Banks ‘Mum’ on stress tests!

Global stocks received a boost yesterday from a number of sources. Firstly, a positive article in the NY Times stated that all 19-US banks subjected to FDIC’s stress tests to determine their viability will pass the review, even if some lenders require additional capital. Perhaps US banks may be healthier than originally anticipated or is this just ‘window dressing’ to fuel consumer confidence? Secondly, good ‘old’ Wells Fargo earning $3b in the 1st Q topping the streets estimates added further momentum. Thin markets and an early close were capable of pushing the EUR to extremes yesterday just before traders left for the long weekend, a nice Easter present, squeezing all those longs out!

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 ‘subdued’ trading range.

Some surprise in yesterdays ‘slew of data’ this side of the pond. US trade will contribute positively to the 1st Q (-26b vs. -36.6b). Digging deeper a fascinating picture is evolving. One notices that the speed and breadth of erosion in imports reflects a very weak US domestic economy that has analysts revising the decline for the 1st Q. Exports rose +1.6%, while imports fell -5.1% in Feb. which led to a much bigger than expected improvement in the deficit headline of -$26b. The export rise was fuelled by the pharmaceuticals, telecommunications equipment and autos sector. The drop in imports however was broadly based. Other data showed that US Initial jobless claims remain range bound, as last week’s claims came in at +654k, down from an upwardly revised pace of +674k claims the previous week. But, it was disappointing to see continuing claims come in higher than expected at +5.84m, with the previous week also being revised higher. This is added proof that the US unemployment rate is pushing towards that psychological +10%!

King at the BOE kept the benchmark lending rate unchanged at +0.5% and reiterated that they will continue its 3-month program to purchase $110b worth of Gilts in an attempt to ease credit markets and bolster the economy.

The USD$ currently is higher against the EUR -0.24%, GBP -0.21%, CHF -0.31% and JPY -0.03%. The commodity currencies are mixed this morning, CAD -0.19% and AUD +0.09%. A mix bag of Canadian data was witnessed yesterday. Unemployment losses were widespread on an industry basis. The ‘goods’ producing sectors erased -62.6k positions (-34k manufacturing, -18k construction and -10.5k natural resources), while service jobs grew by +1.3k (declines in finance, insurance and real estate services totaled -19.8k, which was offset by gains in education and support services). Other data showed that Canada’s overall trade balance was flat +$0.1b vs. the expectations of a small deficit. Exports and imports both advanced. Exports climbed +5.2% and it was all volume strength. Volumes were up +7% while export prices actually fell -1.7%. Import strength, however, was mostly on price effects as import prices climbed +0.9% while import volumes climbed +0.2%. Bottom line, the data looks good for growth, however its ‘rear-view mirror data’. The loonie advanced as global equities and commodities positive movements encouraged risk taking in riskier assets. BOC Governor Carney will announce at the end of this month a plan that would ‘flood banks with cash to halt the hoarding of capital and expand lending’. We have witnessed other currencies depreciate significantly when their governments entertained quantitative easing methods (BOE, BOJ, Fed). For now look to buy USD on pull backs.

Despite weaker fundamental data down under over the past week, the currency managed to advance as Asian stocks yesterday. This has raised speculation that investors will continue to seek higher-yielding assets on pull backs (0.7184).

Crude was higher in yesterday’s session ($52.24 up +286c). Crude is such a fickle commodity to trade. Prices advanced yesterday as investors speculated that with equities again showing signs of life has investors wondering that economies will stabilize and that will fuel demand for the black stuff. Couple that with the weekly EIA report showing a smaller inventory gain than the earlier API industry report can only be good for this sector. Inventories increased +1.65m barrels to +361.1m last week, while the API report said that stockpiles jumped +6.94m barrels (the highest in 20-years). The bullish report does provide market support but with inventories approaching record levels one cannot get too bullish. It is the 24th gain in 28-weeks. Do not expect the bullish movement to be sustainable as traders are concerned that the IEA will probably lower its global demand forecast again this month because of slowing world economic growth. Until we see inventories decline substantially, there will not be a sustained gain in prices. Industrial reports continue to show that rising oil inventories and falling demand signal that the worst of the recession may not be over. Gold remained under pressure yesterday as equities stayed the course which eroded the appeal of the ‘yellow metal’ as an alternative investment ($881).

The Nikkei closed 8,964 up +48. The DAX index in Europe was at 4,491 up +133; the FTSE (UK) currently is 3,983 up +58 (yesterday’s numbers due to the holiday). The 10-year Treasury’s backed up 3bp yesterday (2.89%) and are little changed in the O/N session. Treasuries were cheapened by traders ahead of the 10-year $18b reopening which drew a yield of 2.95% within the historical 2.2bp over market at pricing. There was a big ‘indirect’ interest, which provided a bid to the market afterwards. Now let’s enjoy the holiday weekend.

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