Swine Flu heightens fear in FI and FX!

A potential pandemic swine outbreak is sending fear throughout capital markets in the O/N session. Investors have been diligently strapping on risk aversion trades, causing the FI asset class to rise and the greenback to become better bid. The global economy is not getting a break, if it’s not Bank’s toxic assets or stress testing funding concerns we are plagued with something else. We overcame mad cows and SARS, all the market is doing is the prudent thing, efficiently getting ahead of the curve. G7 sees the light. Will we share their enthusiasm when we get to see the stress test results publicly next week?

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 ‘whippy’ trading range.

US Durable orders were once again weak on Friday (-0.8% vs. -1.5%), however analysts believe there is a glimmer of hope in the details. Headline durable goods orders declined at a slower than expected pace last month, but downward revisions to the previous month’s gain (+3.4% revised to +2.1%) and a slightly worse reading for Jan. make for a weaker than expected overall Q for new orders. Despite all this, analysts believe that the ‘glimmer of hope’ lies in the strength in the core non-defense capital goods for the 2nd-monthly gain in a row, but be warned it is very narrowly based. Almost every category posted a decline in orders, with primary metals out in front, falling -3.2%, m/m. However, fabricated metals (-1.3%), machinery (-0.1%), computers (-0.1%) and transportation (-1.4%) all experienced losses. It’s worth noting that despite the overall weakness in orders and shrinking profit margins, business investment seemed to get a lift from electrical equipment orders, pushing the non-defense, ex-aircraft capital goods component up +1.5%, m/m (the 2nd consecutive monthly increase). Vehicles and parts orders dropped -1.7%, m/m despite an +8.8% increase in vehicle sales during the month although non-defense aircraft orders rose +4.4% m/m, in line with an increase in Boeing aircraft orders. Defense aircraft orders remain volatile, falling -14.4%, m/m, after a +36% increase in Feb.

Other data on Friday showed that US New Homes sales rose but remain solidified in the mid +300k range (+356k vs. +358k). The print has been hovering around these levels since mid Nov., the peak being nearly +1.4m in 2005. Months’ supply finally fell below 11 for the 1st-time since July as Dec., Jan. and Feb. sales were revised up while housing starts continue to decline, thus keeping new home inventories on the downward trend as well. However, even at 10.7 months, there is a large amount of new homes for sale on the market that need to be sold before housing construction is likely to move steadily higher and contribute positively to GDP growth. Digging deeper, one notices that the median price continued to decline, leading to a small improvement on y/y rate, but remains down -12.2%.

The USD$ currently is stronger against the EUR -0.62%, GBP -0.70%, CHF -0.57% and weaker against JPY +0.41%. The commodity currencies are weaker this morning, CAD -0.53% and AUD -1.11%. The loonie advanced for a 4th-week last week, the longest winning streak in 7-months as global equities and commodities pushed higher on Friday. Mind you the BOC Carney’s surprise of no immediate quantitative easing or credit comments caught the market flatfooted and in off-side position the previous day. The commodities advance only rubbed salt into their wounds and speculators have been methodically liquidating the short CAD positions ever since. With the greenback falling out of favor across the board has also strengthened the loonies cause. Risk aversion trading strategies seems to be weaning and depending how the market reacts to ‘stress test’ rumors and swine flu, look for the USD to be sold on upticks in the short term. However, this CAD has appreciated very quickly. Do not be surprised to see some consolidation and profit taking early this week.

It comes as no surprise that the Mexican swine flu fears has once again pressurized the AUD for the 1st-time in 3-trading sessions. The fear that the global economic recession will deepen has investors paring most of their recent riskier acquisitions and seeking some risk aversion trading strategies to benefit their portfolios. Lawrence Summers comments that US economy will shrink ‘for some time to come’, combined with the Japanese government lowering their output forecasts does not help the currency’s plight at the moment (0.7153).

Crude is lower in the O/N session ($49.47 down -208c). Crude prices advanced for a 4th day on Friday as rallying global equities and a weak greenback outweighed concerns about lower demand and record weekly inventory levels. A favorable response from the G7 stating that we ‘may’ have experienced the worst pushed crude 4% higher on Friday. Stronger German business confidence index numbers had pressurized the greenback vs. the EUR and by default led to higher commodity prices. But, this scenario has been handily reversed in the O/N trading session. A potential Pandemic fear is driving oil prices much lower in this opening session. Last weeks EIA inventory report was an ugly bearish headline for the black-stuff, its failure to go down typifies investor sentiment that believes we may have see the worst of this global recession. The report showed that stocks rose +3.86m barrels to +370.6m (the highest level in 19-years) vs. an expected increase of +2.5m. It was a bearish report that revealed that supplies were up in every category. The 4-week total average fuel demand slipped -6.5%, y/y to +18.5m barrels. Gas stockpiles rose +802k to +217.3m vs. an expected decline of -700k barrels. Finally, the supply of distillate fuel (heating oil and diesel), climbed +2.68m barrels to +142.3m, the biggest increase since the 1st week of this year. According the Secretary General for OPEC (they supply 40% of the world’s oil), el-Badri said yesterday that they will reduce oil production again if necessary to support prices. OPEC next meets on May 28th. So far the organization has had 83% compliance to its production cut quotas by its members. Gold remains better bid after a report revealed that China has slowly and systematically increased its reserves of the ‘yellow metal’ over the last few years. It’s up +76% since 2003. Be weary of the IMF needing to raise cash for short term projects, they have 3500+ tons of the precious metal to dispose of ($915).

The Nikkei closed 8,726 up +18. The DAX index in Europe was at 4,612 down -61; the FTSE (UK) currently is 4,123 down -32. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 4bp on Friday (3.00%) and aggressively eased in the O/N session by 6bp (2.94%). Treasury prices managed to print the highest yield since the buy back’s were announced in the middle of last month on Friday. Despite the market remaining overwhelmed with supply announcements, fear has given the FI asset class a leg up. This week the US treasury will sell another $101b of 2’s 5’s and 7’s. The $300b buy-back program on its own is doing very little to keeps rates low!

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