Equity signs of a Bear market rally ending!

Emerging equity markets are down -10% from their yearly highs. The Russian Micex Index has declined more than -20% from this year’s peak and has just become the world’s 1st-benchmark to enter a ‘bear’ market since global stocks began rallying in March! Is the current equity market sell-off a correction within its ‘new uptrend’ or has the market finished its ‘bear market rally’?

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

The focus remains on the upcoming FOMC meeting. There are two trains of thought in this non moving environment. Firstly, some individuals expect the Bernanke and his policy makers may discuss ‘an exit policy’ in their statement. However, with the World Banks findings, low global rates are most likely to remain for some time. So, secondly, there is a risk that the Fed will find some verbal way of strengthening their commitment to low rates. In fact the status quo will remain until the next meeting! The EUR is expected to come under further pressure as fundamental data remains weak, in reality the diversified European Union is playing catch up with all the bad news! This will lead to further vulnerability of the currency, especially on the crosses.

The USD$ currently is weaker against the EUR +0.49%, CHF +0.66%, JPY +0.58% and lower against GBP -0.66%. The commodity currencies are stronger this morning, CAD +0.17% and AUD +0.00%. The loonie managed to print new monthly lows yesterday as the USD aggressively advanced against all its largest trading partners (except Japan) on the back of the World Bank’s negative comments on this recession. It seems that ‘green shoots’ are not rooting, which has had a negative impact on commodities and by default a negative impact on higher yielding commodity based currencies. With lack of liquidity and no direction from ‘no data’, it took very little to push the CAD about. The euphoric rise of the loonie since March has hinged on ‘green shoot’ economic theory and the rampant rise of commodities. In reality, the market has very much got ahead of itself and is easily squeezing weak long CAD positions out. This week’s market focus will be on the FOMC communiqué tomorrow and how receptive the market will be to the 3-refunding auctions. BOC governor Carney will speak again this morning, already he has indicated that ‘Canadian households are facing rising stresses because of increases in unemployment’, which will not be currency positive in the short term. With commodities and equities under pressure and risk aversion the dominant trading strategy, expect the loonie to falter again in the short term. On USD pull backs dealers will want to sell the CAD.

The AUD continues its downward spiral, especially vs. the JPY, on speculation that Cbanks will be compelled to keep borrowing costs low for much longer after the World Bank predicted that this global recession will be deeper than first believed (-2.9% vs. -1.4%, y/y). Prices for commodities and risk-averse trading strategies will have investors wanting to see the currency on upticks (0.7858).

Crude is lower in the O/N session ($66.73 down -73c). Oil remains under pressure mostly on the back of the last week’s EIA report and on comments by the World Bank who believe that this recession will be deeper than originally anticipated in March (to contract -2.9% vs. -1.7%). The strength of the greenback is also dissuading investors from investing in commodities as an inflation hedge. Last week’s EIA report showed a bigger-than-expected gain in supplies of motor fuel. Gas inventories climbed +3.39m barrels to +205m, w/w (the biggest increase in 6-months). The increase was more than 6-times bigger than analysts had predicted, all in time for the holiday driving season in the US! On the flip side, crude oil stocks declined -3.87m barrels to +357.7m, double expectations. A bearish report for commodity prices, despite the fall in crude, over the next couple of months expect the market to focus on the driving season that ends on US Labor Day. Global concerns on the longevity of this recession continue to weigh on energy demand and by default prices. This market is all about the negative correlation of commodities and the USD’s movements. The strength of the USD in O/N markets continues to reduce the demand for the ‘yellow metal’ as an alternative investment for hedging purposes ($918).

The Nikkei closed 9,549 down -276. The DAX index in Europe was at 4,720 up +27; the FTSE (UK) currently is 4,447 up +13. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 8bp yesterday (3.71%) and are little changed in the O/N session. Prices advanced for a 2nd-straight day after the World Bank revised its March reading for global growth or lack there of. This will obviously pressurize the Fed to keep rates close to zero for awhile longer. Expect dealers to cheapen up the curve despite equity markets remaining under pressure as the US Treasury will begin this weeks auction later this morning ($40b-2, $37b-5 and $27b-7’s). Its tomorrow’s 5-year auction that will be interesting, I wonder how much appetite there will be for product ahead of the FOMC communiqué.

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