When Does the EURO Deadline Slippage Begin?

This current market movement is being fueled by “perception and optimism” and financed by US corporate earnings and constructive news from Europe. The market recognizes that Europe has finally developed a sense of urgency. This, after holding its thirteen crisis summit in 21-months last weekend, where they debated how to cut Greece’s debt burden, boost the firepower of the EFSF program, and support banks ahead of tomorrows fourteenth crisis summit.

In current market condition, how much further has risk appetite to recover? Surprisingly strong Chinese data coupled with stronger US growth indicators could drag risk higher despite a less than perfect outcome from the Euro-zone tomorrow. Asset classes well contained price action is an indicator that this is not a risk that many investors are willing to apply aggressively just yet. Clarity has never been Europe’s strong suit.

On the perception front, EU policy makers seem to be making progress. Press reports that the EFSF lending framework is likely to be a combination of “credit enhancement by insuring the losses on sovereign issues and loans to specific countries through a SPIV”. This should allow the capacity of the fund to support sovereign bond markets to rise to about €1t. Greek debt haircut to remain around +60%? How far are the gaps remaining in the EU’s efforts to address the crisis? Everyone want’s action, the right action. Do not be surprised that the market starts applying some EUR deadline slippage.

The dollar is lower against the EUR +0.05% and CHF +0.24% and higher against GBP -0.07% and JPY -0.20%. The commodity currencies are mixed this morning, CAD +0.22% and the AUD -0.00%.

What held the USD/CAD “up” yesterday? Was there good buying interest ahead of parity?  Or was there really no interest to push the loonie higher, despite commodities +3% intraday rally ahead of the BoC rate announcement this morning? The usual risk supporting reasons, such as China and Japan’s growth prospects, and the EU heading toward a revamped strategy to resolve the region’s debt crisis, saw the currency underperforming against its risk currency cousins. Dealers had little interest to play ahead of the BoC announcement.  Investors tended to be equity watching.
 
From the loonies’ point of view, fundamental data has been taking a “back seat”. The BoC releases its monetary policy report this morning and will update its forecast for the country’s economy, last revised three-months ago. There is nothing domestically expected to move the currency, one way or another. That is being left up to EU event risk and Thursday’s, US growth numbers.
 
Despite inflation tapping through the BoC desired level, last Friday Governor Carney said he has “considerable flexibility” in how fast inflation returns to the bank’s desired rate.  The country faces a weak US recovery and uncertainty over the European debt crisis, which could tip the global economy into another recession. Technically and fundamentally, analysts will tell you that Carney is “looking through near-term volatility in inflation”.
 
The loonie, as it has all last week, remains vulnerable to following the broader trends, especially to that which is transpiring verbally in Europe. There’s tremendous sensitivity because of the unprecedented Euro event risk. The market remains a good buyer of dollars on dips ahead of parity (1.0022)

The AUD has been the best performers this month, rallying +3.7% outright as currencies follow an improvement in risk appetite. Anything positive about China will be positive for the AUD. The Aussie has maintained it three-day gains outright, but not without some volatility. Chinese manufacturing data released on the weekend signals that their manufacturing may expand (51.1 vs. 49.9) for the first time in four-months, boosting demand for higher yielding assets. The currencies gains have been limited on the back of domestic data, Aussie PPI slowed in the third quarter yesterday (+0.6% vs. +0.8%) and as EU policy makers have failed somewhat to assure investors that they are nearing a solution to the euro-area debt crisis.

The RBA minutes last week were neutral in tone and failed to give any additional information. When it comes to cutting rates, EU holds the key and the RBA is not expected to be pro-active ahead of the G20 meeting in Caen at which Europe is due to reveal its “comprehensive policy package”. The interest to buy AUD on dips has increased now that the RBA Deputy Governor Battellino signaled this morning no urgency to lower “the developed world’s highest interest rates as policy makers weigh weak growth abroad against a domestic mining boom” (1.0465).

Crude is higher in the O/N session ($92.36 up+$1.09c). At the moment, oil only knows one direction and that’s up. Yesterday, the commodity rallied to a two-month high (at one point intraday rallying +4%), penetrating $90’s a barrel as data revealed economic growth in both China and Japan (this price action is an official bull rally). Providing North American support were equities rallying to a three-month high on the back of better than expected corporate earnings. The CFTC commitment of traders saw the biggest gain of oil contracts (bullish indication) since the beginning of September reported last week. However, the “current geopolitical context creates significant tail risks in a world with such limited spare capacity”. Asset classes will remain at the mercy of Euro rhetoric.

Last weeks EIA crude stocks fell by -4.70m barrels to +332.90m, and remain in the upper limit of the average range for this time of year. Stockpiles were forecast to climb +2m barrels. Gas was not going to be left behind, its inventory print also moved down by -3.30m barrels, a week after decreasing -4.10m. This too remains in the upper limit of the average range. Inventories of distillate fuel (heating oil and diesel), decreased -4.27m barrels to +149.7m, the biggest drop since November. Oil refinery inputs averaged +14.4m barrels per day during the week, which were +134k barrels below the previous week’s average as refineries operated at +83.10% of their operable capacity.

Brent December contracts will begin turning their attention back to supply issue questions out of Libya as the country’s supply comes back online. Until then, expect investors to run into technical selling on some of these steeper rallies as they wait for a clearer idea of where we are going on the economic front.

Everyone wants to know the details from Europe. Lack of details is pushing gold up as a safe-haven bet. The commodity has also found support (store-of-value) on concern that US monetary policy aimed at shoring up growth will eventually spur inflation. Over the past two-weeks, commodities have followed the moves in riskier assets, with the precious metal’s safe-haven appeal diminishing a tad after the price purge swings in the past quarter. Stronger Chinese growth is also providing a source for support. On the weekend, China’s strong PMI print suggests that the slowdown in the country may have peaked. Last week, the yellow metal rallied the most in a week, as a drop in the dollar boosted investor demand.

Right now, we are back to the inverse dollar-gold correlation play. It seems that the demand for ‘physical’ gold from India will provide the strongest tangible support on these pullbacks. Fundamentally, the commodity is trying to find a balance ‘between the two opposing forces’, a risk investment or a safe haven play ($1,658 up+$6).

The Nikkei closed at 8,762 down-82. The DAX index in Europe was at 6,056 up+2; the FTSE (UK) currently is 5,566 up+18. The early call for the open of key US indices is lower. The US 10-year backed up 3-bp yesterday (+2.24%) and is little changed in the O/N session.

Treasury prices remain well contained in a tight range with various parts of the curve acting independently to outside variables. Initial expectations for some broader resolve to the European crisis seem to becoming increasingly elusive, allowing the too and froing of price action. The middle of the curve happened to pare their gains after the Federal Housing Finance Agency announced changes to guidelines for both Fannie and Freddie refinancing program for “underwater borrowers”.

The long-bond ended a four-day decline after European policy makers ruled out tapping the ECB to boost a rescue fund for indebted nations and after the Fed purchased +$2.5b worth of long dated securities as part of its latest stimulus, “Operation Twist”. Dealers put up +$7.4b long bonds for sale.

Over the next few day’s, capital markets will be fueled by Euro-headlines. The Treasury market for the near term has become “policy-dependent, not data-dependent”.

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