‘Tumultuous Thursday’-Bring it on!

Why are we surprised? Do we really believe that all is good amongst US financials? The BOFA headline has hurt equity futures, cross-yen and risk currencies. $34B!! And they supposedly are one of 10? How conservative is the number? More importantly, how will they raise the capital? And who in their right mind would want to invest? It’s no wonder that theses stress tests have been delayed, if I was a BOAF executive I would have fought to get that headline print down. The frightening part is that BOFA is probably one of the healthier financials for the longer term. Expect rating agencies to be waiting in the wings to downgrade some of its competitors. All smoke and mirrors!!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Once again data this week continues to surprise the market and fuel this optimism theme that we may be turning the corner. Yesterday’s US ISM non-manufacturing PMI recorded the best reading conditions in 7-months (+43.7 vs. +42.5), which lends further credence to a bottoming in the economy. However, analysts note the various sub-sectors are producing some uneven effects. Services remain in contraction mode, but the pace of decline is lessening. New-services orders surged +21% last month to +47.0 (remember +50 is the breakeven watermark) and surpassed the +14.5% gain in new-manufacturing orders. New export-orders accounted for most of the gain, rising to +48.5 (the highest level in 7-months), while imports also the same advance. Not to be outdone, inventories advanced (3rd-consecutive month), but still showed a contraction, suggesting businesses are still working to reduce unwanted inventory levels. The pace of job losses remains aggressive, but the speed has eased over the last 2-months! The market continues to expect a similar monthly job loss reading at this Friday’s NFP. Finally, prices being paid are still falling, with no material improvement in the pace of declines over the past month.

The USD$ currently is higher against the EUR -0.13%, GBP -0.34%, CHF -0.20% and lower against JPY +0.53%. The commodity currencies are weaker this morning, CAD -0.15% and AUD -0.36%. The loonie managed to print a temporary 6-month high yesterday as global optimism believed that we may have seen the worst of this recession helped to promote the ‘carry’ and riskier trades. If the equity market can keep the faith then by default commodity currencies will surely get another leg up in the short term. However, stress tests rumors is expected to disrupt bourses today, until all is revealed tomorrow afternoon speculators will want to exit some of their riskier positions, hence the aggressive reversal in commodity currencies like the CAD in late trading yesterday. Technically there is good market support for the USD at the 1.1680 level. The move has been quick and brutal. Do not be surprised to see some further profit taking and unwinding of riskier trades today!

The AUD has fallen from its 6-month high in the O/N session on concerns that US banks included in the stress tests will be forced to raise new capital which would curtail demand for higher yielding assets. The currency has been on a tear over the last 2-months as investors believed that the worst of this recession was over. Prudently the markets have been paring its positions ahead of any surprises tomorrow (0.7395).

Crude is higher in the O/N session ($53.88 up +4c). Oil traded little changed yesterday, eroding some of the early morning losses as consumer sentiment remained upbeat, this was expressed by higher foreign bourses, couple it with an underpinned greenback aided commodities. This morning’s EIA report once again is expected to report another record inventory high. Analysts are anticipating an increase of +2.5m barrels. The market is dealing with the forward thinking mentality rather than any ‘overhangs’ that may be on the books, like the anticipated 19-year high inventory level. This newfound optimism heavily favors forward thinking data. As noted last week, we are technically range bound, all because of the bigger picture, record inventories, H1N1 potentially curtailing travel demand and renewed optimism that the worst may be over. Last weeks EIA report was definitely bearish for the neutral observer. Supplies rose +4.05m barrels to +374.7m barrels vs. an expected increase of +1.8m barrels. This headline print prompted Libya’s top oil official to state that OPEC will ‘keep all its options open, including a production cut before the end of the months meeting’. Like all fellow members, they remain concerned with the overhang of prices with these elevated stock prints. Since Sept. OPEC members agreed to slash +4.2m barrels from its daily production and to date 83% of members have been compliant. Gold continues its rally as a safe heaven alternative ahead of this week supposed stress tests results on tomorrow ($901). Analysts point to strong gold fundamentals that should push prices beyond their recent highs.

The Nikkei closed 8,977 up +149 (holiday). The DAX index in Europe was at 4,853 down -50; the FTSE (UK) currently is 4,336 up +93. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 1bp yesterday (3.15%) and is little changed in the O/N session. Bernanke’s comments kept the market on its toes in the morning session when he was testifying to congress. He indicated that the economic contraction may be slowing, and also was conscious of any future financials concerns curtailing economic growth. Treasuries are experiencing a 7-week decline (the longest loosing streak in 2-years) as the Fed prepares again to issue more debt. Yesterday we had $35b 3’s, today we have $22b 10’s and tomorrow we get $14 7’s. Expect dealers to cheapen the curve, with 10’s having a chance of trading towards 3.25%!

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