Are Global equities providing us with ‘False Hopes’?

Green shoot’s rooting, recession abating, heightened risk appetite, growth! These are words that are getting more airplay now that Goldman and Intel have reported with results which are positive for the market. Two companies and the negative psyches are supposed to be trumped by the positives? Alas, a few well run companies are by no means an indication for the broader economy. We would all like it to be true that the end of the recession is upon us, however, Governments and Cbanks have many fires to put out, unemployment, credit issues and housing before we see any ‘new’ light. Be weary of false ‘illusions’!

The US$ is weaker in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘whippy and illiquid’ O/N session.

US Retail Sales declined again m/m after we eliminate autos and gas station sales (+0.3% vs. +0.5%). On the face of it, it’s the 4th-straight month that the dollar value of core-sales has declined. With access to credit remaining difficult and the negative wealth effect promoting hoarding and paying down debt, very little discretionary spending on other items when we have higher gas prices. The Fed’s go to variable, the consumer, is not using the stimulus being provided, households are avoiding new borrowings despite lower rates! Digging deeper into the report, we witnessed modest gains in food and beverages, electronics last month. But, already mentioned, motor vehicles and gas station sales led the way up +2.3% and +5.0% respectively. It’s worth noting that the volume of new car sales declined in the month, prices rose +2.0% in June. Spending on discretionary goods continues to weaken with furniture and furnishings posting its 4th-consecutive monthly decline. In hindsight, the data probably confirms that retail activity is ‘treading water’. The markets will need to wait a few more quarters before household consumption returns to spur economic growth!

As expected US PPI spiked higher on the back of higher gas prices (+1.8% vs. +0.9%). Analysts believe this to be a temporary blip, as prices have fallen since the beginning of the month. It’s worth noting that it was the strongest monthly gain in 18-months. Ex-energy, headline prices advanced a more modest +0.6% and core-PPI prices were up +0.5%. Digging deeper, energy prices jumped +6.6%, m/m, as gas prices ballooned +18.5% and residential gas also rising +2.5%. Food increased by +1.1%, while not surprising electricity, tobacco, computers and civilian aircraft prices declined last month.

The USD$ currently is lower against the EUR +0.80%, GBP +0.46%, CHF +0.87% and higher against JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.20% and AUD +0.86%. The loonie is on fire! All this despite the mixed fundamental data we saw yesterday. Monday’s more upbeat BOC survey combined with commodity prices advancing from their 2-months lows certainly has helped the currency’s cause. Some investors seem to have been got caught offside from the USD euphoria of late with short CAD positions being liquidated or pared back as the loonie has been the best performing currency over the past 2-trading sessions. Yesterday’s data showed that May Canadian Car Sales were up +1% as expected, but the surprise was a downward revision to April’s estimate that now show -1%, m/m, vs. the +0% first recorded. Net net, it was a weaker than expected report. Other data showed that Canadian Home Sales surged, on a seasonally adjusted basis sales jumped +31.5%, q/q, for the 2nd Q (a record
gain), after sales remained depressed in the 1st Q. This report will have no material impact on GDP growth figures for 2nd Q, with the stock of unsold resale tumbling, it has no direct impact on the Canadian economy (paper transfers). Inventories have been the scourge for this recession any depletion can only be good news for construction! Commodity based currencies will come under renewed pressure if commodity prices cannot maintain this positive traction of late. The loonies’ appreciation has been violent and swift. Do not be surprised to see some sort of retracement and USD profit taking.

The AUD managed to print a weekly high in the O/N session on the back of better than estimated US retail sales boosting demand for higher-yielding assets. Already this week we witnessed the Australian business sentiment index for last month posting a positive print, the 1st in 6-month (+4 vs. -2), which will probably convince RBA’s Governor Stevens to keep borrowing costs unchanged at their 50-year lows of 3%. With both equities and commodities finding some traction in Asia, higher yielding currencies will remain better bid. Risk aversion sentiment has shifted slightly, for it to remain we have to see how this mornings North American numbers bring us (0.7989).

Crude is higher in the O/N session ($60.35 up +83c). Optimism temporarily trumped fundamentals in yesterday’s morning trading and pushed crude prices higher for the 1st-time in 3-session. But, by late afternoon prices retreated on speculation that weekly government reports will show that US fuel supplies jumped as the recession cut demand. Already this week we have managed to print a new 2-month low and technicals point to the market threatening the $55 print. Last week industry reports showed an increase in US fuel inventories. Gas stocks rose +1.9m barrels to +213.1m, w/w, vs. expectations of an increase of +900k, distillates (which include heating oil and diesel) jumped +3.74m barrels to +158.7m barrels. Crude on the other hand came in very close to expectations, falling -2.9m to +347.3m. The market had expected a -2.8m decline. Recent fundamental data have led to concerns that the US stimulus program may not be working. Oil has retreated 19% from this month’s high. Technically, prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to be filling in that gap. With ‘demand destruction’ comes higher inventories and it’s speculated that this week’s inventory reports will further pressurize prices. Gold prices have been under constant pressure over the last few trading sessions as a stronger dollar and lower oil prices curtailed demand for the ‘yellow metal’ as an alternative investment. However, prices have managed to reverse themselves as Asian and European bourses have rebounded dragging most commodity prices along with them ($928).

The Nikkei closed at 9,269 up +7. The DAX index in Europe was at 4,860 up +79; the FTSE (UK) currently is 4,295 up +58. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 8bp yesterday (3.46%) and is little changed in the O/N session. Prices fell for a 2nd-consectuative day, but, not as deep as one would have expected, on the back of US retail sales rising more than anticipated last month. Some speculators are now questioning if the deepest recession in half a century is perhaps abating. The initial market reaction was to see investors shy away from the relative safety of US government debt. However, one should keep an eye on equities as any positive traction of this asset class continues to look tentative!

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