China is our savior? But, it’s entering a ‘bear market’!

We want to believe, but, this day-over-day changing of the minds is giving macro-trading theorists a headache. Various asset classes are trading as if we are passing around a ‘hot potato’. No-one wants it! There is no true conviction, temporary conviction, but not true. The Shanghai Composite index was down another -4.3%, our ‘savior’, is now in a bear market! From its official yearly high on Aug. 4th, it has fallen -20%. We should all be worried, where are our pull-backs? Governor King lost again 6-3 (home game) in this morning’s MPC minutes. He wanted to increase the BOE buy-back amount, but was voted down. Single handedly he has weakened sterling, a currency no one wants short-term! Be weary of the Swiss, the government will probably place their UBS shares soon. That’s given a bid to the currency and the shares themselves. However, the not so subtle SNB will do anything to keep their currency weak. One can expect anything vs. CHF to snap back!

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 ‘volatile’ trading range.

Yesterdays’ US data was dovish, with weaker than expected US housing starts and softer than expected producer prices. The Housing print (581k vs. 587k) was encouraging, as it continues to soften the sensitive nature of inventories. Permits on the other hand have advanced nicely form the 498k trough in Apr. to the 570k mark in June, but, managed to slip last month to 560k. This is further evidence that the trend will have a 5-handle over the coming months. Digging deeper, multi-family starts drove the headline decline in total starts, while single family housing starts ticked higher for the 5th-consecutive month. Disappointingly, singles volumes remain low at 490k. It’s worth noting that homes under construction continue along the downward path are consistently spread across single and multi-family homes.

Producer prices fell (-0.9% vs. 1.8%) more than expected last month as gas prices plummeted -10.2%, m/m. Food prices were down -1.5%, m/m. This headline reversed part of June’s gain and highlights the large impact that volatile energy prices are having on producers. This month’s data may show a different story as energy prices have climbed. One notices that July prices were also down in other consumer goods and capital equipment categories which led to an unexpected decline in core-PPI in July (-0.1% vs. +0.5%, m/m) although at 2.6% y/y, core prices remain well contained. Digging deeper, all the sub-components experienced a monthly decline with consumer goods down -1.1% (weaker energy costs). Capital equipment prices also fell -0.2%, m/m, (computers -1.5%, motor trucks -0.7%, and aircrafts -0.2% etc.)

The USD$ currently is higher against the EUR -0.22%, GBP -0.61%, CHF -0.09% and lower against JPY +0.47%. The commodity currencies are weaker this morning, CAD -0.56% and AUD -0.71%. Briefly, like a lemming, the higher yielding loonie advanced against its southern partner, 1st-time in 3-sessions, as both global equities and commodities caught a break. Yesterday’s data showed that foreigners bought a net $10b’s worth of Canadian securities in June (6th consecutive monthly increase, year-to-date total +$62b vs. +$38.8b, y/y) and increasing their positions in all asset types! This week the CAD has been somewhat suspect as investors speculated that a rally in higher-yielding assets may be overdone in respect to growth. This has gone some ways to tarnish investors’ risk appetite. Despite CAD being the strongest currency last month of all the developed currencies vs. the USD, this week it leads the retreat. If equities cannot sustain their strength, look for commodity currencies to push much lower. This morning we get to see Canadian CPI numbers and investors continue to look to buy USD on pull backs.

The AUD fell in the O/N session vs. the JPY and USD as the Shanghai Composite Index slipped for a 2nd-consecutive day (-4.3%). With hard commodities finding it difficult to maintain traction, has investors paring their global high-yielding positions. In the short term look for dealers to be better sellers on rallies (0.8206).

Crude is lower in the O/N session ($68.87 down -32c). Crude oil yesterday managed to snap 2-days of consecutive losses (-5.3%), as the greenback’s decline encouraged investors to purchase commodities as an alternative investment. It was the EUR’s strength supported by unexpected German investors confidence rather than the weakness of the USD. In hindsight, capital markets are very indecisive at the moment and their sentiment is easily changed by any economic news. Today we get the weekly EIA report and do not be surprised if higher inventories are once again recorded. Bearish fundamentals do not warrant elevated energy prices. Already this week we have managed to print a 2-week low as the strength of global equities were questioned, just like this morning. Last week’s EIA report recorded another high in crude inventories. The data showed that crude stocks in the world’s largest energy consumer rose by +2.5m barrels, against expectations for just a +700k build. The latest data on industrial production for some of the larger countries remains negative and should provide support for further demand destruction. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth will remain very subdued. This certainly does not bode well for any strong rebound for prices in the coming months. Reality continues to tell us that inventories are high, demand is still really weak and the risk is increasing that we could see a $60 print in the medium term. The ‘yellow metal’ managed to advance for the 1st time in 3-sessions yesterday on the back of a weaker USD which boosted its appeal as an alternative investment. However, in this morning session the ‘buck’ has rebounded aggressively and weakened all commodities ($937).

The Nikkei closed at 10,204 down -81. The DAX index in Europe was at 5,184 down -66; the FTSE (UK) currently is 4,648 down -37. The early call for the open of key US indices is lower. The 10-year bond’s eased 2bp yesterday (3.48%) and a further 4bp in the O/N session (3.44%). Treasuries remain coveted in pull backs, after last weeks US data showed that the cost of living was unchanged and that retail sales surprisingly fell last month, confirming that inflation remains subdued. Yesterday’s US reports showed that housing starts unexpectedly fell last month, this may convince investors that the trickle down effect from job losses will temporarily postpone the recovery process!

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