Abu Dhabi keeps Dubai World’s Islands afloat!

US Retail Sales, import prices, inventories and UOM sentiment all point to ‘normalization of US monetary policy’, whether the Fed or the administration like it or not! Even with rates on hold in the front end, a steeper yield curve reflects the ‘diminishing demand from investors anticipating faster economic growth and inflation’. The million dollar question is when do we implement ‘the’ exit strategy? Abu Dhabi has resuscitated global equities this morning, by giving a $10b life line to Dubai World to meet its immediate debt obligations. This will obviously help European Banks, who fear of further reprisals being bestowed upon them and giving once again temporary relief to the USD ‘bear’ this morning. The Tankan business sentiment amongst Japan’s largest manufacturers did not live up to Friday’s UOM headline. It advanced the least (-24 vs. -33) as companies have become more concerned that the JPY’s gains will erode future profits. This is the exact problem that the inexperienced Hatoyama’s Government is trying to overcome! Playing with the USD temporary strength by staying cautious seems a reasonable strategy at the moment.

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, yet illiquid’ trading range.

Friday’s US data was the impetus for a wild ride in the currency markets. US Retail sales beat all analysts’ expectations. Many believe that the headline print (+1.3% vs. +0.6%) states that the US consumer is more resilient than we have been giving them credit for! However, digging deeper, the data may actually be telling a different story. Firstly and historically, most of the gain was due to gas station sales which as we all know can be rather volatile in nature. Secondly, the prospects for immediate ‘future’ growth remain somewhat suspect, as salaries and disposable incomes have been moderating. Before, personal incomes relied heavily on government incentives and benefits. Thirdly, and rather significantly, holiday shopping seems to have drifted to Nov. to take advantage of the deeper thanksgiving discounts. For this reason alone, it would not be surprising to see a weaker print this month! Let’s not be too negative on the release. Can the printed growth be sustainable? What ever way you want to analyze it, consumers seem to be much stronger ‘this’ holiday season than ‘last’. Breaking the numbers down, the headline sales jumped +1.3%, m/m, and coming in at a much stronger print than last year’s -2.6% decline. In addition, while gas stations sales soared +6.0%, m/m, accounting for much of the surprise in the headline, ex-gas sales, total sales were still up a healthy +0.8%. Core-sales (ex-motor vehicles), rose slightly less than headline sales at +1.2%, as motor vehicles increased a further +1.6%, m/m. The retails sales data was backed up by the UOM consumer sentiment index, which advanced for the first time in three months on Friday (+73.4 vs. +67.4). Confidence once again is on the upswing, probably due to the fact that job cuts may now be slowing down. Stronger improved sentiment is a catalyst for supporting US retail sales and this alone may enforce the sustainability as we head into the first quarter of 2010.

The USD$ is currently lower against the EUR +0.24%, CHF +0.26%, JPY +0.36% and higher against GBP -0.14%. The commodity currencies are slightly weaker this morning, CAD -0.12% and AUD -0.10%. On Friday, Canadian new home prices rose less than expected in Oct. (+0.3% vs. +0.5%), but still increased for a 4-consecutive month. Digging deeper, the gains were in the house-only component which feeds into the replacement component of CPI. On a year-over-year basis, new home prices are still in negative territory! The loonie had been rapped on the knuckles last week and sits in the same boat as other growth and commodity currencies. The CAD is currently trading at the bottom of its recent tight range and in danger of losing further support at the USD is threatening to end the year on a high note. Last week the BOC shot a warning shot across the bow of the Canadian consumer. They said that recent rallies in equities and bonds may not be justified, and ‘that rising debt levels of Canadian households will make them more vulnerable when interest rates rise’. Carney said that ‘households need to asses their ability to service these debt obligations over their entire maturity’. Despite the BOC extending its commitment to keep borrowing cost low until well into next year, variable mortgage rate holders should be wary of a hike in long term yields despite the BOC’ remaining on hold. Expect liquidity to become a concern across the board as we close in on the holiday season. Again investors continue to be a comfortable buyer of the greenback on pull backs.

AUD managed to pare some of the sessions earlier losses after the Dubai Government indicated that Abu Dhabi was preparing to bank roll $10b of working Capital to help Dubai World meet its debt obligations. The AUD came under renewed pressure earlier in the session on speculation that the Fed may be moving closer to increasing borrowing costs after both Friday’s retail sales and consumer confidence headlines exceeded expectations. Despite growth currencies get a shot in the arm, capital markets remains focused on the US yield story. For now and until proven otherwise investors continue to be better buyers on dips. When will we see parity, first half of next year? (0.9120) or do we expect US rates to change the whole landscape sooner than we think?

Crude is lower in the O/N session ($69.48 down -39c). On Friday, Crude plummeted for an 8th consecutive day (the longest stretch in 6-years), as the dollar advanced vs. most its major trading partners, temporarily curbing investor appetite for commodities. Technically we managed to break down a significant support level, the $70 barrier. Will we be able to maintain the bearish momentum? Prices have dropped -11% this month on the greenback’s strength and rising fuel inventories. In the bigger picture, if the USD continues its month end buying, expect speculators to shy away from commodities. Last weeks’ EIA report showed that inventories climbed after refiners boosted their operations and imports fell. Oil stocks declined -3.82m barrels to +336.1m million last week vs. the market expectations of a gain of +600k barrels. On the flip side, gas stocks climbed more than forecasted and supplies of distillate fuel (heating oil and diesel) advanced for the first time in a month. Technically the report was a zero-sum game. Gas inventories rose +2.25m barrels to +216.3m vs. an expected increase of +1.6m, while distillate fuel increased +1.62m barrels to +167.3m. Refineries operated at 81.1% of capacity, up +1.4% points from last week and now at the highest level in 2-months. Two reason contribute to this, firstly, refiners anticipate greater future demand and secondly, the need to reduce stock before the end of the year because of tax consideration. Overall it was a modestly bearish report. Fundamentals continue to promote demand destruction. Various OPEC members have been rather vocal of late ahead of their meeting at the end of the month. They believe that prices are in ‘the right range and there is no need to reduce inventories’. Expect the USD’s direction to dictate price action medium term. Cannot say it loud enough, but support levels continue to look vulnerable!

Friday’s bargain hunting appeared after gold futures had plummeted. Over the last five trading sessions the ‘yellow metal’ has managed to fall close to a $107 drop from this month’s highs. The recent record rally required a healthy ‘lemming purge’ which we have just witnessed. Sellers beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,124). There has been a big pickup in demand seen in US physical gold and silver products last week even as prices were tumbling!

The Nikkei closed at 10,105 down -2. The DAX index in Europe was at 5,816 +60; the FTSE (UK) currently is 5,314 up +53. The early call for the open of key US indices is higher. The US 10-year bond backed up 2bp on Friday (3.52%) and are little changed in the O/N session. Stronger US retail sales and consumer confidence data again pressurized the longer end of the yield curve. 10-year product broke significant support levels at 3.50% and technically yields are in danger of approaching the 3.70-75% level as investors ‘want’ to believe that the US economy has truly turned the corner. Last week we witnessed the 2’s-30 spread widen out to 374bp, the most in nearly three decades. A steeper yield curve reflects the ‘diminishing demand from investors anticipating faster economic growth and inflation’. Are investors beginning to have their fill of US debt? Two possible reasons for the lack of interest, duration extending and secondly, the possibility of higher future rates.

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