By Dean Popplewell
There are no risk heroics as the market seems to want to take a breather into the G-20 meetings on the weekend. One gets the feeling of pent up underlying risk demand, but everything remains orderly ahead of the Italian confidence vote being tabled this morning after the government failed to secure a majority on a procedural vote earlier this week. If there is a "no" confidence vote, it would be a near-term negative for risk appetite, the EUR and for Italian debt, leading to concerns about the implementation of the austerity measures agreed upon last month.
At the G20 finance meeting, policy makers are expected to discuss an expansion of the IMF’s firepower as part of a global G-20 agreement next month in France. Just like any other global investor, potential contributors to a fund are doing their own due diligence and will want to wait to see what measures Europeans take to end the debt turmoil at this month's summit on October 23.
This morning, the market is expecting stronger U.S. data with the headline (+0.7%) and core U.S. sales (+0.8%) to rise and the UoM consumer confidence to improve (61.4). Firm readings would likely be supportive for risk and for currencies with strong exposure to the U.S.
U.S. data again played second fiddle to rumor and innuendo. Most of the dollar moves preempted any data releases yesterday. U.S. weekly claims edged down last week (-1k to +404k), signaling a slow improvement in the stubbornly weak U.S. labor market. Claims are still too high given that the economic recovery is more than two-years old. It seems impossible for the weekly number to trend below that psychological +400k benchmark. Again disappointing, was the previous week’s reading being revised higher by +4k. The more reliable indicator, the four-week moving average, happens to smooth out the volatile weekly figures, fell-7k to +408k. Officials noted that there was nothing unusual with the report. Some analysts believe that some of the recent reports had been distorted by one-off factors like Verizon strike or Hurricane Irene layoffs.
Digging deeper, continuing claims fell an unusually sharp-55k to +3.67m (the lowest in six-months), though the prior week saw an upward revision of +25k to +3.72m. The four week moving average dropped from +3.745m to +3.724m. Bigger picture, the trend for continuing claims have remained consistent for the past 24-weeks, as initial claims seems to have plateaued. The recent reports suggest that the labor market is stabilizing after hitting a soft patch over the summer. Most analysts would suggest that many companies remain in that wait-and-see mode, reluctant to ramp up hiring. Despite employers adding jobs last month, the market is growing too slowly to bring down the unemployment rate (+9.1%).
The U.S. Trade deficit hardly registered on anybody’s radar, coming in relatively flat for August at +$45.61b over July’s +$45.63b print. However, the release masked a +7.4% jump in the trade gap with China, to record -$28.96b, as imports soared from China to -$37.36b, a +6.4% jump. How hard will they be pushing legislation to punish China’s currency policy now?
The dollar is lower against the EUR +0.20%, GBP +0.07%, CHF +0.19% and higher against JPY -0.09%. The commodity currencies are stronger this morning, CAD +0.28% and AUD +0.51%.
The loonie rallying two days in a row was too good to be true. After hitting strong technical dollar support levels yesterday, the currency happened to weaken outright as declines in crude oil, the nation’s biggest export, and equities reduced the appeal of currencies tied to global economic growth. When risk is on and commodities are in demand, investors naturally look at higher yielding interest rate sensitive currencies like the AUD and CAD. The loonie rallied the most in more than two months earlier in the week as optimism that European officials will agree a plan to recapitalize the region’s banks sparked advances in higher-yielding assets. Rallying too hard too fast, it was only natural to witness a modest pull back in risk appetite.
Canadian data yesterday showed Canada’s merchandise trade deficit was narrower than analysts forecasted in August as exports and imports both rose. The deficit of -C$0.62m was smaller than the-C$1b median guesstimate. The loonie, like any risk or interest rate sensitive currency, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front. The market is a good buyer on dips, with strong corporate interest ahead of 1.0150 and down to parity (1.0185).
The AUD has maintained its week long rally and one of the few commodity currency to hold its O/N gains on the back of stronger domestic data this week. The AUD is poised to rally +3% in over a week despite S&P’s Spanish downgrade last night. Now, it’s wait and see G20 response time. Earlier this week, Australian employment rose +20.4k, twice the monthly expectation of a +10k gain that was expected, and neatly reversing the previous two months of declines. This eased the unemployment rate lower to +5.2% from +5.3%, m/m, with the participation rate steady at +65.6%. Analysts note that this gain has kept this year's trend stable, rather than a picture of growth. Futures dealers in response to the data print, pricing for a November rate cut fell-8bp to +19bp and a flattened bear curve.
It’s not a surprise to understand that the RBA is still being heavily dependent on how the crisis in Europe affects global growth over the next month. An increase in risk and RBA interest rate cuts again will be off the table and vice versa. However, similar to other growth and commodity sensitive currencies, the market bias prefers to be better sellers of the AUD on these rallies, until the panic flows have abated (1.0249).
Crude is higher in the O/N session ($85.46 up+$1.20c). Oil prices fell for a second consecutive day yesterday, as signs of weakening U.S. fuel demand and slowing crude imports from China strengthened speculation that future consumption will falter from the world’s largest consumers. In reality, inventories and prices remain too high as opposed to the economic risks that the global economy currently faces. Not helping the situation was U.S. weekly crude stocks rising more than expected last week as imports gained, while product inventories declined as refinery usage fell.
The EIA weekly report showed crude stocks rallying +1.34m barrels to +337.6m. The market had been expecting a +300k average build. Crude imports rose +386k barrels per day to +9.05m. On the flip side, gas stocks fell by -4.13m to +209.6m, more than market projections for a-100k barrel fall. Average gasoline demand in the last four-week’s fell by -0.7%, y/y. Distillates (heating oil and diesel), fell by -2.93m barrels to +154m, compared with an average forecast for a-600k barrel draw. Refinery Utilization fell by -3.5% to +84.2% of capacity. Finally, stockpiles at the Cushing rose +532k barrels to +30.6m barrels.
The old support levels now become the new key resistance points. Weaker growth predicted by the IMF, which points to lower oil demand, will have dealers thinking of shorting the market again. Expect investors to run into technical selling on some of these rallies.
Gold fell yesterday for the second time this week as gains in the dollar curbed demand for the precious metal as an alternative asset. China’s trade surplus narrowing for a second month in a row in September happened to pressurize industrial commodities. Earlier in the week, the roadmap for "stability and growth" had investors willing to strap on risk. However, risk appetite hit another headwind with global bourses retreating on weaker earnings data.
After last month's rout, investors remain very cautious about this trade. In the last two weeks, gold has had one of its steepest corrections in history. Demand for physical gold is again expected to support the market. Under normal conditions, the Indian festival season helps drive buying from the world’s biggest gold consumer. Retail gold demand traditionally gains pace from August.
The yellow metal has moved in line with other commodities and assets seen as higher risk, like equities, in recent weeks, despite moving in an inverse relationship with them earlier in the year as buyers sought the metal as a haven from risk. The commodity has risen by more than +2% this week, due to robust demand from jewelers and other consumers in Asia. In fundamental terms, gold is trying to find a balance ‘between the two opposing forces’, a risk investment or a safe haven ($1,678 up+$9.60c).
The Nikkei closed at 8,747 down-75. The DAX index in Europe was at 5,969 up+54; the FTSE (U.K.) currently is 5,449 up+46. The early call for the open of key U.S. indices is higher. The U.S. 10-year backed up +1bp yesterday (2.22%) and is little changed in the O/N session.
The bleeding was stopped. Treasury prices rallied yesterday, with 30-year’s ending their longest losing streak in four-years, as equities fell and a Chinese report showing export growth at the weakest in seven months added to signs global economic growth is waning, which supports U.S. debt. Big picture, Treasuries are in demand due to the uncertain global outlook and Fed activity. Losses by Treasuries may be limited as there’s still a chance U.S. GDP will contract and because of Operation Twist.
This week the U.S. Treasury auctioned +$66b worth of debt with mixed results. Dealers owned the $21b 10-year auction (+58.5%), which tailed +3.1bp. Yesterday’s +$13b long bond was the final issue of the week. With global equities in the red there was appetite for U.S. product.
Investors loved the long bond (a favorite for the Fed’s Twist buying). Yesterday’s $13b issue yielded +3.12%, well below the +3.164% expected. The bid-to-cover ratio was 2.94, highest in six-months. The indirect bid was +28.7%, versus the +32% average, while the direct bid was +29.5%, one of the highest on record.