Bear Market Rally?

Obama woos Congress last night, already identifying $2 trillion dollars of budget savings. Yesterday, Bernanke dismissed outright federal control of US financials in favor of a public-private partnership that the government would eventually exit over time. These actions are once again increasing investors risk appetite. Global equities have gotten off the floor, the fear of a Bear market rally is plausible, but, optimistic investors continue to seek a morsel of hope that the markets may be bottoming out and it’s safe to once enter the fray.

The US$ is weaker the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

The broad downturn in the residential US real estate market is alive and kicking. The S&P/Case-Shiller index for US house prices yesterday if nothing else remains consistent and managed to once again record another monthly low for Dec. of -18.5%, y/y. It remains the fastest drop on record throughout the top 20 US cities, fuelled by record foreclosures and plummeting sales. The index has successfully fallen every month for the past 2-years. All this is resulting in a vicious circle where record foreclosures are contributing to declining property values and household wealth, thus further crippling consumer spending which make up approximately 70% of the US economy. The overhang of inventories and the pace of the record foreclosures will continue to put pressure on future house prices. The effects of Obama’s rescue planes will not be felt or filtered through for sometime! Adding to the US domestic pain, confidence among consumers plunged to a record low this month (25 vs. 37.4). One should now expect spending to slump further as unemployment soars. This is the lowest reading in 42-years. Just when you think it could not get any worse, consumers get the stuffing knocked out of them. Even Bernanke speaking to the Senate Banking Committee yesterday did not ooze confidence. There were many ‘only if’s’ in his scenarios. ‘If actions taken by the administration, the Congress, and the Fed are successful in restoring some measure of financial stability (and “only if” that is the case), there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery. But he did go on to say that ‘downside risks probably outweigh those on the upside’. In hindsight his outlook was definitely the most negative of any of the testimonies he has provided to Congress over the past 3-years. The frightening part is that he does not seem convinced himself!

The US$ currently is lower against the EUR +0.10%, GBP +0.60%, CHF +0.15% and higher against JPY -0.14%. The commodity currencies are mixed this morning, CAD -0.02% and AUD +0.59%. Yesterday was oil settlement day in Canada, resulting in a disguising bid for the loonie and at the same time providing an opportunity to perhaps own the USD? Already this week Canadian retail sales fell at a pace that was double the expected decline in Dec. It was down -5.4% m/m, which translate to a -6.4% decline y/y (this is the largest contraction in 20-years and consistently widespread across all industries). Analysts are now embracing themselves for a larger hit to next weeks 4th Q GDP numbers. On the other hand these numbers provide further proof for Governor Carney at the BOC to justify slashing rates another 50 bps on Mar. 3rd (1%) as the Canadian economy deteriorates at a quickening pace. One should expect this USD weakness an excellent opportunity to sell the CAD$ at advantageous levels.

The Australasian currencies advanced in the O/N session as equity markets rallied after the Fed’s Bernanke eased concerns that the government may take over or immediately nationalize certain financial institutions. It’s worth noting that both currencies, AUD and NZD, are trading near the highest levels in over a month vs. JPY on the back of Japan’s exports plunged 46% last month, thus widening its trade deficit. The AUD (0.6536) also got support after 4th Q wage growth surprised to the upside (+1.2% q/q), thus boosting the case for the RBA to slow the pace of interest-rate cuts (3.50%).

Crude is higher O/N ($40.26 up +30c). During the morning session yesterday Crude prices once again retreated on the back of disturbing US consumer confidence numbers which imply that consumer spending is expected to plummet further. Also adding weight, analysts expect today’s EIA report to indicate that weekly inventory levels will show that US supplies rose by +1m barrels w/w. Last week US crude inventories fell -138k, the only decline so far this year. But once again the depth of this global recession continues to contribute to the demand destruction theory. But with global equities finding it difficult to maintain a consistent positive traction; by default such negativity will weigh on energy prices for the time being despite positive equity prices dragging crude prices higher by days end. Last weeks EIA report is truly the only positive piece of data that has prevented crude from falling out of bed. Weekly supplies fell -138k barrels to +350.6m vs. an anticipated increase of +3.2m barrels. It is logical to conclude that this years OPEC production cuts are making an impact. Imports of crude into the US declined -859k barrels a day to +8.79m, the lowest level since Sept. 2008. There will be no sustainable rally witnessed until we see global demand increase or inventory levels ‘consistently’ pared due to the OPEC production cuts. Year-to-date, crude is down 20%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. With the psychological and technical level of $1,000 an ounce achieved last week, investors have been happy taking their gold profit and currently reducing their exposure. With the RSI above 70 speculators are happy to look for better levels to own the ‘yellow gold’ ($957).

The Nikkei closed 7,461 up +192. The DAX index in Europe was at 3,963 up +68; the FTSE (UK) currently is 3,865 up +49. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 3bp yesterday (2.80%) and are little changed in the O/N session. Despite another record amount of US FI product needed to be issued this week one would have expected traders to be more aggressive in cheapening up the curve to attract outside interest. But, Bernanke’s testimony on the US economy being in a ‘severe’ contraction and warning that the recession may last into 2010 unless policy makers stabilize the financial system had the longer end of the curve better bid. A record low consumer confidence number does not help the situation. The US treasury plans to sell a record $32b of 5-ys notes Wed. and a record $22b of 7-ys notes Thurs.

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