The shenanigans at Citi! Do we not learn?

Is this a bear market rally or is the tide changing? The market is putting its faith on a leaked internal memo from Citi that indicated that they are having the best Q since the beginning of the recession. Only last week the market believed that the company was within days of collapsing. We are talking about a former giant that’s within smelling distance of being a penny stock, an entity that has received billions in tax payer’s money and multi-billions in assurances from the US treasury. Least we forget, they have been allowed to write down billions on their balance sheets, surely it’s even possible for them to have a positive Q, but to bet your ‘devalued’ house on them being the reason for potentially turning this market sentiment is a stretch! This morning we have been brought back to earth on China’s worse than expected export numbers (exports tumbled -25.7% and imports fell -24.1%, y/y). There will be time for ‘concrete’ euphoria it’s just not yet.

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 ‘whippy’ trading range.

Bernanke comments and recommendations yesterday were expected. Nothing new or earth shattering was presented to dissuade current positive equity market sentiment. Again he urges an immediate and extensive overhaul of US financial regulations. This he proposes will ‘smooth out the boom-and-bust’ cycles in US financial markets. Bernanke is the PR man of choice. He provided support in saying that the Fed and the Treasury will take ‘any necessary and appropriate steps to ensure banks have capital to function well in even a severe economic downturn’. He wants to ‘review capital regulations to ensure that they are appropriately forward-looking, and that capital is allowed to serve its intended role as a buffer – one built up during good times and drawn down during bad times’. Now all the market can wait for is the White House proposal for regulatory change.

Even though being long gold is probably the most overcrowded trade at the moment, many analysts are revising their prediction over the next 2-years, some calling for $2,000-3,000 an ounce. On the whole the ‘yellow metal’ has held in very well when one compares it to other commodities. Gold looks set to move substantially higher as governments all around the world embark on a cycle of ‘quantitative easing’ or printing money. It’s worth noting that the US monetary base (supply) has increased more in the past 6- months than the aggregate total over the past 20-years. Even China is deliberately inflating its own domestic money supply, similar to the BOE objectives. This will make gold the ultimate safe haven from policy maker’s attempts to lower indirectly their various currencies. With interest rates predicted to advance aggressively over time, Gold will be the only go-to play!

The US$ currently is higher against the EUR -0.13% and CHF -0.20% and lower against GBP +0.10% and JPY +0.15%. The commodity currencies are mixed this morning, CAD +0.05% and AUD -0.15%. A swift kick in the teeth for loonie bears was felt yesterday. The CAD$ strengthened from a 5-year low after advances in global equities and higher crude prices signaled investors are stepping up purchases of riskier assets. The question of course, is this rally sustainable? Canadian Finance Minister is already prepping the public for weak employment numbers this Friday. Earlier this week the loonie fell to its lowest level in nearly 5-years on concerns that the global outlook may worsen led investors to take refuge in the greenback. Year-to-date it has declined -5.5%, after a record -18% loss last year vs. its southern partner. This global recession has depleted demand for commodities. Nearly 50% of all of Canada’s export revenue is commodity based. In Friday’s employment report, analysts expect a further loss of -50k jobs. Traders continue to look for better levels to sell the CAD$ in the short term.

The AUD$ retreated from its 1-week high after China said its trade surplus plunged as exports fell by a record, thus raising speculation that demand for the nations’ commodities will weaken (0.6445). Gains were also capped in yesterdays run up as we wait for the unemployment reports for down under. Already business confidence and falling job ads data impeded further strength of the currency as traders continue to look to sell into rallies at the moment.

Crude is little changed in the O/N session ($45.69 down -2c). As Mar. 15th approaches, investors continue to speculate that OPEC will announce another production cut. This is expected to shore up the price of crude and lower global stocks. This bullish commodity has only one supporter and that’s OPEC. They pump about 40% of the world’s oil and have cut production 3-times since Sept. to slow the slump in prices and prevent a glut on world markets. Already this week, Venezuela have said that the ‘dramatic drop in prices has been greater than warranted by the decline in global demand’. OPEC’s Secretary General said that they must remove another +800k barrels a day to reduce output by -4.2m since their objectives were established last Sept. Some analysts do not expect this bullish run to be sustainable despite the market anticipating that OPEC will cut production further at this weekend’s meeting. If they do decide to reduce production targets this month, the technical charts indicate that prices may rise to $55 a barrel. However, the world is awash with the black-stuff, it’s the storage problems that are causing concerns. This will lead to prices remaining under pressure in the longer term. Last week’s surprising EIA report showed an unexpected decline in US crude, this support cannot be sustainable as ‘demand destruction’ remains. Crude oil supplies fell -757k barrels to +350.6m vs. an expected rise of +1m barrels. Refineries operated at 83.1% of capacity, up +1.8% from the last report. A gain in global equities has reduced demand for the ‘yellow metal’ as an alternative investment for now. A greater appetite for risk will have the commodity testing the $875 support level. Expect traders to be better buyers on deeper pull backs ($902).

The Nikkei closed 7,376 up +321. The DAX index in Europe was at 3,843 down -43; the FTSE (UK) currently is 3,666 down -50. The early call for the open of key US indices is a tad higher. The 10-year Treasury yields backed up 7bp yesterday (3.00%) and are little changed in the O/N session. As anticipated Treasury prices fell as traders prepare for this week’s funding requirements. The Treasury will auction $18b in 10-year notes today and $11b in 30-year bonds tomorrow. Global indexes’ advancing has also put pressure on the safer-heaven asset class. Expect supply concerns to remain the order of this week!

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