EUR losing Stamina and Will to Exist

Spain says its madness. They are not in need of an EU bailout. Capital markets beg to differ, pushing contagion tainted countries bonds yields dramatically widened (Portugal up 33bp, Ireland up 18bp and Spain up 8bp). There are currently no ‘new’ European policy initiatives to calm this market, even with the Germans expected to ratify the Greek package this Friday. Any slowness on their behalf and the Capital Markets will go for the juggler. We could see some innovative implementation by the ECB on CDS trading, but that too, will only have a limited effect on FI instruments. For now, forget earnings season, forget stronger US fundamentals and concentrate on the populous views. Greek society despite living off the ‘hog’ for many a year, is unwilling to accept the austerity measures with open arms. It’s no wonder that ECB’s Weber said Greece’s fiscal crisis is threatening ‘grave contagion effects’.

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

US data took a back seat to the panic liquidation ongoing in Europe. Nevertheless, the market was served with better than expected factory order print (+1.3% vs. +0.0%) and a stellar pending home sales release (+5.3% vs. +5.0%). With respect to factory orders, non-durable goods posted the strongest monthly gain in 10-months, coupled with a rapid shipment pace bodes well for a strong US manufacturing recovery. If one includes the ISM report released earlier in the week and we have a summer shaping up to deliver strong production numbers. Excluding transportation, factory order gains were even larger at +3.1% (strong showing in the non-durable sector). Looking at the various sub-categories, there is strength throughout the report. The business investment remained strong as non-defense capital goods ex-aircrafts advanced +4.5%, m/m, supporting last week’s GDP report. The non-durable component surged +2.9%, posting its 8th consecutive monthly gain. Even the durable goods orders revealed a healthy surprise and was revised up from -1.3% to -0.6%, m/m. It’s worth noting that volatile transportation accounted for all of the weakness as non-defense aircraft orders plummeted -66.9%. Ex-transportation and durable goods would have risen a robust +3.5%. The trickle down effect managed to see shipments advanced +2.2%. With overall inventories remaining lean, the inventory-to-shipments ratio eased again to 1.27 times shipments, close to record lows of 1.14 times. The shipment gains require continued new-orders strength.

Not to be outdone, US pending home sales continue to dance to a healthy beat. Last months expiration of home buyer incentives seems to be working. After a dismal Jan. print, a stellar Feb. (+8.3%) and an equally impressive Mar. (+5.3%) gave us a healthy quarter. Incentive contracts had to be signed before the April 30th deadline in order to qualify. The market expects that strong interest will lead to a solid upward bias into the summer.

The USD$ is higher against the EUR -0.42%, GBP -0.16%, CHF -0.40% and JPY -0.16%. The commodity currencies are weaker this morning, CAD -0.11% and AUD -0.29%. Fear, fear and fear is pressurizing growth currencies. The loonie depreciated the most in a week vs. its southern neighbor yesterday, as global bourses and commodity losses encouraged traders to reduce positions in currencies related to economic growth. Investors favored Government bonds. The long CAD positions, taken on expectations that the BOC will hike rates sooner rather than later, are been squeezed out as global sentiment turns on Europe. Weak domestic currency long’s are been trumped by risk aversion strategies. Will we get a breather? Technically, the dollar wants to continue to grind higher despite interest rate hikes wanting to provide some sort of ceiling. Until the market gets some clarity on the contagion fears, the trend will remain intact. Fundamentally, North America is beginning to produce some stellar numbers, however, China and Europe will dictate growth currencies next move. For now, it’s difficult to want to add to CAD longs with the current sentiment.

It was not surprising to see the AUD trade near its 5-week low in the O/N session on concerns that global growth may falter and on market speculation that the RBA will cool the pace of future interest-rate and dampening the demand for riskier assets. Earlier this week the RBA hiked their benchmark interest rate for the sixth-time in seven-months (+4.50%) after policy makers raised their outlook for inflation and believed that their domestic economy is well insulated from the Greek debt fall out. The currency has traded under pressure since then after Governor Stevens said borrowing costs are around ‘average’, thus signaling that it may slow the pace of advances. Also providing pressure to the currency is the softer Asian bourses coupled with weaker commodity prices. Stevens said that inflation may not slow as much as earlier forecast and ‘now appears likely to be in the upper half’ of the RBA’s target range of 2-3% over the coming year. The minutes leans heavily towards a ‘lack of urgency’ to push rates higher in the medium term. The Bank can afford to hold in a ‘wait and see mode’. Now that the rate decision is out of the way, expect growth currencies to be guided by equities and commodities. For now the market expects to be a better seller of the currency on rallies (0.9107).

Crude is little changed in the O/N session ($82.74 down -1c). Finally the fear factor is having an impact on crude prices. Yesterday, ‘black-gold’ depreciated the most in three-months as the greenback surged against most of its major trading partners, thus curbing the appeal of commodities as an alternative investment. Coupled with a slowdown in China’s PMI numbers sent global equities lower and by default pressurizing the commodity sector. Is this sustainable? That all depends on contagion fears been contained and perhaps too on the effect of what the oil spill will have on future supply. With China imposing its third increase to bank reserve ratios in as many months has investors questioning future growth demands by the world’s second-biggest energy consumer. Last week’s Fed rhetoric coupled with the weekly EIA report showed that refineries cap-u is at the highest level in two years gave the black stuff a ‘leg up’. Analysts remain concerned that the European contagion issues will dominate risk aversion and push crude to once again test the $80 print. For now, one should expect better selling to remain on rallies.

In the grand scheme of things, gold is wanted by investors despite the dollar’s rally and questionable global growth. Yesterday it managed to print a new 5-month intraday high on European debt concerns before paring some of its early gains. With the EUR continuing to trade under pressure on fears that the bailout package for Greece will not win support from the region’s governments, managed to push the yellow metal to record yearly highs in both the EUR and CHF. Contagion fears are expected to provide a floor for the commodity in the short term. Last month the commodity climbed +5.9% as investors sought surety to hedge against financial turmoil in Europe. In reality, investors continue to prefer the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors wanting an alternative to an ‘on going weakening’ of the EUR ($1,172).

The Nikkei closed at 11,057 up +132 (closed). The DAX index in Europe was at 5,996 down -11; the FTSE (UK) currently is 5,399 down -12. The early call for the open of key US indices is higher. The fixed income market gave it all back and then some. The US 10-year eased 6bp yesterday (3.61%) and is little changed in the O/N session. Treasury prices rallied on concerns that the EU does not have a handle on its European debt issues. Investors seek surety and they want bonds across the board, thus sending 10-year yields to a 2-month low. Even stronger US data could not dissuade the ‘flight to quality’. With the fear of a credit-crisis phase sweeping throughout Europe will have FI better bid on pull backs especially with the lack of new-issues. We have to wait another two week’s for dealers to take down supply. Contagion equates to lower yields.

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