EURO Crapshoot

Why have one when you can have two? With one summit looking like becoming two, are we any closer to the final solution? All this drama and he said she said is getting confusing. A matter of urgency is a prerequisite and so is perception. Europe is seeing to be doing the right thing and that’s providing some relative calm, but, when does the storm occur? Maybe Monday? By then investors will have decided if they liked the first EURO tease of a solution or not. It is increasingly unlikely that we will get a conclusive agreement on ways to leverage the EFSF this weekend, hence the need for another summit next week, possibly on Wednesday 26 October.

October’s modest decline in the German headline Ifo index this morning suggests that the German economy is still holding up reasonably well. The Business Climate Indicator fell from 107.5 to 106.4, the fourth consecutive monthly drop was broadly in line with expectations. The index remains above its long-run average and points to annual GDP growth of about 3%. Recently the headline has not been a particularly good leading indicator of growth.

US data yesterday tried to make an impression, but it ended up playing second fiddle to the soap box shenanigans going on in Europe. US weekly claims eased slightly last week, showing a small improvement but indicating that the labor market is still weak (down-6k to +403K). Again it was disappointing to see a prior week being revised higher by +4k to+409k. The more reliable indicator, the four-week moving average fell by -6.2k to +403k. The headline print remains above that psychological +400k analysts number, a level where they believe that the job market was beginning to improve. It’s the same byline, companies remain reluctant to add to payrolls in an ‘iffy economy’ but at the same time are resistant to big layoffs. Digging deeper, continuing claims (one week lag) totaled +3.7m, up +25k, week-over-week. Net result, the labor market is growing too slowly to bring down the US unemployment rate of +9.1%.

US Existing home September sales just about piggybacked market forecast (-3% to +4.91m vs. +4.93m). In the details, it was a pleasant surprise to see the August’s headline print being revised higher, now reporting a monthly rise of +8.4% vs. +7.7%. The trend in existing sales looks fairly “flat” with year-over-year growth of +11.3% being flattened by a weak year ago data due to the expiry of “buyers tax credit”. It was not surprising to see that price data was soft on the month, down by -3.4% on the median and -3.1% on the average.

Finally, some surprisingly healthier news. The Philly Fed index of general business activity rose to 8.7 from -17.5 in September. Yippee! We are now back in “expansion” territory. The report comes hot on the heels of the NY Fed’s manufactures activity which shrank for the fifth consecutive month earlier in the week. The Philly’s subindexes turned or remained positive. New-orders improved to 7.8 from -11.3, the shipment index galloped to 13.6 from -22.8 last month. Hiring slowed to 1.4 from 5.8, but the workweek index strengthened to 3.1 from -13.7.

The dollar is higher against the EUR -0.25% and lower against GBP +0.02%, CHF +0.31% and JPY +0.16%. The commodity currencies are mixed this morning, CAD -0.18% and the AUD +0.08%.

The CAD, like any other commodity and growth sensitive currency, is suffering from whiplash, all caused by the dreaded Euro headline ticker. Many less assured investors have crept and stayed on the sidelines. Any time traders think the currency is gathering enough momentum to take on the stronger dollar, negative Euro rhetoric promotes risk aversion action. For most of yesterday, the loonie price action swayed with crude prices. By day’s end, the currency was able to move away from its low when Merkel and Sarkozy agreed to ask Euro-region leaders to assess a ‘package’ this weekend in-order to agree on the measures to resolve Euro sovereign debt crisis at a second meeting next week.

In this most important of weeks, option trading is showing that bearishness on the Canadian currency has advanced. Even domestic fundamental data is not providing the currency any support. Yesterday, Wholesale sales increased +0.2% to +$47.5b. The market was expecting a +0.5% increase.

The loonie, as it has done all week, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front.There’s tremendous sensitivity because of the unprecedented Euro event risk. The market remains a good buyer of dollars on dips (1.0166).

Like all risk currencies, the AUD has fallen O/N on concern that European leaders will not reach a resolution this weekend on the debt issues. France and Germany splitting on a crisis solution is sapping demand for higher yielding assets. The chance for a positive announcement for the markets is decreasing and allowing investors to lean towards a risk off mode. The AUD is heading for its biggest loss against yen in over a month. Outright, the currency has been pressured by the weaking pace of commodity prices.

The RBA minutes earlier this 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”.

With global markets not embracing risk, the interest to buy AUD on dips has wained, better sellers on rallies are appearing (1.0223).

Crude is higher in the O/N session ($86.25 up+$0.18c). Oil prices have remained under pressure because of European uncertainty. The failure to have a resolution is having a major affect on a market heading for a weekly loss. The commodity was able to pare some of yesterday’s deeper intraday losses after a joint German and French statement called for governments to agree on a “comprehensive and ambitious” plan by October 26.

The weekly 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.

After this weekend’s summit release the market will begin turning its attention back to supply issue questions as Libya 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.

The escalating worry about Europe’s inability to resolve its debt problems continues to drive investors away from riskier assets and favor the greenback. A dollar riding higher has been doing gold no favors this week. For a fourth consecutive trading session, the yellow metal is moving in tandem with riskier assets. Nervous investors have been selling on a lack of progress over the Euro-zone talks and an uncertain US economic outlook. The commodity is on track for its largest decline in two weeks.

The metal is not garnering the same safe-haven appeal as it did a few weeks ago. Right now, we are back to the inverse dollar-gold correlation play and the belief that a larger Euro rescue package will curb the demand for the metal as a protection of wealth. It seems that the demand for ‘physical’ gold from India is providing the only 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 ($1,622 up+$9.20).

The Nikkei closed at 8,678 down-4. The DAX index in Europe was at 5,795 up+29; the FTSE (UK) currently is 5,408 up+24. The early call for the open of key US indices is higher. The US 10-year backed up 3-bp yesterday (2.18%) and is little changed in the O/N session.

Similar to all the other asset classes, FI has been held hostage to “all” Euro rhetoric. Late into yesterday’s session a joint EU statement that a second summit was to be held had debt product do an about turn, and push their prices lower. France and Germany agreeing on the need for “an ambitious response” to the Euros sovereign debt crisis has reduced the refuge appeal of US securities. The Treasury market for the near term has become “policy-dependent, not data-dependent”. With the weekend upon us, all asset classes remain susceptible to Euro rhetoric.

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