In 2010 Beware Of the Keynesian Hangover

2008 and 2009 are the Years never to be forgotten. They nearly brought global financial markets to their knees. They punished greed, leverage and irresponsible risk. Years that have managed to make some oligarchs much poorer and perhaps made us sit up and think about future society’s values a wee bit more. A pessimist will tell you to brace yourselves for the possibility of more of the same, while an optimist has confirmed an ending to the recession with little chance of a ‘double dip’. Whatever is in store for us let’s have a happier NEW YEAR.

The US$ is weaker in the O/N trading session. Currently it is lower against 15 of the 16 most actively traded currencies in a ‘volatile, yet illiquid’ trading range.

Yesterdays Chicago PMI beat all analysts’ expectations (60 vs. 55.2). It seems that US companies expanded this month at the fastest pace in nearly 4-years, perhaps providing us with stronger proof that the economic recovery is gaining momentum. Stimulus programs have boosted a rebound in global sales that is reducing stockpiles. By default, the trickle down effect should encourage manufacturers to increase production in the coming months. Digging deeper, the orders sub-component, climbed to its highest level in more than 2- years. Even the employment headline registered growth for the first time in 13-months (pre-recession). The production index and order backlogs also improved. In fact it was a rosy report for the second last day of the year.

The USD$ is currently lower against the EUR +0.53%, GBP +0.42%, CHF +0.62% and JPY +0.20%. The commodity currencies are stronger this morning, CAD +0.72% and AUD +0.73%. The loonie bear’s took a firm grip on the market yesterday, exiting short dollar positions on stronger growth signs south of the border. The CAD declined the most vs. the greenback on the second last trading day of the year. Prior to yesterday, the currency was the best performer amongst the 16 most traded currencies this month. Elevated commodity prices and robust equity indices had kept the loonie in ‘demand’ territory. However, yesterday’s action was a reversal of fortune. Today’s action will be a function of portfolio year-end requirements. Speculators continue to want to short the loonie after the fortnights tentatively over exaggerated gains. There is better buying on pullbacks.

The AUD rallied in the O/N session and is on course to record the largest annual gain vs. the greenback in 6-years. Stronger commodity prices and positive equity indices have convinced investors that the recent currency ‘softening’ was somewhat overdone. Similar to most currency pairings, the markets lack direction because of liquidity constraints and low volume. The RBA believes its monetary policy is ‘now back in the normal range’ after lenders raised business and home-loan rates by more than the RBA themselves have increased (+3.75%) the overnight cash rate target. Traders have aggressively pared bets that the RBA was in a position to hike rates for a fourth consecutive time in Feb. (0.8924).

Crude is higher in the O/N session ($79.89 up +49c). Oil prices initially came under pressure after yesterday’s weekly EIA report showed a smaller than forecasted decline in inventories. This month, prices have been rising even as the dollar climbs, they are rising even as interest rates are backing up. There is no correlation and it can only suggest that the market is beginning to believe that global demand is rising. Forget the dollar. The demand ‘variable’ seems to be back on the table again. Expect crude to remain better bid on pull backs as consumption is expected to pickup because of the North American cold snap. Oil inventories dropped -1.54m barrels to +326m last week vs. an expected decrease of -1.85m barrels. They were +5.2% above the 5-year average, down from +5.3%last week. Despite this week’s report, the trend of demand and consumption continues to climb. Year-to-date, oil has climbed +76%, the largest increase in a decade.

Gold retreated for a second consecutive day yesterday on the back of a strengthening greenback persuading investors to shy away from investing in the commodity as a hedging alternative to a weakening USD. In this morning’s European session all was reversed as the dollar has wilted on the final trading day of the year. The buck has managed to appreciate +3.8% this month, of course the million dollar question remains, is this month’s dollar strength sustainable and will it be repeated at the beginning of the New Year? As per usual, investors will be guided by the inverse relationship of the ‘yellow metal’ to the reserve currencies price movements. Month-to-date, the commodity had depreciated just under 12% after printing a record high of $1,227.50 early in Dec. Year-to-date, it has appreciated +23%, the ninth consecutive yearly gain. Not unlike other asset classes, this month’s holiday swings have been somewhat overly exaggerated on liquidity constraints ($1,105).

The Nikkei closed at 10,546 down -91 (holiday). The DAX index in Europe was at 5,957 down -54; the FTSE (UK) currently is 5,410 up +12. The early call for the open of key US indices is higher. The US 10-year bond backed up 1bp yesterday (3.81%) and are little changed in the O/N session. The $32b US 7-year auction came in at 3.345% vs. the pre-auction levels of 3.346%. The bid-to-cover ratio was stronger than expected at 2.72 vs. Nov.’s print of 2.76 and Oct.’s 2.65%. The average for the past 10 auctions was 2.56. Indirect bids (Primary dealers, Cbanks etc.) accounted for 45% vs. the 62.5% print in Nov and the 59.3% demand in Oct. With indirect registering 45% and the tail being small (0.5bp) there seems to be decent foreign demand for longer dated securities.

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