My way or No way! Obama

This week has all the action, political intrigue, jousting for positions, fighting for survival and there no films ‘rights’ here. Political leaders are getting more air time ahead of the G20 meeting in London, where the Met by the way seem to be preparing for a battle. Behind the scenes leaders are supposed to be heading towards a consensus of sorts, not sure what, while publically they come across as only hopeful in anything! One way or another, Capital markets will be surprised on Thursday. Perhaps the ECB will ease 50bp and announces quantitative methods during the G20? It will certainly have the market moving. Once the day’s hangover is gone Friday serves us up NFP!!

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 ‘violent’ trading range.

There has been very little fundamental data to trade off so far in this event laden week. It’s anyone’s guess if we get any consensus from the G20 meeting on Thursday and a bigger question being what type of consensus? Obama’s administration’s stance on the auto industry has sent global equities spiraling and encouraged investors to once again strap on ‘risk aversion’ trades. In effect the industry is getting its final chance to restructure themselves otherwise they will be allowed to ‘slide into structured bankruptcy’. It seems that Trichet comments yesterday indicating that the Euro-zone has become weaker since Jan. has given the green light to a 50bp ease at this weeks ECB monetary policy meeting. Ireland had its top credit rating removed by S&P late yesterday, citing that the country’s deteriorating finances as the culprit. They have now joined Spain, Portugal and Greece. S&P believes that Ireland’s public finances will likely require a number of years of sustained effort to repair on a far greater scale than PM Cowan’s current plans. Their economy is virtually on its knees and examples like this may convince European policy makers to embrace quantitative easing methods, similar to those being employed by BOE, BOJ and the Fed, which could lead to a far weaker EUR in time.

The USD$ currently is lower against the EUR +0.62%, GBP +0.15%, CHF +0.50% and higher against JPY -1.07%. The commodity currencies are stronger this morning, CAD -+0.61% and AUD +1.31%. CAD managed to print a 2-week low yesterday as selling pressures on the back of plummeting equity and commodity prices was amplified by month-end and quarter-end corporate USD demand. With the strength of the greenback across the board by default the loonie was expected to fall foul of risk aversion strategies. This has not carried on in the O/N session. All last week the currency had been driven by the strength of commodity prices (50% of Canada’s total export revenue is commodity based). But, oil has once again taken it on the chin as global equities come under intense pressure. Fundamental or technical data is providing no guidance to investors. It’s currently all about the ‘big’ dollar and commodities. Look for investors to want to buy USD on any pull backs.

The fear of the global recession deepening is pressurizing the AUD$ on the whole, however the currency managed to gain some traction in the O/N session especially vs. JPY. With stocks stabilizing the currency has received a short term boost. The fear of the recession deepening has traders looking to sell the currency on upticks for now (0.6900). The concern that the G20 meeting will not achieve anything has investors looking to the sidelines.

Crude is higher in the O/N session ($48.62 up +21c). Crude prices remain under intense pressure as global equity markets tell us that this recession may be deepening and further adding to the theory of demand destruction. The strength of the greenback continues to contribute to the plummeting price action as it limits the appeal of commodities as an alternative investment. Crude prices have tumbled nearly 12% since the middle of last week. Qatar’s oil minister said yesterday said that ‘demand remains slack and it is unlikely to reach $60 a barrel this year’. Prices of late have been driven solely by the strength of the USD. Fundamental data has been very bearish and warrants a further weakening of prices as demand destruction remains buoyant. Last week prices had encroached on its 4-month highs as advancing global equities psychologically signaled that fuel demand would increase, a theory that been shot down rather quickly. The EIA report showed that US inventories climbed to their highest level in 16-years as demand wanes. It was the 22nd gain in 26-weeks and left stockpiles +13% higher than the 5-year average for the period. Inventories rose +3.3m barrels, w/w, vs. an expected rise of +1.1m. It was another bearish report that requires demand to move higher for prices to at least stabilize. This certainly puts OPEC and further production cuts back onto the dealing table. The fundamentals of supply and demand do not justify oil penetrating that psychological level of $55 a barrel anytime soon. The strength of the greenback has pressurized the yellow metal as an alternative investment for now. However, on deeper pull backs expect the metal to be better bid in this trading environment as the fear of inflation occurring on the back of the Fed’s plans to buy debt has investors wanting the commodity ($920). Be weary that the G-20 is expected to ask the IMF to make proposals to use proceeds from planned gold sales to support poorer nations this week.

The Nikkei closed 8,109 down -126. The DAX index in Europe was at 4,027 up +41; the FTSE (UK) currently is 3,844 up +81. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 2bp yesterday (2.72%) and are little changed in the O/N session. Treasury prices remain better bid on pull backs as the 3rd-outright purchase of debt by the Fed combined with global equities plummeting yesterday due to US government’s remarks that the auto sector may be heading for bankruptcy. However, traders remain concerned that government supply will exceed demand going forward. It is believed that debt sales will triple this year to a record of $2.5t. For now, the fear of this global recession deepening has encouraged risk aversion strategies that is given the bond market a stronger bid.

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