Obama’s ‘o-phoria’ is dead in the water!

A two day equity rally is giving the investor the opportunity to liquidate more of their own ‘toxic’ portfolio. This ‘O-phoria’ has lifted stocks and seems to have created a ‘temporary and artificial floor’ on rates and on commodity prices. It’s believed that hedge funds are half way done dumping their own equity positions-another $200b to go!! This does not give me a warm and fuzzy feeling. The US administration is systematically devaluing the US$ by their deficit actions and by default will lose their reserve currency status. We have not had thanksgiving yet!

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

The US markets will begin to shut down later today as we prepare for the long Thanksgiving holiday weekend. However there is a great deal of economic news to be digested despite the holiday season that’s in it. As expected, yesterdays US data was weak. There was no question that US home sales would fall, it was only a question of by how much. Home re-sales dropped -3.1%, m/m to 4.98m units last month as the credit crunch intensified and layoff announcements jumped. With rising foreclosures continuing to depress prices, increased economic uncertainty has kept homebuyers on the sidelines. As the economy deteriorates further and job opportunities diminish, the prospect that the housing correction will last longer than previous estimates continues to rise. Single family sales declined -3.3%, m/m to 4.43m units, and erasing part of the last months rebound. Prices continue to fall as inventories remain high and foreclosures rise, but it will not be enough to entice homebuyers back into the market in the short term. The total median price fell to $183k, while the average price dropped to $224k. Already this morning in the European session Capital Markets is preparing for much weaker data. Global equities cannot seem to sustain its largest rally in 20-years. One can surly expect 4-5 handles on currency pairing again as liquidity becomes more of an issue.

The US$ currently is higher against the EUR -0.18%, GBP -0.16%, CHF -0.38% and lower against JPY +0.75%. The commodity currencies are weaker this morning, CAD -0.78% and AUD -1.91%. The loonie has found some traction due to a number of positive variables. Yesterday was spot oil settlement day, all day traders were weary of any commercial interest would depress the USD. But, the advance of global equities and commodities had a greater impact on the currency. The bailout of Citigroup and speculation that governments will stimulate faltering economies even further encouraged investors to pare some of their risk aversion trades. In the short term this can only bode well for the CAD dollar. But, is this relief rally sustainable? Investors continue to eye commodity prices for direction. Despite oil rallying yesterday, the black stuffs prices continue to trade close to its 20-month low. Crude accounts for approximately 10% of all of Canada’s export revenues. Governor Carney last week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. Over the weekend PM Harper has already indicated that the government would run a ‘short term’ deficit to stimulate the economy. Traders have priced in another 50bp ease next month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%). After yesterdays fast paced and somewhat exaggerated move, expect traders to be better buyers on USD pull backs (of course this depends on both equities and commodities).

This week has started off where we left off with investor’s continuing to unwind the ‘carry trade’ and dumping higher yielding currencies. Despite the Citigroup ‘bailout’, risk aversion strategies continue, as uncertainty and fear dominate. For now traders continue to be better sellers on rallies (0.6369).

Crude is lower O/N ($52.53 down -197c). Crude prices advanced yesterday after the announced US rescue plan for Citigroup over the weekend. The government’s action had boosted investor confidence; coupled with a weaker USD, it managed to improve the appeal of commodities across the board. Further stimulus packages announced by Asian governments also managed to lend a helping hand. In this current environment, is it sustainable? Last night’s price action does not think so. OPEC remains concerned that oil prices continue to flounder around the 20-month low. Reports show that OPEC members are adhering to quotas that were agreed on last month. The members are expected to meet in Cairo this weekend; last month they set quotas to 30.98m barrels a day for this month compared with 32.2m a day in Oct. But, they remain worried by the direction of future prices. They are not sure if there is too much product on the market or that liquidity is drying up. According to Venezuela’s oil minister, Ramirez, deterioration in global demand has left a surplus of about 1m barrels a day over supply that needs to be removed by year end. It is very much a given that OPEC will cut output again, the announcement of the timing is the issue. Analysts that were bullish less than two months ago have aggressively revised next years target to $80 a barrel. Crudes slide since the summer will threaten investment in oil and gas production projects around the world. Fear is destroying future demand at the moment. Last weeks IEA report showed that inventories climbed more than forecasted as fuel demand dropped. Stocks climbed +1.6m barrels to 313.5m w/w vs. an expected jump of +1m barrels. Not surprising, US fuel demand over the past month has averaged +19.1m barrels a day, that is down -7% from a year ago (where is the cold weather). Speculation that the recession will further curb demand could push prices lower. To date, crude prices are down 63% from their summer highs and down 42% y/y. The erosion of future demand continues to be a ‘big’ question mark for global economies. Gold has advanced over the past few trading sessions as traders speculate that the Fed will lower interest rates soon to stimulate the economy, thus boosting the appeal of the ‘yellow metal’ as an alternative investment and a safer heaven to a weaker greenback ($812). It has moved substantially higher since last Friday’s open of $745. We are approximately 10% higher.

The Nikkei closed 8,323 up +413. The DAX index in Europe was at 4,504 down -50; the FTSE (UK) currently is 4,123 down -30. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 14bp yesterday (3.35%) and gave nearly all that up in the O/N session (3.22%). Treasuries were under pressure for most of the day yesterday as traders positioned themselves for the issuance of more short term US government debt ($36b). Investors are now speculating that a bailout of further US financials will require President elect Obama to spend more than previously indicated to boost the US economy. It’s believed that the new tally will be around $700b in aid, a lot higher than the $175b package that Obama proposed a month ago. Today’s economic reports are expected to show that consumer confidence remains at a record low and the US economy once again eased in the 3rd Q more than analysts predicted. This gave treasuries a bid O/N.

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