China marches to its own beat!

China commands and we all jump! Well it’s our risk appetite that jumps. The ‘Super’-power continues to exceeded analyst’s expectations. In Nov., industrial production advanced (+19.2%), while exports and imports surged, confirming the nation’s role as leader of ‘our’ world recovery. Not immune to symptoms experienced in the western hemisphere, China too, could be exposed. New loans and money supply have also expanded by a record, extending a credit boom that may fuel asset bubbles and inflation. One can expect the PBOC to increase bank’s reserve requirements to tackle these problems. This pace is not sustainable as other current global demand is questionable!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies in a ‘subdued, yet illiquid’ trading range.

We witnessed a mixed bag of US data yesterday. Many had thought that the NFP number was too strong to be true and this week’s initial jobless claims print highlights disconnect between the two reports. Initial claims came in higher than expected +474k vs. +457k, unlike the continuing claims prints which actually improved (+5.460m vs. +5.157m). They both remain elevated, especially continuing, which is within striking distance of the yearly high. The most disappoint category was to see the emergency benefits program continue to climb (4.178m vs. 3.851m). This is probably because more unemployed are able to take advantage of the extensions of these programs. The extended benefits (EB) program actually improved on the week (+407k vs. +597k), but disturbingly, the Emergency Unemployment Compensation (EUC) soared just under +9%! It’s in this category that analysts will tell you where the unemployed will take advantage of the recently passed benefits program and where most of them will be counted. We should expect future increases in this number.

Not to be out done, the US trade report also produced a significant surprise. The deficit shrank to -$32.9b vs. -$36.5b even after a net downward revision of $1b the previous month. Most of the pleasant surprise can be attributed to petroleum products. Oil imports had spiked in Sept. and reversed more than half of the increase in Oct., accounting for roughly 50% of the surprise. However, the non-oil deficit also performed better than expected. In a sign of ongoing improvement in the global trade environment, exports of goods posted a very strong gain of +3.6%. However, some analysts expect the Nov. and Dec. deficits to still rise, despite Oct. positive showing. Over all consensuses expects a neutral effect on 4th Q GDP rather than the anticipated drag. A weaker buck promotes growth!

The USD$ is currently lower against the EUR +0.06%, GBP +0.19%, CHF +0.01% and higher against JPY -0.67%. The commodity currencies are slightly weaker this morning, CAD -0.06% and AUD -0.11%. The loonie rocked for awhile yesterday as Canada’s trade balance unexpectedly climbed back into surplus territory in Oct. (+0.4b vs. -0.6b). Not surprisingly, exports to the US, its largest trading partner, accounted for most of positives. On the flip side, imports deteriorated for the third consecutive month. The real-trade deficit narrowed as export volumes grew at a faster pace than imports. Unlike the US situation, we should expect the 4th Q GDP to receive support. The BOC shot a warning shot across the bow of the Canadian consumer yesterday. They said that recent rallies in equities and bonds may not be justified, and ‘that rising debt levels of Canadian households will make them more vulnerable when interest rates rise’. Canadian has kept adding debt while other countries reduced and saved. Carney said that ‘households need to asses their ability to service these debt obligations over their entire maturity’. Earlier this week he extended his commitment to keep borrowing cost low until well into next year. Variable mortgage rate holders should be wary of a hike in long term yields despite the BOC’ remaining on hold. They have to keep the hot property market in check. They cannot afford an asset bubble! Overall, the currency will be dictated by the dollar and commodities direction as we wind up this calendar year. Expect liquidity to become a concern across the board as we close in on the holiday season. Investors continue to be a comfortable buyer of the greenback on pull backs.

Australian fundamentals are on fire and may persuade the RBA’s Stevens to resume an unprecedented round of interest-rate increases early next year (3.75%). For a second consecutive week the currency has advanced, despite earlier touching its lowest levels after a downgrade of Greece’s debt and the Dubai World’s damped demand for higher-yielding assets. However, China announcing that its industrial production and new lending rose more than forecasted has boosted the demand for higher yielding currencies. Investors continue to be better buyers on dips. When will we see parity, first half of next year? (0.9160).

Crude is higher in the O/N session ($71.08 up +54c). How long will the $70 level support the black stuff after this week’s ‘shellacking’? The ‘techies’ will tell you that it’s a major support, but realistically the market took a breather after such volatile swings of late. Already this week the commodity has fallen to a new 2-month low as the weekly EIA report showed that inventories climbed after refiners boosted their operations and imports fell. Oil stocks declined -3.82m barrels to +336.1m million last week vs. the market expectations of a gain of +600k barrels. On the flip side, gas stocks climbed more than forecasted and supplies of distillate fuel (heating oil and diesel) advanced for the first time in a month. Technically the report was a zero-sum game. Gas inventories rose +2.25m barrels to +216.3m vs. an expected increase of +1.6m, while distillate fuel increased +1.62m barrels to +167.3m. Refineries operated at 81.1% of capacity, up +1.4% points from last week and now at the highest level in 2-months. Two reason contribute to this, firstly, refiners anticipate greater future demand and secondly, the need to reduce stock before the end of the year because of tax consideration. Overall it was a modestly bearish report that has the technical’s wanting to test the sub $70 support level. Fundamentals continue to promote demand destruction. Various OPEC members have been rather vocal of late ahead of their meeting at the end of the month. They believe that prices are in ‘the right range and there is no need to reduce inventories’. Expect the USD’s direction to dictate price action medium term. Cannot say it loud enough, but support levels continue to look vulnerable!

Yesterday bargain hunting was seen after gold futures had plummeted. Over the last five trading sessions the ‘yellow metal’ has managed to fall close to a $107 drop from last week’s highs. The recent record rally required a healthy ‘lemming purge’ which we have just witnessed. Sellers beware, despite the ‘mother in-law’ and anyone who can, does own this ‘hot’ commodity, these pull backs remain strong buying opportunities as it’s ‘the international currency’ ($1,140). There has been a big pickup in demand seen in US physical gold and silver products this week even as prices were tumbling!

The Nikkei closed at 10,107 up +245. The DAX index in Europe was at 5,783 +74; the FTSE (UK) currently is 5,310 up +66. The early call for the open of key US indices is higher. The US 10-year bond backed up 8bp yesterday (3.50%) and are little changed in the O/N session. The last of this week’s $74b auctions, the long-bond, was not well received. In fact the disappointing demand managed to widen the 2’s-30’s spread to 373bp, the most in nearly three decades. The notes drew a yield of 4.52%, compared with the average forecast of 4.483%. A steeper yield curve reflects the ‘diminishing demand from investors anticipating faster economic growth and inflation’. Are investors beginning to have their fill of US debt? Two possible reasons for the lack of interest, duration extending and secondly, the possibility of higher future rates.

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