Over the course of December and January traders witnessed the ultimate in fickle behavior by the globally traded market, which was instigated by the December 4th 2009 Non-farm Payroll numbers printing at -11K jobs, that was far better than the expected -114K. Joyous jubilation hit Wall Street and, as the bunting and tick-tape floated around sunshine lit skies, the USD found buyers.
The equity markets took their time to absorb the historically unreliable NFP report, but within three sessions had found enough support to move S&P futures trade off the 1085 area, and up to test 1151, in a 6.5% move that topped out just in time to absorb January’s NFP numbers.
The Correlation Story
In the December move higher in stocks, the USD shed its high correlation with the equity markets, and took a hiatus from the 90% correlated moves each day, as the global market bought into U.S. economic jobs growth. Stocks went higher, yields went higher, commodities went higher (it took an extra week for commodity markets to catch up, but they too bought into the party with oil moving from $77 to $84 in an 8.5% move), all at the same time, in a play that bought into USD strength and safety.
In January, the NFP party had some cold water thrown on it with a read of -85K. Two days after the release the S&P futures market started its decline from 1151 toward 1068 at the time that February NFP numbers were revealed. The 7% drop in S&P trade reversed the December NFP equity rally.
The USD took strength from the January equity decline, and re-built the Risk Aversion = Stocks Lower = USD higher correlation (dollar up as Treasuries are bought as stocks are sold). The February NFP numbers were released at -20K, with massive revisions to the October and November numbers that added over 200K more job losses than had been reported, and threw into question the market-wide reaction to previously positive numbers.
Will The Sentiment Current Continue to Flow?
Tenured forex traders will now ask whether the USD will continue to get bought in the S&P lower/Treasuries higher/USD higher link. December revealed the ease in which sentiment can, and does, change, and February may just be about to set off an inverse play of the December pattern.
There are good reasons to believe that equities going lower may not empower the USD this month, especially during the week that the U.S. Treasury goes cap-in-hand to the global market with another record matching bond sale to raise more cash for the over-drawn economy to get through another month of red-bill paying.
The January move to buy the dollar was turbocharged by news that Dubai World was still struggling to revamp its debt obligations, and those long-USD moves were then boosted by headlines that Greece was in danger of defaulting on its government debt obligations. With gleeful joy, the media pounced on the fact that other members of the Euro-zone were also likely to be in the same situation, with Portugal, Italy/Ireland, Greece and Spain making up a group-of-four/five that suddenly has the traded market’s attention drawn to it.
In that environment, and with lofty disregard for what came before, buyers of the USD loaded the long side of their boat and abandoned any thought process that the economy backing the largest amount of fiscal deficit the world has ever seen could ever get into a position that would be worse than that in front of them. Apparently, all is well with U.S. debt, so long as someone else has debt issues too.
USD Safety a Myth?
The move to safety of USD-based Treasury debt empowered the USD in January, but the reality check in regard to the implied NFP employment situation will now not help back that move. The fickle market’s attention will now have to be drawn to forward U.S. growth, as the Euro-zone story grows old, and reality once again sets in.
The drop in value by the euro will have been welcomed by the single currency exporters, and will now likely have U.S. administration attention drawn towards a USD that is now verging on expensive in regard to servicing U.S. debt levels.
The top four U.S. states in the Fiscally Challenged Rankings would make the Greek situation look something akin to a storm in a tea cup. The threat of downgrades to U.S. debt are generally ignored - after all, the U.S. based rating agencies know what side their bread is buttered, one would assume.
The reality check in regard to safety, and especially the safety of the U.S. economy when based on positive NFP surveys that are unreliable at best, will now call into focus whether February can be a long-USD month, whatever the equity market chooses to do.
Global Banking Top 50
The banking sector in the U.S. does not compare in any way to the ‘safety’ of overseas banks in regard to long term bank deposit and foreign exchange currency ratings from Standard & Poors, Fitch, and Moody’s. The top 50 globally rated banks from the GFMag yearly 'Safe Bank' survey show some statistics that Stress-Test followers may find surprising.
Last year there were thirteen newcomers to the global list: a 20% replacement ratio rate from 12 months ago. The highest ranking bank was Germany’s KfW, while Singapore and Finland added major players to the list, with two of Singapore’s entrants matching Deutsche Bank (NYSE:DB) and Bank of Montreal’s credit ratings.
Spain and Canada moved into the top ten with Banco Santander (STD) and Bank of Canada (NYSE:RY). Some casualties to the list include Citi (NYSE:C), Bank of America (NYSE:BAC), Barclays (NYSE:BCS), and Royal Bank of Scotland (NYSE:RBS).
As of October 2009 the IMF had Spain listed as the ninth largest world economy. It is the sixth largest world investor in overseas purchases and in recent years has been the fourth largest investor in the U.S. and the second largest investor in the UK.
Spain has a bank in the top ten safest bank report. The U.S. has no banks in the top 20, and just five banks in the top 50 list.
The Numbers Tell the Story
U.S. safety is a state of mind, and a state of necessity in regard to the amount of U.S. based reserves that will realistically be impossible to easily challenge. Once the world realizes that Greece, Spain, Portugal and Ireland are actually in no worse of a condition than the top ten fiscally challenged individual U.S. states, the USD love-fest may run out of legs. The U.S. administration got a near-term strong-dollar policy boost that they continually back. It will be interesting now to see how they actually deal with the impact of a stronger dollar as they try to off-load more expensive U.S. debt.
Our fickle mistress that is the globally traded market may just use this time to re-visit USD values that were built on the flight to safety.
4 of the top 8 safest banks are German
9 of the top 10 are European
13 of the top 20 are European
5 of the top 20 are Australian or New Zealand
2 of the top 20 are Canadian
26 of the top 50 are European
France has as many top 50 banks as the U.S. and a far higher overall ranking with 3 of the top French banks within the top 20, and one, CDC, in at number 2 on the list.
The five U.S. banks in the top 50 were Wells Fargo (NYSE:WFC) (21), US Bancorp (NYSE:USB) (26), Bank of New York Mellon (NYSE:BK) (34), JP Morgan Chase (NYSE:JPM) (45), and tied for 50th with three overseas banks is BB&T (NYSE:BBT).
There are at least seven U.S. states in as bad, if not worse condition as Spain, Greece, Portugal and Italy, in regard to growth/employment/debt ratios. California, Florida, Illinois, Michigan, New Jersey, North Carolina and Ohio all have over 15% unemployment reads on a minimum 8 million population base, and all have borrowed more than a billion dollars each to maintain their bankrupt unemployment funds.
There are swaths of states that are not far behind in their unemployment rates, borrowing and/or population size. These numbers do not take into account the state deficits over and above employment based reviews, and these states certainly do not have the ‘safety’ of owning U.S. based Treasury debt or having banking institutions that are deemed globally safe, unlike one of the market’s current whipping boys, Spain.
The Worm Turns
There were murmurs last week of the threat of rating agency downgrades to U.K. debt that were hidden in the noise of daily global market sound. The GBP was however plagued by the noise, and could not seem to shake off the stigma of possible downgrades. It may not be too long before the market focus goes to USD valuations, in light of debt/growth ratios, that cannot be papered over with horrendous revisions to October and November NFP numbers.
The worm may turn on the USD in the near-term, and those economies with natural recourses not impeded by forward debt may shine through. The whipping boys may just take back the whip, and reverse the moves made from December 4th 2009. We will monitor Cad and Aud, as well as Eur/Jpy, and report as the story unfolds and the fickle behavior unwinds.
Disclosure: No positions