Ben you are doing us proud!

With a stronger than expected US earning’s season, a few financials loan loss provision concerns (Wells, BoA etc.), hedge fund managers with so much cash on the sidelines are dominating every pull back in the equity markets. Just when you think we will see a retreat, off she goes! Ben has held firm and his performance in navigating the economy warrants another 4-year nomination according to some of the Banking committee that he gave his testimony to this week. Investors and Bankers around the world would sigh with relief. Any competition for the job would not have the global confidence backing!

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

Not everything was doom and gloom yesterday, despite the lack of US data (this morning we have a plethora of it), the HPI managed to book the smallest decline in 10-months. Following the ‘less bad is good theory’, the freefall of housing prices may be abating. Prices declined -5.6% in May, y/y, and managed to rise +0.9% from April (the market had expected a -0.2% drop m/m). The reason for the gains was that the number of distressed sales dipped. There were 5-US regions managing to show increases. Of course, this is the worst housing slump on record fueled by record foreclosures and job losses dissuading potential buyers. From its highs back in middle of 2006, house prices have been slashed close to 40%. Bernanke and Co. want to keep rates as low as possible for as long as possible to ‘spark a housing recovery’. One data point is not a trend, but it’s a start! Obama government has pledged to spend $275b to keep Americans in their homes. They are doing this by offering incentives to servicers, in some cases modify terms for delinquent borrowers or refinance mortgages that exceed the value of homes. It’s the pace of falling behind on their payments that administrators should be concerned about, uncertainty about job security and an unemployment rate about to break the +10% psychological barrier will surely provide more downward pressure.

The USD$ currently is weaker against the EUR +0.15%, GBP +0.34% and stronger against the CHF -0.07% and the JPY -0.89%. The commodity currencies are mixed this morning, CAD -0.18% and AUD +0.45%. Yesterday we witnessed Canadian retail sales growing more than double the original estimate (+1.2% vs. +0.5%), strong proof that the consumer may be coming back from the dead after a few dismal months. Headline gains were reported in almost every category, apart from clothing. Economists, like any analyst, remain concerned on two fronts for the data. Firstly, despite price adjusted sales rebounding, the stronger headline may be attributed to the spike in auto sales which surged over +3% last month. Secondly, with continued job weakness, uncertainty and wage disinflation, one wonders if this strength is sustainable, especially since higher prices accounted for a large share of the increase. The data falls very much in line with the BOC’s Governor thinking, who said earlier in the week that the economy will shrink less this year than their April predictions (-2.3% vs. -3.0%). The currency has been one of the strongest amongst the G10 countries over the past month. With investors shying away from risk adverse trading and coveting riskier assets coupled with commodity prices ‘not falling off a cliff’ has the loonie better bid on USD rallies at the moment. In no time at all and the BOC will probably contemplate currency intervention as global markets continue to embrace the loonie. The rapid rise of the currency has certainly slowed down Canada’s pace of growth.

Australian CPI rose in the 2nd Q (+0.5% vs. +0.1%) on Wednesday, fueling the belief that the RBA has finished lowering interest rates. With the US earnings reporting season being largely positive, we have seen equities strengthen and risk appetite increase, especially in the Asia. The AUD is stronger in the O/N session as investors are willing to own higher yielding assets once again and sell JPY especially (0.8191).

Crude is little changed in the O/N session ($65.50 up +10c). Oil yesterday fell for the first time in 6-days after the API on Tuesday afternoon reported that crude supplies gained w/w (+3.1m barrels to +349.9m). It was the firstly weekly increase since April. On the other hand, the weekly EIA report showed that inventories fell slightly less than expected (-1.8m barrels vs. -2.1m), while gas and distillates showed smaller than expected builds (+1.2m vs. +1.5m). Refinery utilization fell by -2.1% to +85.8% of capacity, more than expected. The crude numbers provided a sharp contrast to the API’s reported crude build. But, the refinery run cut of -2.1% was consistent in both reports and should provide further bearish implications for oil prices. Basically we will again have to rely on equities and currency trends to anticipate any directional meaning. Technically, demand destruction is not supporting higher fuel prices. Earlier this week, the Chinese refiners boosted their processing levels to a 16-month high and this temporarily aided the price. China (the 2nd largest oil consumer) raised their operating rates for an 8th-straight week to +85.12%. On the face of it, the Chinese economy seems to be responding positively to their economic stimulus packages. The black stuff has advanced +44% this year and +6% alone last week. Green shoot economics has led to higher equities and higher oil prices. Strength is highly dependant on advancing equities! Gold traded under pressure yesterday as the demand for the ‘yellow metal’ as an alternative investment wilted on the Fed’s interest- rate outlook and the temporary rise in the dollar ($952).

The Nikkei closed at 9,792 up +70. The DAX index in Europe was at 5,124 up +3; the FTSE (UK) currently is 4,487 -6. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up5bp yesterday (3.54%) and are little changed in the O/N session. On Tuesday, Bernanke did not disappoint FI traders, his tempered inflation views coupled with keeping interest rates exceptionally low’ for an ‘extended period’ saw the bond market aggressively rally. Yesterday, the US yield curve steepened 4bp (2’s/30’s 256-260). The long end of the curve had rallied the most in 2-months after his initial comments and entered into overbought territory, so investors sought profit taking. From a technical perspective, bonds are pointing to lower yields.

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