Bernanke demands Banks to identify other ‘risks’!

We have witnessed a 37% equity rally in 9-weeks. Why? It may be true that the pace of economic decline is no longer as ‘negative’ as it was at the peak of the post-Lehman credit contraction. But, the reality is that employment, personal income and retail sales continue to spiral downwards. This tentative sign of a pause in economic declines is promoting ‘green-shoot’ economics (the new buzz word). How many of us have invested in this rally? And are we witnessing the beginning of the end of the ‘bear’ market rally? The fall from grace could be much quicker!

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

The average number of weeks unemployed ticked up last month to +21.4, a new 60-year high. Data like this is getting overlooked and lost in the recent optimistic stampede. The length of job losses is a tougher sell than ‘green shoot economics’ so it seems! There has been many financials announcing their intention to raise further capital. The good news so far is that they seem to have little problem in raising funds. However, one should be concerned about the ‘flaws’ of the stress tests, this funding may not be adequate enough. Forex-land is happily consolidating after the large moves of last week. There has been some considerable profit taking in JPY crosses and one gets the feeling that we are only biding time for the next leg down!

The USD$ currently is lower against the EUR +0.49%, GBP +0.47%, CHF +0.45% and higher against JPY -0.23%. The commodity currencies are higher this morning, CAD +0.27% and AUD +0.62%. It was not a surprise to see the loonie pare some of last Friday’s wild gains vs. its biggest trading partner. Canadian headline employment data certainly surprised us by a ‘long country mile’. The skeptics would not be surprised to see this number aggressively revised down next month. With the greenback clawing back some of its multi-month lows and commodities fighting against a headwind, it’s only natural to see some of last weeks CAD gains to be given up. The country’s fundamentals are strong when compared to other G7 partners, but it exports 70%+ of its goods and services down south and 50% of that revenue is commodity based. With the aggressive run up over the past 5-trading sessions, speculators would prefer to see better levels to add to their long CAD positions. Historically, the 1st trading day after an NFP release tends to be rather quiet. This morning’s Trade balance data should provide the markets with direction. The stronger data will allow the BOC to breathe a sigh of relief. The market can expect ‘no’ additional measures to be implemented any time soon by Governor Carney. Despite the move been swift and violent, the ‘trend remains your friend’!

The AUD advanced as investors speculated that this global equity market rally since Mar. continues to have legs, thus boosting demand for the higher-yielding commodity assets (AUD, NZD and CAD).assets. Fundamentals look good, the currency managed print another 7-month high in the O/N session as deep recession fears subside (0.7630).

Crude is higher in the O/N session ($59.45 up +95c). Oil prices felt the pressure yesterday as the market digested last weeks +10% rally. Speculators believed that the rally was over exuberant. They expect US inventory levels to continue its record climb, resulting in demand destruction, which will pressurize prices once again. The advance of the greenback from its multi-month lows combined with the Chinese CPI falling -1.5% last month (risk of deflation) certainly does not help. Fundamentals show that supplies are high and rising and demand is low and falling, this cannot support the black stuff in the short term. Last weeks EIA crude reports revealed that inventory numbers climbed less than forecasted, but once again managed to print a new 19-year record high. The release was ‘bullish’ in respect to the other reports of late. Crude supplies rose +605k barrels to +375.3m, but less than the forecasted +2.5m gain. Meanwhile gas supplies fell -167k to +212.4m vs. a +500k gain and distillate fuel (heating oil and diesel), rose +2.43m barrels to +146.5m, the highest print in 32-months. One should expect OPEC rhetoric to intensify ahead of this months meeting. With oil prices easing yesterday, Gold suffered as speculators fear of inflation diminished, but this morning with the Greenback trading heavy, there has been renewed appetite for the ‘yellow metal’ ($919).

The Nikkei closed 9,298 down -153. The DAX index in Europe was at 4,909 up +42; the FTSE (UK) currently is 4,452 up +16. The early call for the open of key US indices is higher. The 10-year Treasury’s eased 3bp yesterday (3.21%) and are little changed in the O/N session. Treasury prices rallied as the Fed once again continues its buy back program. This week we will witness a total of 3-buy-backs of varying maturities (it will be the 17-19 occasion since conception in Mar.). Also leading the FI rally is dealer speculation that the Fed must increase its purchase program as higher yields send mortgage rates above the 5% mark. Rising long term yields will inhibit economic growth. We are witnessing the clash of their buy-back program and the US governments borrowing requirements. The requirements are starting to overwhelm the market as noted by the $14b long bond auction last week where speculators we able to push yields aggressively higher. The main problem is with the abundance of supply and the pickup in economic activity. Dealers will not want to support the longer end of the curve indefinitely.

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