Chinese fears curb EURO demand

All eyes have been on the Euro-zone finance ministers, who along with the ECB and IMF will continue the discussions in Dublin tomorrow, debating the scope for support of Ireland’s banking sector, if need be. The Irish will only take ‘the hand out’ if the banking crisis is too big to fix on their own. Providing fodder for market uncertainty is the Irish refusing to set a deadline for the end of talks in the markets opinion. Investors always welcome additional clarity, it will give them time to focus on the Spanish banking problems. Rising speculation that China will hike rates as early as this Friday and is prepared to implement price controls is again undermining global risk sentiment despite the EUR’s favorable bounce.

The US$ is weaker in the O/N trading session. Currently, it is lower against 10 of the 16 most actively traded currencies in a ‘subdued’ trading range.

There was a mixed bag of US data yesterday. US core-PPI came in unexpectedly lower last month (-0.6%), the first decline in twelve months and the sharpest drop in four-years. The y/y core producer prices advanced at a slower pace of +1.5%, down from +2.1 the previous month. The headline gain for finished goods (+0.4%) was mostly on the back of higher energy prices (+3.7%). It’s worth noting that the energy subcategory accounts for +20% of the index. Unlike the ‘core’ details, declines were widespread, led mostly by the vehicle sector. Analyst’s note that in the earlier stages of processing, prices received by manufacturers of intermediate goods advanced +1.2% (the third consecutive month of growth). Again the pace of growth for core prices has moderated of late, mostly due to the household balance sheets, the employment outlook and global softness. Today’s CPI is expected to report a similar scenario, stronger reasons for the Fed continuing its QE2 program

The US industrial production disappointed last month. The headline reported a flat print vs. market expectations of +0.3% gain. Excluding the volatile components (vehicles,
+1.6% and technology +0.0%), the core-industrial production fell -0.1%, m/m, and the second consecutive month to retreat. The losses were concentrated in utilities, electricity (-3.3%) and gas (-4%) and a modest decline in mining (-0.1%). On the flip side, manufacturing experienced broad based growth (+0.5%), led by autos (+1.6%) and machinery (+1.4%).

The important indicator for Fed watchers is the Capacity Utilization rate. Yesterday’s headline advanced a tick to 74.8% vs. the Sept print of 74.7%. Analysts believe the print is close to peaking if new-orders remain subdued. If this is the case, coupled with the soft employment situation, would lead one to believe that the Fed is expected to be on hold for most of next year. 

On the surprising side was the US homebuilders index edging higher this month (16 vs. 15). The market will take any good news. However, confidence remains depressed, well below the psychological 50-point break even level. The market is expected to continue to weaken through the remainder of this year. The underlying details were mixed, but of interest was their outlook for the housing market improved (2-pts to 25), adding to the gain registered in the previous report (5-pt).  Analyst’s also note that the prints are well below the highs recorded in the first six-months. The number of prospective home buyers inched up 1-pt to 12 (second consecutive gain and highest print in five-months). Overall, the housing markets remain depressed, with supplies of distressed and shadow inventories, weaker consumer demand, and a fragile employment situation continuing to blight the housing situation.

The USD$ is lower against the EUR +0.18%, GBP +0.25%, CHF +0.15% and higher against JPY -0.17%. The commodity currencies are STRONGER this morning, CAD +0.06% and AUD +0.02%. Weaker Canadian data yesterday, coupled with emerging market monetary tightening, commodities plummeting, global bourses seeing red had the loonie lovers seeking shelter. Canadian manufacturing sales declined in Sep. (-0.6%, m/m, vs. -0.9%), with sales ‘volumes’ (-1.4%) responsible for most of the retreat. This certainly does not bode well for the Sept. GDP print. Digging deeper, 13 of 21 sectors registered contractions, with the top decliners being railroads (-24.7%), autos (-10.4%) and textile (-3.6%). The biggest winners were leather (+15.7%) and petroleum products (+6.2%) and excluding autos, shipments were up +0.6%.The backlog of orders fell -1.9% and new orders dropped -4.9% on the month. The market is back to embracing the event risk factor, the Euro-peripheral debt problems. It’s interesting that the currency has not received any aftershock from the BHP railroad takeover of Potash by the Federal Govt. Expect the dollar index and commodities to continue to pressurize the CAD short term, unless growth sensitive currencies become in vogue rapidly.

The AUD has established a new two week low in the O/N session. As the leading commodity currency, the AUD is highly vulnerable to growing speculation that China will hike rates as early as Friday. The contagion fears from the fallout of the Irish banking crisis has been curbing demand for higher yielding currencies. Declines have been somewhat limited after a government revealed that wages rose in the third quarter by the most in almost two years (+1.1%). The RBA minutes earlier this week indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’ damping prospects for further increases. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). The market now expects the RBA to sit on its hands until next Feb. The slump in commodities and the general strength of the dollar has impeded the advance of growth sensitive currencies. Last week’s softer jobs numbers down-under has also justified the unwinding of profitable Aussie positions. The unemployment rate jumped to +5.4% from +5.1%, a six-month high as job seekers swelled to a record. Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Chinese variable (0.9779).

Crude is lower in the O/N session ($81.80 -54c). Oil prices tried earlier this week to creep higher after stronger economic indicators out of US and Japan could signal increased fuel demand. However, and instead the commodity has declined for a fourth day to trade at a two-week low, on fears that a Euro-zone’s deepening debt crisis coupled with emerging markets Cbanks tightening monetary policy would reduce demand for the asset class. The market remains on tender hooks, fearing that China may also attempt to rein in inflation, further reducing demand. Last week’s inventory numbers provided little support despite the unexpected decrease in stocks, 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. The ‘big’ dollars value will continue to influence prices despite fundamentals.

Gold continues to see profit taking on upticks. The yellow metals prices remain under pressure after South Korea beat China to the punch and hiked rates. Investors to date have been aggressively using the commodity as a hedge against inflation. Now that the emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. A stronger greenback has also restricted the demand for bullion as gold usually trades inversely to the dollar. Speculators are expecting European debt concerns to eventually provide support on these pullbacks, as Capital Markets shift their focus toward sovereign debt issues and away from QE2 debates. Year-to-date, the metal is up + 21.2% and is poised to record its 10th consecutive annual gain. For most of this year, speculators have sought an alternative investment strategy to the weaker dollar and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,335 -$3).

The Nikkei closed at 9,811 up +15. The DAX index in Europe was at 6,691 up +27; the FTSE (UK) currently is 5,682 +1. The early call for the open of key US indices is higher. The US 10-years eased 10bp yesterday (2.83%) and are little changed in the O/N market. After two days of plummeting prices and higher yields Fed rhetoric has stemmed the bleeding. Comments from NY Fed Dudley and the Fed’s Vice-Chair Yellen stating that they are not trying to weaken the dollar or push the inflation rate higher than 2% provided the market bid. Policy makers have come under a fair amount of criticism for their buyback policy and the market was pricing in the possibility of the Fed backing off. Today’s CPI data is expected to show inflation is slowing, proof that longer term yields should be lower.

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