EURO Bleeding Persists

Merkel and company have been out in full force providing rhetoric support for the EURO idea, trying to reassure the market that there is no quick fix, stabilizing measures take time. Time is a precious commodity in capital markets. Unfortunately, a mass exodus can take little time to complete.

Amongst the G10 class, investors have little choice. This morning they continue to seek safety in the USD, as the JPY and CHF no longer fill the role with the SNB and BoJ primed and ready to ‘react’. The EUR is what the market seeks safety from and this despite the possibility of a US default and the Fed’s expansionary monetary policy. Fundamentals would have investors seek a Scandinavian or commodity currency alternative. There we have liquidity and proximity issues. So it seems to be back to the dollar temporarily at least.

Confusing Chinese support comments has put this market on edge before we get to hear what Merkel, Sarkozy and Papandreou have got to say for themselves. Comments from Chinese Premier Wen deflect calls to widen support for indebted European countries have led to a sell off in risky assets. PBoC adviser Li was also quoted as saying that China should not buy large amounts of European bonds. Providing another nail was Moody’s cutting the long-term debt and deposit ratings of a number of French banks.

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 ‘stubbornly’ dollar bid session.

Investors took no notice of the little US data on offer yesterday. The market was more interested in what Merkel and company had to say to keep the Euro from becoming an extinct currency by showing their support for Greece. US import prices fell last month (-0.4%), less than what had been expected (-0.8%), indicating that inflation pressures are benign. It was the second drop in three months, and gives Bernanke more wriggle room to add additional stimulus.

CPI and PPI data will also be presented this week. The market anticipates that headlines will show mild increases in prices and support the FOMC communiqué that policy makers see a continuation of the subdued pace of price effect into next year. Analysts expect the Fed to announce at next weeks extended rate meeting the purchasing of long-bonds and sale of short paper (operation twist). The US economy needs another jolt to create jobs. Digging deeper, if you excluded petroleum then import prices have increased by +0.3% on a monthly basis. Import costs for food and beverages fell by -0.8%. Import prices from China rose by +0.1%.

The dollars is higher against the EUR -0.21%, GBP -0.03%, CHF -0.13% and lower against JPY +0.08%. The commodity currencies are weaker this morning, CAD -0.70% and AUD -1.19%.

The loonie started the week under water outright and above parity as risk aversion was aggressively applied on Greek fears of a default. Gradually the currency climbed to a session high yesterday versus its largest trading partner as risk aversion waned and the sell off in equities was not as badly received. The currency continues to track the broader sentiment. However, there seems to be some genuine interest to own the domestic currency at or just above parity.

Last week was the second consecutive week for the currency to decline as the BoC kept rates on hold as expected (+1%). Upcoming data this week for its largest trading partner may indicate that both industrial production and sales may have slowed. Governor Carney has applied the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’ which is an ‘expected about-face from the July statement. The Governor will be turning towards becoming more concerned about global growth. For the time being, futures traders anticipate the BoC to remain on hold until the end of the third quarter of next year.

Canadian data of late has done little to have an impact on the loonies price action (last month the currency lost -2.3% and completed the first losing month in three), that has been left up to investors own attitude towards risk.

Analysts are beginning to downgrade Canadian growth this year and next, largely based on a downgrade to the external environment in which the Canadian economy is operating, for example its proximity to its largest trading partner. Global focus remains firmly on Germany, France and Greece today. What will they say? Parity again is looming (0.9924).

In the o/n session the AUD has tumbled to a new one month low outright and versus the JPY on fears that Greece may default and on a weak business outlook. The NAB business confidence index earlier this week fell to-8 last month, the lowest level in two-years. Manufacturing, retail, wholesale and construction conditions all remained very weak, while mining and the service industries generally remained strong. Now that the domestic data is coming out a bit negative, there will be some questions ahead on what will happen to the Aussie economy. If anything, the RBA is likely to be on hold for an extended time, allowing investors to sell higher yielding assets.

Australia released a new methodology for calculating seasonally adjusted inflation that indicated the RBA’s core measures may have been lower last quarter. Under the new settings, CPI rose an estimated +0.7% in the second quarter and the weighted mean advanced +0.5%. There’s still strong interest to sell the Aussie on rallies and buy the dollar as it becomes tougher for the AUD to outperform while all eyes are on European issues.

If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test to trade higher, however, parity seems to be beckoning with this negative momentum (1.0200).

Crude is lower in the O/N session ($89.13 down-1.08c). Oil prices frolicked between profit and loss most of yesterday as market participants traded with some anxiety. However, dealers expect this morning’s inventory report to show that crude supplies declined a second consecutive week in the US due to the storm in the Gulf of Mexico to have fueled the late afternoon bid yesterday. The tightening in the market of late has been more about supply outages than natural demand.

Last week’s EIA inventory report revealed that crude stockpiles decreased by-4m barrels to +353.1m, but are above the upper limit of the average range for this time of year. Not as radical but on the flip side was gas inventories move higher by +200k barrels last week, after shedding -2.8m barrels in the prior week, and are in the upper limit of the average range. Analysts were expecting crude inventories to dip by-2m barrels and gas stocks to shed by -1.4m barrels. It was certainly a bullish report for prices. Oil refinery inputs averaged +15.5m barrels per day during the week, which were +6k barrels per day above the previous week’s average as refineries operated at +89% of their operable capacity.

For the moment crude prices continue to hold. The possibility that Libya may be able to export oil cargo this month, for the first time in six-months, could pressurize the asset class.

Gold has found a temporary base just ahead of $1,800. The commodity rallied yesterday for the first time in two days. At the beginning of the week investors were preoccupied with liquidating some of their profitable gold positions to finance equity margin calls. Now the market has found a bid as concern that the European debt crisis is escalating and the dollar’s drop is boosting the demand for the metal as an alternative asset.

The bullion is in its eleventh year of a bull market. Technical analysts believe that commodity prices have recently undergone a strong correction, followed by a decent consolidation and particularly as European sovereign concerns escalate. Investors are guessing that the Fed will be required to ease monetary policy in answer to stimulate their economy. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities eventually ($1,832+$2.10c).

The Nikkei closed at 8,518 down-98. The DAX index in Europe was at 5,189 up+23; the FTSE (UK) currently is 5,197 up+22. The early call for the open of key US indices is lower. The US 10-year backed up +5bp yesterday (1.99%) and is little changed in the o/n session.

Treasuries yields rallied for a second consecutive day on “eased” concern that the Euro-zone’s debt crisis may cripple the region’s banks and on pressure from this week’s supply. This is a temporary fixed income excuse as dealers position themselves.

Greek Prime Minister Papandreou plans to hold a conference call with Merkel and Sarkozy today on developments in Greece and the Euro-area. Global investors are hopeful! Technically, the market has come too far too quickly and with this weeks supply to absorb, investors can expect further steeping of the US curve.

Yesterday, the US Treasury issued the second of this weeks auctions, $21b 10’s. It was not well received, stopping +1.2bp behind the mid-market auction deadline quote at +2%. It was again another record low yield. The bid-to-cover ratio was 3.03 and lower than the 3.2 average of the past eight-sales. Indirect bid was just shy of an average of +48.5%, but well above last months +35.4%. Long end remains heavy ahead of today’s 30-year issue, the last of this weeks supply.

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