there is a genuine fear that Ã¢â‚¬ËœrealÃ¢â‚¬â„¢ money is losing it value as global government debt gets bigger, supported by printing more money. These actions are driving real tangible asset prices higher. Hence, equities, oil and gold rallying at the same time! Are we losing our faith in cash? Many we are in the one country thatÃ¢â‚¬â„¢s printing the most of it, the US.
The US$ is weaker in the O/N trading session. Currently it is higher against 5 of the 16 most actively traded currencies in another Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.
No domestic data to influence the greenback yesterday, thank god for that! Everyone and everything took a swipe at the currency. It came from all directions. Started down-under with the RBA unleashing tightening their Ã¢â‚¬ËœeasingÃ¢â‚¬â„¢ leash, gold and inflation concerns led the EUR higher and forced the unceremoniously dumping of the dollar. The rumor of Arab states colluding to do away with pricing oil in dollars was earnestly denied from many sources. Technically, it would not be that difficult to do, but, what do we replace it with? Political consensus is a nightmare! The G7 shot themselves in the foot at the weekend by not mentioning a Ã¢â‚¬ËœstrongerÃ¢â‚¬â„¢ dollar policy, the G20 Ã¢â‚¬Ëœbigger boysÃ¢â‚¬â„¢ like the Australia have thrown a spanner into the works. The RBA under governor Stevens did not do a good job in telegraphing their intentions, hence the volatility. Trichet is going to have his hands full coming up with his communiquÃƒÂ© tomorrow.
The USD$ is currently lower against the EUR +0.04%, GBP +0.01%, JPY +0.74% and higher against CHF -0.08%. The commodity currencies are stronger this morning, CAD +0.34% and AUD +0.41%. The loonie managed to print its strongest level vs. the USD in over a year yesterday, as equities, crude and gold advanced on speculation that the global economic recovery may accelerate. Even the IVEY PMI (61.7 vs. 56.2) lent support. Beware the headline print is not seasonally adjusted. Digging deeper, the report showed good news on jobs (55.9 vs. 47.5, m/m). An optimist would say that the IVEY employment news would suggest a positive upside risk for FridayÃ¢â‚¬â„¢s Canadian jobs report. Market consensus is already looking for a +5k gain. Buying the rumor and selling the fact could endanger the looniesÃ¢â‚¬â„¢ weekly strength being unwound with anything less than +5k! Other data showed that Canadian building permits rose in Aug. (+7.2% vs. -10%) as Toronto muni-workers returned to work following their strike. There is so much Ã¢â‚¬ËœcashÃ¢â‚¬â„¢ on the side lines that investment managers cannot put it to work quickly enough. Heightened risk appetite continues to drag the loonie along for the ride. Ã¢â‚¬ËœToo much too soonÃ¢â‚¬â„¢ is a concern and that may play out after the employment numbers! Despite this, the loonie is loved on the crosses, especially vs. sterling. It would not be a surprise to the market if the currency managed to achieve parity before Christmas again vs. its largest trading partner.
Not a surprise too many, but Governor Stevens at the RBA hiked O/N borrowing cost from their 49-year low by 25bp to 3.25% earlier this week. He even went further and indicated that future hikes were in the offering which has caused the currency to vault to a 14-year high vs. the greenback. Stronger fundamentals like rising job vacancies, retail sales and house prices supports the RBA view that the Ã¢â‚¬Ëœbasis for such a low interest rate setting has now passedÃ¢â‚¬â„¢. Until global equities come under pressure, investors will continue to purchase the currency on pullbacks (0.8940).
Crude is higher in the O/N session ($71.13 up +25c). The terminally ill USD continues to lend support to the black stuff, especially the Ã¢â‚¬ËœbucksÃ¢â‚¬â„¢ decline vs. the EUR, which continues to boost the appeal of commodities as a hedge against inflation. Lending a hand yesterday was the EIA revising global demand by +410k barrels for the final Q of 2009. It does not help that the market was rife with rumors that was later denied that the Gulf Arab states were in talks to replace the Ã¢â‚¬ËœdollarÃ¢â‚¬â„¢ with a basket of currencies for oil trading. In theory, it would be easy to replace the dollar. The difficult question is with what? Expect the insurance premium to be somewhat priced out, unless todayÃ¢â‚¬â„¢s inventories headline blindsides the market. Not much of a surprise to most of us is that crude has remained in a tight trading range after weaker than expected US data last week. Demand destruction remains healthy! Russia increased its production last month and has now surpassed Saudi Arabia as the largest produce. They have just added to the global glut of the black-stuff. It has been prudent for investors to book profits after reaching once again technical resistance above $71. Last weeks EIA headline happened to record a large gas drawdown. The report revealed a -1.6m barrel drop in gas inventories, inline with the API print, but against analysts’ expectations of an increase. Over the past month, US gas demand is up +5% and this after the end of the holiday driving season! On the flip side, crude inventories happened to increase by +2.8m barrels, w/w, vs. expectations of a +600k rise. With energy fundamentals remaining unconvincing, it would be a safe bet that crude should be confined to its $10 range of $65-$75. However, we can never rule out geo-political influence! Technically oil prices remain inflated as they are not supported by market fundamentals, but geo-politics will always keep the black-stuffs prices artificially higher.
ItÃ¢â‚¬â„¢s difficult to stop a runaway train! Gold managed to print a new record 14-month high yesterday and looks to improve on its rich vein of strength, as the plummeting USD continues to support demand for the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative investment. Now, if we bring inflation into the equation, then pull backs could even be shallower ($1,047).
The Nikkei closed at 9,799 up +107. The DAX index in Europe was at 5,681 up +23; the FTSE (UK) currently is 5,147 up +9. The early call for the open of key US indices is higher. The 10-year bonds backed up 4bp yesterday (3.24%) and are little changed in the O/N session. Dealers managed to cheapen up the short end of the US curve ahead of the $39b 3-year note auction yesterday. Their jobs were made easier as investors continue to show an insatiable appetite for global equities. China, the biggest buyer of US Treasuries, is on holiday and the US treasury will sell another $20b in 10-year notes today and $12b of long bonds tomorrow. For most of this week, investors had been happy to seek duration (price sensitivity to interest-rate change expressed over time). The surprised Aussi hike has portfolio managers questioning their long term strategies!