The EUR and its sovereign concerns dictate position taking

These unique times require one to step back and decipher last week’s actions. The North American employment numbers gave the market some positive fodder to chew on. However, the European Sovereign debt concerns lead all capital market fears. Last week, there was about $77b of CDS contracts sold to protect Greece’s debt, that’s double to a year ago. They currently have about Eur408b debt outstanding. What is worrying European policy makers is that ‘the market concerns could spread from the nations running high deficits-Portugal, Greece, Ireland and Spain-to euro-zone members with more stable finances such as Belgium and Austria, which saw their bonds come under pressure last week’. Countries such as Belgium, Austria and France ought to be able to weather a bond crisis well because despite high levels of government debt, they don’t rely on foreigners to fund their deficits. Belgium, for example, is a net exporter of savings to other countries. Will Capital Markets methodically pray on the weaker?

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Yesterday, US Treasury Secretary Geithner said the US is in no danger of losing its ‘Aaa’ debt rating even though the administration has predicted a $1.6t budget deficit for this year. ‘Absolutely not’, when asked whether a downgrade is a concern. ‘That will never happen to this country’. Geithner said investors around the world turn to US Treasury securities and dollar-denominated assets whenever they are worried about global stability. That reflects ‘basic confidence’ in the US and its ability to bounce back from the global recession, he said. IN the end the general investing public has no other choice!

Former Fed Chair, Alan Greenspan said a Us economic recovery is ‘going to be a slow’ and that he ‘would get very concerned’ if stock prices continue to fall. A drop in stock prices is ‘more than a warning sign’. ‘It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity’.

The USD$ is currently higher against the EUR -0.01%, GBP -0.13% and JPY -0.14% and lower against the CHF +0.06. The commodity currencies are mixed again this morning, CAD +0.10% and AUD -0.10%. Again on Friday analysts were way off base when it came to Canadian employment numbers. In Jan., Canada created three times as many jobs as expected (+43k), disappointingly led by part-time positions (+41.5%), which pushed the unemployment rate down to its lowest level since Sept. (+8.3%). However, there was still no love for the loonie. It fell for a fourth straight week vs. the dollar and JPY, on concerns that Greece and Portugal et al will continue to struggle to pare their budget deficits, and by default weigh on the price of crude and gold. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions.

The Australian dollar managed to jump on to the commodity negativity band wagon last night and remains under pressure with global bourse’s finding it impossible to maintain positive traction. Analysts are now predicating that the currency slide may even be greater. Some believe that the AUD, by mid-year, will trade close to 0.8200 on prospects that the RBA will raise interest rates at a slower pace than traders are anticipating. Earlier last week, the RBA kept rates unchanged at 3.75%, establishing a wait and see policy, as they wait to experience the true impact of the earlier hikes. Naturally, there remains a lofty rate premium built into the currency after three successive hikes. Let’s see how the growth currencies react to the day after NFP (0.8686).

Crude is higher in the O/N session ($72.00 up +81c). There was no way that crude prices were going to remain elevated with a ‘dollar’ trending upwards. On Friday, despite retracing from its worst levels, the black-stuff still managed to drop to a seven-week low as global equities fell for a fourth consecutive week on the back of European sovereign debt fears. The ‘skepticism that economic recovery will be sustained’ has temporarily diminished the appetite for commodities. Last week, we witnessed a surprisingly large build in oil inventories in the EIA report. Crude stocks advanced +2.3m barrels, beating expectations for a little change, w/w. With the report showing a smaller build than the earlier API print (+4.7m), the data affirms the markets concern that the demand for energy is weakening as the US economic recovery remains tepid at best. Refineries continue to struggle with the problem of excess supply and too-little demand. They are operating at 77.8% of capacity, down from 78.5% last week, a loss of -0.8%, w/w. Gas stockpiles fell by -1.3m barrels to +228.1m vs. an expected +1m increase. Also in the declining boat was distillate stocks (heating oil and diesel fuel), they fell by -948k barrels to +156.5m vs. an expected decline of -800k. Again for a second consecutive time, the crude print was the only bullish component of the report. Look for better selling interest on upticks.

I bet many had wished they had gotten off the gold train much earlier. The lemming long trade of last year (+24%) has witnessed wild gyrations over the last 5-trading sessions. On Friday, again the ‘yellow metal’ plummeted to a three-month low as the dollar extended its rally, thus eroding the appeal of the precious metal as an alternative investment. All markets are now a measure of risk tolerance. With the dollar entrenched in an upward trend year-to-date should further pressurize the yellow metal. A percentage of dealers do not believe that the commodity downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR questionable and the dollar the ‘go-to’ currency for surety reasons, expect to see selling on upticks for the time being ($1,071).

The Nikkei closed at 9,951 down -105. The DAX index in Europe was at 5,475 up +40; the FTSE (UK) currently is 5,095 up +33. The early call for the open of key US indices is higher. The US 10-year note eased 2bp on Friday (3.58) and are little changed in the O/N session. Despite the US unemployment rate improving 3-ticks to 9.7%, treasuries across the curve remained better bid driving yields down for a fifth straight week, on concerns that various European countries might default on their debt convinced investors to acquire the safety of US assets. US yields have managed to print six week lows as Capital markets sweats over the PIIGS situation. This week the US government will sell an equivalent to last Nov.’s record-tying $81b in notes and bonds (3’s $40b, 10’s $25b and 30-years $16b). Historically, the Monday after the NFP ends up being the quietest trading day of the month.

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