Equities trump ‘flu’ alert!

Even the WHO raising their threat level has yet to impact the greenbacks slide. It was only days ago that panic buying of the dollar had us believing that this was the ‘end’ for economic hope for a considerable length of time. Well the flu seems to be spreading with vengeance, thankfully mild so far, but global earnings is winning this battle and pushing equities to a 4-month high. The Fed kept the status quo, both in language and action yesterday. Markets will now focus on the ECB and stress test announcements next week.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies, in a ‘violent’ trading range.

Not a total surprise, but not what was expected from the advanced GDP results. The US economy plunged again in the 1st- quarter (-6.1%), making this the worst recession in 50-years. It even came close to the 4th Q print (which was revised down even further from -3.8% to -6.3%). The poor showing was in part due to plummeting of residential and non-residential investments by 38%, which alone subtracted -4.7% from the headline print. A -$104b decline in inventories (businesses are lean-a good sign) combined with a further decline in housing shaved -2.8% off GDP. Analysts believe that smaller stockpiles ‘may set the stage for a return to growth in the 2nd-half of the year as signs that the Fed’s efforts to reduce borrowing costs and increase lending are starting to pay off’. Consumption surprised to the upside, advancing +2.2% (the most in 2-years), which was led by a +9.4% jump in durable purchases. We can conclude that global economies will most likely emerge from this recession very slowly as the recovery will be weak.

The USD$ currently is weaker against the EUR +0.97%, GBP +0.85%, CHF +0.60% and stronger against the JPY -0.07%. The commodity currencies are considerable stronger this morning, CAD +1.17% and AUD +1.62%. Talk about turning on a dime, the loonie has once again revisited its pre-swine levels and even further. It has flatfooted the market by catching many speculators long USD. Yesterday it touched its strongest level in 2-weeks and in the O/N session headed towards its yearly lows, all on the back of speculation that the worst of the global recession may be over, thus boosting global equities and the price of crude oil. The performance of the greenback, slipping against most of its major trading partners’ has also given the currency a natural lift. The loonie had remained vulnerable like many other currencies as investors gravitated towards some sort of risk aversion trading strategies as fears that the ‘unstoppable’ virus would curtail a recovery in the global economy any time soon. But, the market over the past 2-trading sessions has managed to price out this insurance premium. Technically there should be some good market support for the USD at the 1.1850 level. Analysts expect the currency to once again trade under pressure and head towards the 1.2500 level by end of this quarter. Do not be surprised to see some profit taking occurring if fears that the swine flu may take a firmer grip on this global recession.

Renewed optimism after business confidence numbers exceeded expectations in NZD and improved by the most in 16-years this week combined with growth in Japanese manufacturing and a healthier US consumer confidence headline has us believing that the worst may be over. This has dragged the AUD to new 6-month high in the O/N session (0.7321). The trend is your friend, look to buy on pull backs.

Crude is higher in the O/N session ($51.73 up +76c). Crude oil pared yesterday’s initial gains on the back of the anticipated weekly EIA report. Supplies rose +4.05m barrels to +374.7m barrels last week vs. an expected increase of +1.8m barrels. This headline print prompted Libya’s top oil official to state that OPEC will ‘keep all its options open, including a production cut before next months meeting’. Like all fellow members, they remain concerned with the overhang of prices with these elevated stock prints. Since Sept. OPEC members agreed to slash +4.2m barrels from its daily production and to date 83% of members have been compliant. However, despite some strong fundamental data of late, anomalies like the Swine flu outbreak could curtail air travel in the short term and by default increase inventories once again. Already this week the Algerian Oil Minister Khelil stated that non-OPEC members have left the market oversupplied by about +720k barrels a day. This bearish report along with demand destruction should provide some muted rallies for the black stuff. Gold has reversed some of this weeks decline as the greenback struggles against most of its trading partners, which has increased the ‘yellow metal’s’ appeal as an alternative investment ($899).

The Nikkei closed 8,828 up +334. The DAX index in Europe was at 4,803 up +98; the FTSE (UK) currently is 4,253 up +64. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 12bp yesterday (3.13%) and are little changed in the O/N session. It’s all about ample supply vs. buy-back’s that have dictated FI prices of late. Yesterday the US government said it plans to sell a record $71b in long-term debt next week and will add more 30-year bond sales as part of its efforts to fund the record deficit. Even Bill Gross at PIMCO said that the Fed may have to increase the buy-back program if 10-year yields consistently trade through the 3-3.10% level. We can expect dealers to continue to cheapen the curve as record supplies keep coming down the pipe.

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