How low can we go?

It’s been depressing for the investor to watch these markets plummet in most asset classes. Not an ounce or shred of positive news has been reported of late. It seems predictions are falling on deaf ears. Our own psyche has beaten us down to new lows and it begs the question, are we the investor being irrational? We are beating the ‘good’ to a pulp, forcing their non-existence while at the same time supporting the poor performing. We all expect the U-turn, but, it seems that our own actions may be pushing that further and further away. Soon something will give and signs that the quantitative easing by policy makers is gaining traction. Let’s hope then that we act with the same ‘exuberance’ on the way up as we have on the way down!

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Do not be fooled by yesterdays US consumer spending numbers, the first positive blip in 7-months cannot be sustained with the ongoing threat of deeper jobless losses. In Jan. the US consumer had a ‘pulse’ as they spent their government income assistance quickly and took advantage of the post-holiday discounts (+0.6% vs. -1.0%). Other data showed that income rose +0.4%, not through total compensation including benefits or just wages and salaries (they fell), but through net transfers that recorded a strong +1.7% gain m/m. It’s worth noting that analyst’s saw that all other forms of income were down, including rental and investment income, while transfer payments spiked +3.5% higher mostly through unemployment insurance. As a result, income (+1.7%) over spending (+0.6%) pushed the personal saving rate up to +5% (that’s the highest level in 14-years!).

The ISM manufacturing index unexpectedly rose in Feb. for the 2nd consecutive monthly gain (35.8 vs. 35.6). However, the manufacturing sector remains in contraction territory as the 35.8 print continues to hover at the lowest level in 27-years. Analysts believe that this uptick can only be temporary as businesses continue to face deteriorating demand, which translates into lower profits/margins. By default, future readings should push the index lower. It’s worth pointing out that ‘all’ of last months increase were the result of a +4.2 point gain in production to 36.3 as new orders, employment, imports and inventories all continued to decline. Prices paid and new export orders were unchanged. Not so good was that US construction spending fell more than expected yesterday. Eyeballing the details, every type of construction activity was down in Jan., apart from home improvement spending. The data revealed that the declines were widespread across private (-4.3%) and public (-2.4%) non-residential spending, cumulating into a net -3.5% decline in non-residential activity. While a drop in private-residential spending (-2.9%) led to the net -2.8% retreat. Optimism was seen on the home improvement front, where spending was up +3.8% in Jan., signaling the strongest growth in 7-months.

The US$ currently is lower against the EUR +0.59%, GBP +0.41%, CHF +0.27% and higher against JPY -0.46%. The commodity currencies are stronger this morning, CAD +0.37% and AUD +2.29%. Wow, not to be left behind, but, Canadian economic indicators are showing a country that is firmly entrenched in a recession. Yesterday’s real-GDP contracted -3.4% q/q annualized for the 4th Q (the largest decline in 18-years). This surely puts Governor Carney in the 50bp ease camp later this morning (currently at +1%). Analysts point out that while real-GDP is plunging at a similar pace to the 1990s recession, this downturn is more broad-based and far-reaching. Dec.’s real-GDP numbers came in much weaker than expected at -1.0%, m/m vs. expectation of a decline of -0.7%. At -3.4%, q/q, this is the weakest report in nearly 2-decades! Interestingly wages rose +0.7% providing some support to personal disposable income which gained +0.4%. The personal savings rate soared to +4.7%, while personal spending fell for the 1st-time in 14-years, down -0.8%. Exports also contracted -4.7%, while imports dropped -6.4% with automotive products down -16%. This certainly justifies the loonie bashing of late. The CAD$ managed to print a new monthly low yesterday and capped off a volatile couple of trading sessions, where it has retreated -2.3% vs. its largest trading partner down south. Risk aversion trading strategies continue to favor the ‘buck’.

In a surprise move Governor Stevens at the RBA kept O/N lending rates on hold last night (3.25%), pushing the AUD higher vs. the greenback (0.6432). To date he had lowered the benchmark by 4% between Sept. and Feb. and is to be expected to be on hold for the foreseeable future. In that time period the AUD has lost 26% of it value vs. the greenback. In the meantime one should expect the currency to sustain this bounce as investors turn towards this evenings GDP numbers. Analysts are looking for +0.2% for the 4th Q, a positive print no less!

Crude is higher O/N ($40.63 up +63c). Crude oil pared 10% of its value yesterday on signs that manufacturing in the world’s two biggest energy consumers contracted last month. China’s manufacturing shrank for a 7-month earlier this week and the US’s ISM faired no better (see above). Prices also fell as equity markets retreated and the ‘greenback’ remained better bid thus reducing the appeal of commodities. The USD$ managed to print a 3-year high against six of its major trading partners. Last week the black-stuff peaked at a 1-month high after the EIA report showed that US gas inventories fell as demand strengthened and refineries cut operating rates. Inventories plummeted – 3.32m barrels to +215.3m. The market is now trying to anticipate the future outcome of the scheduled OPEC meeting on Mar. 15th. Last year they cut production 3-times and already this year they cut output -3.8% to +25.3m barrels a day in Feb. The market wonders if they will make additional cuts at these levels. Already this week some members have given opposing views. According to the Algerian oil, he believes that the group will ‘most likely’ reduce supplies to support prices when it gathers, while Iran’s oil minister said OPEC is ‘unlikely’ to lower crude production. Market consensus seems to be leading towards warranting another cut. However, it’s expected that the commodity market will come under greater downward pressure as we become exposed to more bad economic news, further evidence of plentiful supply and spare production capacity. The issue with OPEC is that they have to maintain a fine balancing act between growth and stifling any potential growth (they represent 40% of global supply). With stock markets tumbling, look towards the yellow metal to remain better bid on deeper pull back as a ‘store of value asset’ ($925).

The Nikkei closed 7,229 down -50. The DAX index in Europe was at 3,703 down -7; the FTSE (UK) currently is 3,631 up +5. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 9bp yesterday (2.88%) and backed up 5bp in the O/N session (2.93%). Yesterday, FI prices rose as global equities tumbled due to the fear of this recession intensifying. Also, AIG (deemed too important to fail) will get as much as $30b in new government capital in a revised bailout after posting a record 4th Q loss weighed on investors nerves as they seek sanctuary in a ‘safer heaven asset class’ for now. This morning Treasuries have pared some of yesterday’s gains, on speculation that the US government will have to sell more debt to pay for the rescues.

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