North Korea to test Capital Markets nerves!

North Korea sees the US being hostile and by default the rest of the world must be too! Even in the O/N session, they announced that they tested some shorter range missiles. This has had Capital markets in the region on the defense. Expect the UN Security Council to be hammering out new mandates to be imposes on the country, while investors seek further sanctuary!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

It seems that the EUR has topped out vs. the greenback, temporarily of course. In times of uncertainty, investors and speculators continue to gravitate towards the ‘old buck’. Much attention has been focused on the Euro-land in the O/N session. Apparently an article in a London newspaper states that ‘German debt is ready to blow like a grenade’ (Telegraph UK). Supposedly German banks have Eur200b of bad debts, and further write-offs may reach another Eur860b, twice the total reserves of the country’s financial institutions! This has pressurized the currency right out of the gates, one should expect better to see better levels to own it.

The USD$ currently is higher against the EUR -0.51%, GBP -0.43%, CHF -0.50% and lower against JPY +0.17%. The commodity currencies are weaker this morning, CAD -0.59% and AUD -0.67%. With the US on holiday and very little outside interest in the Canadian dollar, dealers were happy to pare some of last weeks gains, pushing the currency from its 7-month high as they booked some profits and sought sanctuary in the greenback. With oil backing off and last weeks move being some what overdone, with little volume Canadian dealers were able to get a head start ahead of its North American counter-parties. Depending on North Korea’s reaction to the rest of the world’s condemnation of its actions, investors should expect higher yielding currencies to underperform in the short term. The longer term fundamentals certainly support a much stronger CAD, however investors have plenty of time to add to their positions at more favorable levels.

The AUD has weakened in the O/N session on speculation that their record + 20% gain vs. the USD over the past 3-months was too rapid. It does not help that most investors sold higher yielding assets on the back of North Korea missile testing which is weighing on equities in the region (0.7747).

Crude is lower in the O/N session ($60.01 down -161c). Crude prices felt the pressure from two fronts yesterday. Firstly, the belief that OPEC will not adjust any production quotas at this weeks meeting and secondly, on the back of the USD gaining traction due to North Korea’s nuclear testing. Their actions have boosted the appeal of the currency as a safer heaven and reduced the attractiveness of commodities as an inflation hedge. The Global demand scenario has not warranted such an aggressive run up over the past 2-weeks, a scenario that is sure to keep OPEC members happy. Last week’s EIA report showed that US inventories declined more than forecasted. Stocks dropped -2.11m barrels to +368.5m vs. an anticipated decline of -0.4k, w/w. US refineries are operating at +81.8% of capacity, which is down -1.9%, w/w and is the lowest utilization rate in a month and a half. One can conclude that refineries are nervous about increasing production as global demand remains weak. The 4-week monthly demand is averaging at +18.3m barrels a day, that’s down 8% y/y. OPEC (produce 40% of global crude supply), is expected to keep quotas unchanged on Thursday as recovering oil prices do not warrant new production cuts. If anything, these elevated prices will likely encourage some members to increase production once again! Gold has not swayed too far from last weeks closing prices as the uncertainty of the USD had boosted the purchase of the yellow metal as an alternative investment ($948). With the big dollar gaining some traction look for better levels to own it.

The Nikkei closed 9,310 down -36. The DAX index in Europe was at 4,834 down -85; the FTSE (UK) currently is 4,317 down -46. The early call for the open of key US indices is lower. The 10-year Treasury backed up 11bp on Friday (3.45%) and has eased 3bp in the O/N session (3.43%). This week’s $101b issue by the US Treasury (2’s-$40b, 5’s-$35b and 7’s-$26b) will be the main focus of attention as the US government resumes debt sales after a 2-week hiatus. Investors fear that the US will lose its AAA credit weighting is also pressurizing FI prices.

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