Is China healthy again?

One day the market is risk-adverse, next risk-taker. Is it possible to have a two day-trend for a change? It would make the summer go by a tad smoother. Qatar supposedly brought +7-yards of EUR for their Porsche stake yesterday morning and caught the market completely flat-footed. I suspect Porsche subscribers are down after that volatile move. No wonder ‘cash for clunkers’ was so popular! As expected the Swiss government will divest from UBS immediately and place the shares with international investors. This has temporarily given a boost to the CHF. Caution should be applied, SNB covets a weaker currency, and it will snap-back causing more tears!

The US$ is stronger in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘whippy’ trading range.

. With no US fundamental data yesterday to guide us through these summer days, capital markets took their cue from weekly oil inventory reports. Oil over the last 2-trading sessions has managed to advance +8.7% and catching many ‘non-green shoot’ believers offside. Now we have hurricane season to contend with. Like CNN hawks, we will follow every disturbance and the market will question, will she hit or land and disrupt the refineries in the Gulf? The so called weather premium takes effect now! The net effect has triggered a rally in energy stocks which again has led the broader market up. The mood change has seen the Shanghai Composite index reverse Tuesday’s -4.3% loss and once again give a boost to the carry and higher yielding assets as risk is warranted, again! Investors are getting ahead of the curve. These equity advances are not sustainable.

The USD$ currently is higher against the EUR -0.09%, CHF -0.16% and JPY -0.31% and lower against GBP +0.15%. The commodity currencies are mixed this morning, CAD -0.09% and AUD +0.28%. Yesterday’s Canadian CPI was slightly more dovish than expected for headline (-0.3%) and core (0.0%), but not enough to change analysts beliefs that prices continue to take a back seat to fundamentals as inflation remains a non-issue, a similar theme for other Cbanks. Digging deeper, the core-CPI reading was due to lower prices for clothing, footwear, alcohol and tobacco. On the other hand, seasonally adjusted food prices were up a tick, while other sub-categories remained flat. It was transportation falling -1.6%, m/m, which accounted for most of the headline decline. The report will allow Governor Carney to keep O/N lending rates at a record low (0.25%). What has all this meant for the loonie? Absolutely nothing, the currency was able to rebound from early morning losses induced by an uptick in risk aversion strategies after Asian equities struggled. The bullish weekly crude reports resuscitated the currency to last week-ends price level. The market is nervous of another weekly snap-back.

The AUD rose vs. both the USD and JPY as gains in US and Chinese equities boosted the demand for higher-yielding assets. The Shanghai Composite Index has managed to recover most of Tuesday’s -4.3% slide. The main reason for US equities strength has been the rapid rise in commodity prices; specifically oil this week (+8%). Are elevated commodity prices sustainable? (0.8312).

Crude is lower in the O/N session ($72.37 down -5c). Wow! Hot on the heels of a bullish API report on Tuesday, where inventories fell a shockingly large -6.1m barrels, the weekly EIA report was not going to be out-done. The government report showed that US inventories declined the most in more than a year as imports plummeted and refineries increased their operating rates. Inventories declined -8.4m barrels, w/w. More eye-catching was that imports fell -15% to +8.53m barrels a day (the biggest drop and lowest rate in 11-months since the last hurricane season). Right now we have to contend with Hurricane Bill, but it’s supposed to stay clear of all refinery operation! Crude prices for the longest time have been trying to find their own conviction and investors have been looking for signs that the US would recover its energy appetite as the economy recovers. Despite oil prices retreating early in yesterday’s session on the back of global equities struggling, the bulls got what they needed in this weeks report. Even Kuwait’s oil minister declared yesterday that current prices are ‘not bad, not bad at all’. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. Despite probably seeing the worst of the recession, global growth will remain very subdued. This certainly does not bode well for any strong rebound for prices in the coming months. But, after all it’s the hurricane season! The ‘yellow metal’ managed to advance for only the second time this week, on the back of a weaker USD which boosted its appeal as an alternative investment ($949).

The Nikkei closed at 10,383 up +179. The DAX index in Europe was at 5,315 up +83; the FTSE (UK) currently is 4,746 up +57. The early call for the open of key US indices is higher. The 10-year bond’s eased 3bp yesterday (3.45%) and are has managed to back up 4bp (3.49%) in the O/N session. Treasuries remain coveted in pull backs after last weeks US data showed that the cost of living was unchanged. Government buy-backs have not helped prices as dealers continue to make them pay up for the product. Are equity prices sustainable?

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