Obama’s State of Union lifts global indices while dollar softens

A myriad of reasons has been supporting the dollar. Firstly, the dissent from Kansas City Fed President Hoenig yesterday after the FOMC rate announcement was a big boost for the buck. Secondly, the Fed reinforcing their intentions to cease buying MBS beyond Mar. will make US assets more appealing on the international scene and finally, Greek bonds plummeting has investors concerned if Europe is capable of containing the countries budget deficit woes. This morning the market is trading on the Obama positives in his speech last night. He proposes to extend middle class tax cut, which was due to expire at the end of the year. World bourses like this as do growth currencies. He aims to increase tax incentives for businesses to invest in new plants and equipment (small business are still finding it difficult to get credit) and finally, stepping up re-financing for homeowners other wise foreclosures again will be an eyesore. It was Obama’s’ comments on the Volcker rule what Capital Markets wanted to hear about. It looks to be implemented providing a ‘negative form of risk’. ‘We cannot allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy’.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Yesterday’s US new home sales disappointed (+342k vs. +370k, -7.6%, m/m), providing proof that the extension of government tax credit’s has yet to support demand. Homebuyer traffic seems to have lost its way after the Sept. peak. This was by and large through distortions caused by uncertainty over homebuyer incentives. A variable that analysts believe cannot be sustainable. The data is somewhat misleading. Digging deeper, the current level of unsold new homes are at the lowest point in over 37-years. Month’s supply moved up to 8.1, and that’s despite a drop in inventory levels, because of sales softening in the month. Going forward, the market believes that homebuilder’s activity will rise as a market in demand will want these new supplies. It’s expected that bank’s shadow inventories (mostly foreclosures) will remain off the market for most of the first half of this year, thus requiring builders to add supply. This is expected to push starts and new home sales higher. Eventually they will want to offload these inventories, which are growing exponentially, because they will eventually be facing higher capital requirements and require liquidation for funds. Demographically, the Midwest accounted for most of the losses as sales plunged -41%. The South experienced a modest decline, while the Northeast and West posted gains on the month. Surprisingly, both the median and mean price rose last month, advancing +5.2% and +7.6% respectively.

The USD$ is currently higher against the EUR -0.13% and JPY -0.43% and lower against GBP +0.68% and CHF +0.11%. The commodity currencies are stronger this morning, CAD +0.71% and AUD +0.98%. With global equity indices and commodity prices floundering managed to push the loonie to print a new 5-week low yesterday. After experience a -3% drop last week vs. its largest trading partner, mostly on the back of a vocalized Governor Carney expressing his concerns of a strong domestic currency’s role on future growth, had futures traders paring their bets on when interest rates hikes would occur. Similar to the Fed’s policy, rates will remain low for an extended period of time. The currency has lost -1.4% over the past month, the fourth-worst performance among the 16 most-traded USD counterparts. The market seems to be caught long the CAD and is eager to pare some of these positions. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions. Currently, analysts believe the CAD is still overvalued and are targeting 1.0750 near term. The loonie received a boost from Obama’s tax pledges to middle income families last night. He also stated that the economy is well under the road too recovery. Growth currencies have all rallied. Is it sustainable?

The AUD managed to complete a u-turn in the O/N session and rallied from its one-month low, especially against the JPY, as Asian bourses rallied for the first time in over a week, thus boosting demand for higher yielding assets. In his first State of the Union, Obama has called on Congress to extend tax incentives to spur growth in the world’s largest economy. Obviously, this will benefit commodity currencies. Earlier this week, the IMF declared that the Australian economy is expected to outpace other advanced economies and expand +2.5% this year and +3% next year. Analysts believe with such a robust and stellar economy there is no reason to keep rates as low as they are. Stronger fundamentals has AUD traders increasing their bets to a +76% chance that the RBA will hike another +25bp on Feb. 2nd. It’s expected to be their fourth consecutive hike (0.9024). The markets have had a change of heart and want to be a better buyer on dips.

Crude is little changed in the O/N session ($74.33 up +66c). Crude oil and gas both fell to five-week lows yesterday, after the weekly EIA report showed that gas inventories rose to a 22-month high. The black-stuff tumbled just under 3% and is technically set to threaten the $70 level in the medium term. Demand destruction remains healthy. Gas inventories climbed +1.99m barrels to +229.4m last week vs. an expected increase of +900k, another consecutive bearish print. In contrast, crude supplies dropped -3.89m to +326.7m vs. an expected rise of only +1.5m barrels. Technically, the crude print was the only bullish component of the report and that was mostly due to the closure of the Houston Ship Channel because of foggy conditions. Refineries ran at 78.5%of capacity, little changed from the previous reading of 78.4%. Market sentiment remains negative with trading momentum pointing to lower levels. Year-to-date, the black-stuff has managed to drop -12% from its 15-month high of just under $84 recorded in the first few days of the New Year. With China taking dead aim in trying to ‘cool its economy’ by hiking bill rates and increasing reserve requirements for banks coupled with a bullish greenback has dissuade investors seeking the commodity as an alternative investment. These reasons are only adding fuel to the ‘bear strategy’ for commodities. The market continues to see sellers on upticks in the short term.

Witnessing the selling of bullion to cover losses in the equity markets is likely to increase over the coming weeks. Global bourses are finding it difficult to maintain any significant gains. From this week’s lows, the metal has found it difficult to rebound as traders speculate that a stronger dollar could curb further the appeal of the precious metal as an alternative investment. The market is expected to remain contained until we make a bona-fide attempt at penetrating resistance levels ($1,080). There is no doubt about it, the commodity trades ‘heavy’ as ‘one direction lemming buying’ has the market caught long product after last years 24% rally. Any liquidation of the metal with momentum will have nervous investors seeking an early exit. With the EUR remaining vulnerable and the dollar the ‘go-to’ currency, expect to see selling on upticks for the time being ($1,092).

The Nikkei closed at 10,416 up +162. The DAX index in Europe was at 5,707 up +63; the FTSE (UK) currently is 5,263 up +63. The early call for the open of key US indices is higher. The US 10-year note backed up 4bp yesterday (3.66%) and are little changed in the O/N session. Initially, treasuries rose as Greek bonds plummeted, driving investors temporarily to the safety of US government debt despite the abundance of product to be auctioned off this week. Traders attempted in vein to cheapen the curve accordingly to absorb product as any pull backs we accounted for by foreign demand. However, after the Fed’s announcement bonds erased earlier gains when policy makers said they will cease buying MBS in Mar. as planned and wind down other liquidity programs. Today is this week’s final auction ($32b of 7’s). Will we see the same appetite for US product?

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