Shock European Banks under Capitalized

Our Summer hiatus is over’ it’s back to cracking them books, back to stroking our ‘egos’ as we spin the wheel and try and figure out what policy makers next moves will be. Governor Stevens last night was a slam dunk. He was PM’less up to their interest rate release. The BOJ’s Shirakawa said that they are ready to take more action and are watching the effect of their strong currency on the nation’s economy. Them is fighting words! Let’s hope they do not have the same impact as last weeks futile attempt to weaken the JPY. Tomorrow, Governor Carney will be the hottest ticket in town. It’s probably the toughest rates decision to predict in a decade, do not be surprised to see a hike and then see the policy makers head straight for the hills. Lastly, what can I say about the BOE, they are the BOE.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range in the O/N session.

The dollar is King this morning after a WSJ article suggests that European Banks underestimated their exposure to sovereign debt, pushing the EUR to record new recent lows. Now its anybody’s guess if we are capable of recovering the recent appetite for risk after this Labor holiday? Oh, I bet not!

The USD$ is higher against the EUR -0.90%, GBP -0.17%, CHF -0.09% and lower against JPY +0.28%. The commodity currencies are weaker this morning, CAD -0.60% and AUD -0.76%. Now that the loonie is coming off its first winning streak in over a month, this week will be a big week for the CAD. Starting with tomorrows highly anticipated interest rate announcement by the BOC and ending with the release of the monthly jobs report on Friday. The BOC call is a spilt vote amongst analysts. Fact, futures are pricing in a +60% chance of a BOC tightening. It’s probably one of the toughest calls over the last decade. A string of disappointing Canadian data and a darkening global outlook have weighed heavily on the market’s conviction for a Sept. hike. Last month, the CAD happened to post one of its worst performing months in over a year, falling -3.5% vs. the dollar. The dollar has now capped a triple top at 1.0675 and will prove a formidable support level for the currency again. Canada is not immune to weaker data reported south of its borders. It is only natural that growth and interest rate sensitive currencies would experience some volatile moves on changing risk attitudes. Friday’s US employment report gave us a change in risk attitude, the market embraced risk somewhat and has temporarily pushed the loonie into overbought territory as commodities continue to underperform

Not unexpected was Govenor Glenn Stevens at the RBA keeping rates on hold ‘for the time being’ (4.25%) as concern that the global economic recovery may falter trumped evidence of an accelerating expansion domestically. Not helping the currency will be the forming of a minority government. PM Gillard won the backing of key independent lawmakers, allowing her Labor Party to retain government and pursue a ‘tax on mining companies’. The currency was also hindered on concerns about the health of European governments and banks. Technically, ‘the fiscal outlook looks worse under a minority government and management of an economy growing at +10% in nominal terms may increasingly rest on the RBA’. The currency has underperformed against all of its major trading partners. The commodity rich currency is not isolated, as other growth sensitive currencies are suffering the same fate. Government data has also happened to put a lid on the recent rally (0.9100).

Crude is lower in the O/N session ($73.40 -150c). Crude prices fell for a second consecutive day as the labor holiday signified the ending of the peak consumption season in the US. Historically, traders will start to sell gas short anticipating an increase in inventories over the next few weeks. Stronger economic growth data happened to provide a leg up for the ‘black-stuff’ earlier last week. Aiding the commodity was the weekly EIA report revealing an unexpected decline in supplies of distillate fuels. Distillates (heating oil and diesel), fell -739k barrels to +175.2m. The market had been expecting the inventory to increase by +1.15m barrels. Inventories of crude itself advanced +3.42m barrels to +361.7m Supplies were forecast to climb by +1.2m. On the face of it, the weekly report should have been market bearish, but investors happily ignored the data as they found solace in Chinese and US manufacturing data showing new signs of growth. How long is this sustainable? The market is wary that the underlying situation has not changed, the fundamentals remain weak, demand does not look good and stockpiles of crude and products remain at a record high. Speculators remain better sellers on up-ticks in the short term.

Gold prices continue to advance on its record high print recorded earlier this year as investors seek to protect their wealth. The uncertainty of recent data has had investors contemplating boosting their demand for the commodity as a safe heaven. Last month, bullion appreciated +5.2% alone. The market would not be that surprised to see some sort of technical pull back supported by profit taking selling if investors embraced more risk. Consumers are trying to put there cash somewhere more solid on mounting evidence of a US economic slowdown. Speculators again are supporting the various safe heaven assets on pullbacks, avoiding risky assets due to uncertainties in the markets. With a genuine fear for global growth, by default, should boost the demand for the metal as a protector of wealth in the grand scheme of things. Sentiment for the yellow metal remains bullish The opportunity costs of holding gold are low due to falling interest rates ($1,250 -70c).

The Nikkei closed at 9,226 down -75. The DAX index in Europe was at 6,121 down -33; the FTSE (UK) currently is 5,407 -32. The early call for the open of key US indices is lower. The US 10-year backed backed up 9bp on Friday (2.70%) and managed to half of this u in the O/N session (2.65%). Treasury prices plummeted after the surprising NFP report and its revisions last week. Fixed Income was temporarily piggybacking on its highest yields in over a month, as gains in global equities had diminished the demand for the safety of the debt asset class amid optimism that the US economy will avoid a double-dip recession. Technically, the curve had become too rich and the overbought asset class was due for some sort of correction. The curve 2’s/10’s spread had widened 8bp to +219bp after flattening sub +200bp a matter of days ago. Treasuries had also been trading heavy ahead of this weeks US $67b three debt sales (3’s, 10’s and long bonds). However, in the O/N session, treasuries have managed to give up half of their losses as concerns over European fiscal issues has once again increased the demand for safety.

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