Convinced yet? Now, what do we do?

The optimism of global government bailouts has extended the equity rally into its 5th-week in the O/N session. The euphoria has dragged commodities higher once again despite a slew of bad employment data. We desperately want to be convinced that we may be turning the corner. However, in reality this will be a ‘long and difficult experience’ as many of reasons for this debacle remain broke!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

NFP was better than the expected whispers on Friday (-663k vs. -659k). However, it’s still a very bad report for last month with downward revisions for Jan. and a sharp drop in hour’s worked-to-date. Hours plummeted by -1%, m/m, (the largest monthly drop in 13-years), it’s this loss in income from a shorter work week which will eventually have the biggest impact on growth. It seems that employers are scaling back the hours faster than shredding the work force, a lateral shift from full to part-time jobs in an effort to reduce company overheads. The unemployment rate rose as expected to +8.5% (8.543%), as an 861k decline in household survey employment outweighed a 166k drop in the labor force. Early jobless claims data suggest that the rate will approach 9% this month. Results for the various individual industry sectors were also pretty much as expected, with factory jobs falling 161k and construction losing 126k. The only major sector to escape a decline was, as expected, health care, but the +15k rise in that category was the smallest to date. Overall, this was an as-expected report indicating very bad, but at least not worsening, labor market conditions.

The ISM non-manufacturing index for Mar. unexpectedly declined (40.8 vs. 41.6) as unemployment climbed and consumer confidence continues to hover close to its record lows. Digging deeper, new-orders fell to 38.8 from 40.7 m/m, and the gauge of employment dropped to 32.3 from 37.3 (consistent with ADP and NFP findings), while a measure of prices paid decreased to 39.1 from 48.1.

The USD$ currently is lower against the EUR +0.13%, GBP +0.37%, CHF +0.10% and higher against JPY -1.10%. The commodity currencies are stronger this morning, CAD +0.15% and AUD +0.11%. An about turn for the loonie as G20 consensus encouraged investors to seek higher yielding currencies and commodities, thus turning their back somewhat on risk aversion strategies. With crude appreciating more than 8% from its lows last week and 50% of commodity revenues being exported, the CAD was bound to find some traction and print its highest value in over a week. Investor appetite for riskier assets seems to have increased as policy makers slash interest rates to improve lending conditions amid a worsening global recession. It’s expected that BOC’s Carney will eventually follow suit and introduce quantitative measures which will only put pressure on the loonie.

The AUD continues to shows sign of strength as it approaches its 3-month highs. Last week it advanced for a number of reasons, global optimism, higher equities and commodity prices, but more importantly it advanced after its trade surplus widened which added to optimism that the worst of the world recession may be ending. Australians will receive further economic stimulus in next month’s budget (0.7172). Traders continue to buy on pull backs.

Crude is higher in the O/N session ($53.15 up +63c). With Friday’s economic data meeting expectations and the initial G20 euphoria behind us, investors were happily booking profits after last weeks 9% rally. The bullish price action of crude over the past couple of trading sessions had a large percentage believing that the world has already experienced the worst. Oil rose the most in three weeks last week after leaders at the G20 agreed on measures to fight the global recession. But beware, reports showing rising oil inventories and falling demand continues to signal that the worst of the recession may not be over. Last week’s EIA report showed that US stock levels rose to a 15-year high as this global recession continues to curb demand. It was the 23rd gain in 27-weeks. Inventories climbed +2.84m barrels to +359.4m last week vs. an expected increase of +3m. Most surprising was gas supplies, which unexpectedly rose by +2.23m barrels to +216.8m w/w. OPEC’s secretary general El-Badri said yesterday that despite fundamentals remaining the same he hopes that the market has bottomed out, but realizes that ‘demand remains slack’. Gold was not immune to this new found optimism, last week it fell on speculation the global economy will improve, thus eroding the appeal of the ‘yellow metal’ as a safe haven ($882). Apparently there are no inflationary concerns now!

The Nikkei closed 8,857 up +108. The DAX index in Europe was at 4,429 up +45; the FTSE (UK) currently is 4,071 up +42. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 5bp on Friday (2.85%) and another 5bp in the O/N session (2.90%). Treasury prices continue to remain under pressure after last weeks G20 pledge of $1t in emergency aid to the IMF and World Bank. With NFP data coming in close to expectation, traders are now shifting their focus to the anticipated record supplies of US debt ($2.5t) despite the $300b buy-back policy of trying to keep longer rates down. What will happen if an auction fails?

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