IMF warning sticker on Spain distresses EUR

Saber rattling from North Korea and debt warnings morphing in Spain has markets on high alert this morning. It’s not just the ‘naked’ currency speculation that is a threat to the EUR being pushed much lower to seek fair value. The net FI flows in the 1st Q shows an annualized net outflow of 105b EUR’s vs. the net inflows of 225b EUR’s in all of 2009. This is strong evidence confirming an asset allocation change amongst global investors. The significant shift confirms that the currency’s weakness is being dominated by a ‘broad shift in investor attitudes, a shift which goes well beyond shorter-term FX position changes within hedge funds’. Now that we have the IMF warning sticker being slapped on Spain, a country with 20% unemployment, a government already suffering from low popularity trying to implement a 10% fiscal adjustment of GDP through 2013 has many speculators trying to ‘get out of Dodge’.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘volatile’ trading range.

North American trading yesterday was quiet because of the long holiday weekend for most. However, there was data released in the US which seemed to have minimal impact directly on the markets, it was left up to other factors. Purchases of previously owned houses surprised to the upside (+7.6%, +5.7m vs. +5.36m), but was accompanied by an even bigger jump in inventories (climbing to +4.04m), the highest level in 11-months. Analysts note that at this pace of sales, it would take 8.4-months to sell those houses compared with 8.1-months at the end of last month. The pace of purchases was probably due to the buyers rushing ‘to qualify for an expiring government tax credit’. Despite the median prices showing the biggest gain in four years, analysts expect the increasing supply, coupled with the increasing foreclosure rate and the loss of sales, because of the federal credits expiring, could once again bring pressure down on US home values. The weaning off federal stimuli is only creating ‘a vicious circle’. The market is not even including Banks shadow inventories.

The USD$ is higher against the EUR -1.16%, GBP -0.93%, CHF -0.38% and lower against JPY +0.72%. The commodity currencies are much weaker this morning, CAD -1.44% and AUD -2.09%. In the O/N session it’s been risk aversion trading strategies that have pushed the loonie towards its lowest level in three months. With the holiday weekend now over, questionable global growth, weaker commodity prices have the ‘growth currency’ in a stranglehold. The flight to quality, equity losses and the fear of a multilateral currency intervention has had the CAD underperforming on the crosses. OIS’s are currently prices a 50% chance that the BOC will hike in June, earlier last week the market had priced in a 75% chance. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency.

The AUD fell for a second consecutive day as investors sold higher yielding assets on concerns that the European debt crisis will worsen and on reports of escalating tensions between North and South Korea. Plummeting equity markets in the region and potential War rhetoric apparently from Kim Jong has pushed the currency lower against nearly all its major trading partners. So far this month the AUD has managed to slide -12% on declining equity and commodity prices. It’s not surprising with the doubt that the markets are experiencing in the EU/IMF accord that growth currencies have retreated from their initial euphoric highs recorded earlier this month. The AUD sits close to its longer term support levels after the weekend sell off (0.8108).

Crude is weaker in the O/N session ($67.59 down -262c). Crude prices were little changed yesterday as the dollar’s strength negated expectations for demand growth in China. Initially, speculators managed to push the commodity higher on rumors that China was going to delay some of their ‘bubble burst’ measures to cool the economy. However, the somewhat ‘euphoric stability’ has been short lived. With global bourses plummeting in the O/N session, again has pushed the commodity to test once again last week’s lows. Prices seem to be trying in vain to rebound on oversold indicators. The market can expect the other issue of oversupply to be addressed by OPEC if we continue to see price slippage. Last week’s EIA report managed to record a ‘smaller positive print’, showing that crude stocks gained +200k barrels vs. a market expectation of +1m. On the other hand, gas stockpiles fell -300k barrels. Interestingly, again inventories at Cushing (the delivery point for benchmark WTI) rose +917k barrels to a new record of nearly +38m. Not helping the crude’s price is refinery runs dropping to 87.9% of capacity, from 88.4%. With global equities under pressure is only fueling concerns that the region’s debt crisis will worsen, and by default it may affect global demand. The US economy and the dollars strength and not oil fundamentals have driven the market to date.

Last week the story line was the EUR appreciating, equity losses mounting and inflationary fears ‘none’ existent had speculators heading for the exits. Now that the EUR has lost all of that firm footing, equity losses continuing, has again revived the demand for the commodity as a ‘safer heaven’ asset class. Over the last five trading sessions, the yellow metal managed to depreciate -4.2% as investors liquidated positions to supplement losses in other asset classes. Longer term investors have been using the commodity as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,186).

The Nikkei closed at 9,459 down -299. The DAX index in Europe was at 5,654 down -150; the FTSE (UK) currently is 4,946 down -143. The early call for the open of key US indices is lower. The US 10-year eased 12bp yesterday (3.11%) and is little changed in the O/N session. Treasury yields managed to print yearly lows on the back of plummeting global bourses and on fear that Europe’s fiscal crisis will slow economic growth. On a macro level, treasury prices should remain bid as demand for the ‘safest assets’ intensifies. This week the market is to take down $130b of product (3’s, 5’s and 7-year bonds) and dealers will be expected to cheapen up the curve. The benign US inflation numbers earlier last week solidifies the Fed’s stance on keeping rates on hold for an ‘extended period of time’. Overall, the European political risk has the US yield curve wanting to test much lower. Technical analysts are looking for a 3% print in 10-years.

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