G20 head fake

Investors continue to juggle a couple of event risks this week. First we have the G20, the bark and no bite show. It is quickly becoming another ‘outing’ without accountability as leaders struggle to address currency and trade imbalances blamed for fueling asset bubbles and stoking protectionism. Second, Ireland and coming to grips with the death of the ‘Celtic Tiger’. Who is going to ‘own’ them now? Will it be the IMF, ECB? Whoever does, will they be able to contain the situation? Finally China, our supposed savior. The PBOC has its own issues with ‘hot’ money and the threat of asset bubbles. We are witnessing a precarious state of investor harmony. Unless global leaders quickly agree and take responsibility for their inept and slow reactions, volatility can only get greater.

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

Yesterday’s US data was somewhat upbeat. The trade deficit contracted for the month of Sept. (-44b vs. -46.2b) while new weekly claims fell more than expected (+435k vs. +452k), both positive signals for a weak US economy. Analysts expect the trade figure to help boost 3rd Q GDP, while the stronger claims report points to an improving jobs market, though still one marked by a high unemployment rate (+9.6%). Digging deeper, the trade deficit narrowed +5.3%, m/m, with the underlying subcategories revealing some encouraging signs. Analysts note that the ‘nominal’ dollar based deficit (price and volume effects) narrowed as exports continued to climb higher (+0.3%) and imports contracted (-1%), and this despite the impact of higher oil prices. The ‘real’ trade deficit happened to narrow by +3.1%, m/m. It’s the biggest improvement in six-months. The ‘real’ print is what matters to GDP. The losses in imports were concentrated in the consumer (-4.4%) and food (-16.4%) categories. It’s expected that the positives will lead to a small upward revision to 3rd Q GDP to +2%.

The weekly jobless claims print points to continued improvement to NFP. The stronger reading (+435k) coincides with the start of the reference period for the US payrolls report which is the first half of the month. It is the strongest print in four months. A psychological plus is that two of the last three weeks releases have come in below the +450k barrier. Despite the positives, there is only limited evidence to suggest that any meaningful acceleration in hiring. The US continues to grabble with a stubbornly high unemployment rate. Digging deeper, continuing claims (+4.301m vs. +4.387m), extended (+911k vs. +1.03m) and emergency benefit claims (+3.81m vs. +3.97m) all posted improvements on the week. With the recent run of positive data in the US, could helicopter Ben have avoided the bond buying and running the risk of inflation?

The USD$ is higher against the EUR -0.35%, GBP -0.04% and lower against CHF +0.19% and JPY +0.07%. The commodity currencies are weaker this morning, CAD -0.02% and AUD -0.25%. Canada’s trade deficit unexpectedly widened yesterday (-2.5 vs. -1.5) as exports plummeted in Sept. The softer headline print flows directly into GDP with leading indicators pointing to more of the same in the medium term. The data is strong proof that Canada cannot fundamentally rely on foreign demand to buffer the slowdown in domestic activity. In the details, the dollar value of exports fell -1.7%, m/m, due to a -2.2% drop in export volumes that was offset only partly by a +0.5% rise in export prices. In volume terms, net exports fell -17.7%, q/q, and the ‘sharpest pace of deterioration registered in this recession’. Breaking it down regionally, it’s worth noting that exports to it largest trading partner, the US, fell -3.6%, while exports to the rest of the world climbed +3.6%. Despite the weaker data, the loonie caught a break on the back of stronger commodity prices. The currency happened to print its strongest gain vs. the EUR is several weeks as the loonie took back most of earlier week’s losses vs. its largest trading partners. For a commodity supportive currency, the loonie has only appreciated +1.5%, y/d, underperforming other growth currencies. Investors continue to look for suitable levels to own the currency.

The AUD traded briefly below parity for a second consecutive session, but happened to regain composure O/N after Moody upgraded China’s credit rating. Temporarily impeding the currency’s gain was the surprise jump in the Aussie unemployment rate to +5.4% from +5.1%, a six-month high as job seekers swelled to a record, easing concern that a labor shortage will drive up wages. This week’s sudden jump in risk aversion over European periphery debt issues and a larger than expected Chinese monthly trade balance has again reduce the risk appetite of investors. The Chinese surplus is the second biggest this year. With Chinese authorities demanding higher bank reserves, again will restrict the flow of ‘hot’ money, indirectly and negatively affecting regional bourses and growth currencies. To date, the AUD has been this quarter’s best-performing major currency vs. its US counterpart. Interest rate differentials have been a big plus for the currency. Governor Stevens is expected to increase rates further even as the US and Japan leave borrowing costs near zero. Policy makers at the RBA said that economic growth will accelerate next year and ‘the Aussie’s advance will help slow inflation’. With the Australian economy continuing to grow ‘at or above trend and inflation remaining in the upper part of the band’ provides support for further monetary-policy tightening from the RBA. For now the currency remains in demand on pull backs as carry look attractive to investors (1.0024).

Crude is higher in the O/N session ($88.26 +45c). Oil rose yesterday after a surprisingly weak US inventory report showed an unexpected decrease in inventories as imports declined and refineries bolstered fuel production. The supplies of weekly crude fell -3.27m barrels to +364.9m. The market had anticipated inventories to climb +1.5m barrels. Aiding prices was the inventories of gas and distillate fuel (heating oil and diesel) posting bigger-than-projected declines. Gas stocks dropped -1.9m barrels, while distillates fell -5m barrels. Total oil and fuel inventories are now at their lowest levels in six-months after retreating in four of the last five weeks. Refineries operated at 82.4% of capacity, up +0.6%, w/w. Crude-oil imports tumbled -5.7% to +8.09m a day, the lowest level in eleven months. Analysts expect global economic growth to drive oil demand and reduce inventories even further, which are still exceptionally high in developed countries. This is an argument that supports the yesterday’s wildly bullish report for the commodity. Dealers expect prices to inch along as the dollar remains suspect. The ‘big’ dollars value will continue to influence prices despite fundamentals.

The one directional gold play temporarily came a mid week halt, despite the commodity routinely recording record highs over the past few weeks, as the dollar strengthened to the highest level in a month vs. the EUR, eroding the metal’s appeal as an alternative asset. In this morning’s session, the commodity has righted itself. To date, gold has advanced and fallen on speculation that European governments may struggle to pay debt. That argument depends on what direction the big dollar decides to take. The commodity has not fallen out of bed. It’s just going through a ‘mid-life’ crisis after managing to record such lofty heights. With Capital Markets shifting their focus toward sovereign debt issues and away from QE2 debates will continue to provide strong support for this asset class on medium term pull backs. Year-to-date, the metal is up + 28.2% and is poised to record its 10th consecutive annual gain. Precious metals have outperformed global equities and treasuries as Cbanks try to maintain their low interest rates to boost economic growth. Any pullback will continue to be bought. For most of this year speculators have sought an alternative investment strategy to the historical reserve currency and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,412 +$13).

The Nikkei closed at 9,861 up +31. The DAX index in Europe was at 6,722 up +2; the FTSE (UK) currently is 5,814 -2. The early call for the open of key US indices is higher. The US 10-years eased 7bp yesterday (2.62%) and are little changed in the O/N session. As expected, dealers lent on treasuries ahead of yesterday’s long bond auction to cheapen up the curve. Even with stronger US data and Bernanke’s QE2 plans, the focus was on how strong demand for longer term product would be. The $16b 30-year bond was a very weak auction and the market was correct in being worried. There was a +3.6bp tail, yielding +4.32% vs. +4.281% WI’s. The bid-to-cover was 2.31 below the four auction average of 2.72.

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