European banks have a $2.3 trillion PIIGS stake, EUR cannot fail

Let’s put some things into perspective. According to the BIS, banks in Germany and France have a combined exposure of $119b to Greece and $909b to the other four members that make up the acronym PIIGS. Collectively, European banks have $253b at stake in Greece and a whopping $2.1 trillion with the other troubled sovereigns. The net effect, Greece is not the problem. It’s the whole European banking sector that’s the concern. It is no wonder that European finance ministers are supposedly ‘stabilizing the situation’. How does one reach ‘an accord’ with figures like these?

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 ‘whippy’ trading range.

Some bright news on the US jobless claims front yesterday played second fiddle to the EU’s summit objectives. It was a pleasant surprise to witness fewer Americans than anticipated filing claims for unemployment insurance. First-time claims dropped by -43k to a seasonally adjusted +440k, the lowest total in over a month. With some of the backlog administrative issues out of the way, the headline print indicates that companies are possibly nearing the end of their major cuts as the economy starts to show signs of sustainable growth. The number of people claiming benefits for more than a week fell by nearly -80k to +4.5m (the fewest in 12-months). This sub-category does not include individuals receiving extended benefits. Also surprising was the number of individuals collecting extended payments had also dropped, by -171k to +5.68m. With the fastest pace of growth in 6-years last quarter is a strong indication that the US economy may be on the verge of adding jobs as companies will need to replenish inventories to keep pace with future sales forecasts. In the big picture of things, a pessimist will try and convince others that the job scenario ‘is not deteriorating nor is it improving’.

The USD$ is currently higher against the EUR -0.41%, CHF -0.52% and JPY -0.49% and lower against GBP +0.13%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.13%. For a third consecutive day and the longest winning streak in 5-week’s yesterday, the loonie experienced ‘one way traffic’ as speculators coveted growth currencies on the tentative support by EU officials for Greece. Technically any positive news from Europe had risk appetite returning to the market. On a cross related basis, the currency has certainly outperformed most of its other G7 members. One gets the feeling that the domestic currency may be overbought, despite commodities also advancing. Yesterday, it was the strongest performing currency and the intraday technical charts indicate that there is strong support for the greenback at we approach ‘parity’. Despite some of the European uncertainty being lifted, a definitive proposal for Greece will probably endorse some domestic currency profit taking. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet.

Australia added three times as many jobs expected last month earlier this week (+52.7k vs. +15k) and lowered their unemployment rate by 2-ticks to +5.3%, a new 11-month low. Australia’s ‘hiring boom’, the largest in 5-years is expected to pressurize the RBA to resume their policy of hiking borrowing costs to prevent wage increases from feeding inflation. Futures traders have doubled their bets that the bank will raise the O/N lending rate by +0.25% to 4% at next month policy meeting. This week’s surprising release indicates how tight the employment market is down-under, since last Aug. the economy has managed to add +195k new jobs. The AUD remains better bid on the back of the Governor Stevens stating that ‘holding down interest rates (3.75%) for too long may help create asset bubbles’. Coupled with Chinese bourses finding some traction has given growth currencies a leg-up this week. With a 44% chance of a rate hike priced in for Mar. 2nd, expect investors to be better buyers on pull backs.

Crude is higher in the O/N session ($74.82 up +42c). After today we will be back on track with the weekly EIA report. The Government shutdown in Washington, due to weather related issues, delayed the previously scheduled release to this morning. Like most commodities, prices have found some positive traction on stronger global fundamentals. Crude managed to advance for a fourth consecutive day yesterday after the IEA raised its forecast for global demand for the remainder of this year. They increased their estimates for world consumption by +170k barrels a day to +86.5m ‘on accelerating growth in emerging markets’. This is a net +1.8% increase over last year’s consumption levels. As expected by most analysts, they did not revise higher consumption in the OECD region, but ‘adjusted emerging market growth up in China and the rest of Asia on higher GDP’. This morning’s delayed report is expected to show that stockpiles of crude grew by +1.5m barrels. The already released weekly API reported that US crude inventories climbed to its highest level in nearly 4-months (gained +7.2m barrels to +337.6m), however, this has not been a reliable bellwether chart recently. Last week’s EIA headline recorded a surprisingly large build, crude stocks advanced +2.3m barrels, beating expectations for a ‘little change’. Again, for a second consecutive time, the crude print was the only bullish component of the report. Can crude finish out the week on an upswing? Momentum is leading us that way, any significant build and profit taking will be a priority.

Yesterday, the yellow metal found some luster, climbing the most in over a week as signs of an economic recovery boosted demand for the commodity. At the same time some investors sought an alternative to holding EUR’s on concerns that the Greek budget deficits may widen. Stronger fundamentals out of both Australia and China gave gold the initial leg up from just above the week’s low, while a brokered accord, short on details, had nervous investors seeking security in the asset class. Where too from here? That depends on the convictions of one’s own risk tolerance. With the positive Australasian outlook and the remaining sovereign debt questions, one should expect better buying on dips to remain in play for the time being ($1,089).

The Nikkei closed at 10,092 up +128. The DAX index in Europe was at 5,548 up +45; the FTSE (UK) currently is 5,191 up +25. The early call for the open of key US indices is lower. The US 10-year note backed up 6bp yesterday (3.72) and eased 3bp in the O/N session (3.69%). It was like the perfect storm occurring for the last of this week’s record bond auctions. Traders certainly had the best of excuses to cheapen up the curve accordingly when European leaders publically stated that they have reached an ‘accord’ on Greece’s debt crisis. The US long bond or 30-year treasuries touched a four-week high as a record-tying $16b auction yielded lower-than-average demand. All three-issues this week came with a ‘larger tail’. The indirect bids (proxy for foreign demand and Cbanks) was low at 29% vs. 40.7% in Jan and 40.2% in Dec. On the flipside, direct bids were high at 24% vs. 4.9% in Jan. The bid-to-cover ratio was 2.36 vs. 2.68. Again it seems that nervous investors want to stay away from the ‘expensive’ long end of the US curve, perhaps apprehensive about tying money up for so long. In hindsight, this week’s auctions are an expensive issue to own, expect better selling on upticks.

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