Obama’s week of Contagion…..!

A week of ‘contagion’ where Global indices continue to retreat, so far the Dow has reached a 6-year low. Year-to-date the index has pared 15%. Financial equities are within a new 17-year low. Everyone is questioning the viable economic and the financial situation in Eastern Europe (Hungry, Poland) and to the West (Ireland). This has led to Sovereign credit spreads surging. The Nikkei has already lost more than 16%. Gold is rallying. Politicians and CBankers do not seem to be asleep at the switch now as we regress! All this continues to remain attractive for the greenback, Trichet speaks today and any hint of moving, then the EUR will penetrate that 1.2500 barrier.

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

The number of unemployed US citizens drawing benefits last week again broke the weekly record for the 4th time on the trot (+4.99m). First-time applications for benefits remained unchanged at +627k, a tad higher than analysts had estimated (+620k). One can expect that the Detroit layoff announcements this week combined with the trickle down effect finally kick in, will surely push the US unemployment rate towards that psychological 9% level. The 4-week moving average (less volatile measure) rose to +619k, the highest level in 27-years from +608k w/w. In 14-months since the recession officially began, the US has managed to eliminate +3.6m jobs, last month alone US companies pared +596k jobs, the largest 1-month loss in 35-years. Now we wait to see if Obama’s packages gain traction, change consumer psyche and stop the sea of red. Other data yesterday surprised to the upside. US producer price index advanced last month to +0.8% from a declining Dec. number of -1.9% on the back of autos (+0.3%), tech and chemical companies (+1.3%) hiking prices despite slumping sales to try and boost the balance sheets. If one excluded the most volatile component, food and energy, then one notices that core-PPI advanced to +0.4% vs. -0.2%, m/m. The Fed minutes this week doest not expect these prices changes to be sustainable, with a prolonged weakening economy and a dismal unemployment situation upon us; policy makers continue ‘to see a threat of broad declines in prices’.

The US$ currently is higher against the EUR -0.63%, GBP -0.59%, CHF -0.85% and lower against JPY +0.60%. The commodity currencies are weaker this morning, CAD -0.30% and AUD -0.93%. Despite weaker economic data this week, the loonie managed to advance against its largest trading partner south of the border as the greenback systematically lost ground against most of its major trading partners coupled with the fact that commodities remain better bid. Yesterday’s weekly EIA report provided the CAD$ the biggest reason for its sudden love affair with the optimistic investor. Over the last 6-months the greenback has appreciated 19% vs. the loonie. Yesterdays move was not consistent in strength to other commodity influenced currencies. Being guilty by its proximity and association with the worlds largest market does not have all the advantages. Despite all this, the economic data of late has been weak and solidifies Canada’s recessionary stance. The economy, who relies heavily on its southern partner (over 70% of all goods head south), does not expect any pick up soon. Some analysts are already revising their numbers and expect the economy to shrink 2% this year as opposed to 1.5% recommended a few months ago. Dismal exports, jobs and manufacturing growth will only impede the economy and currency even further. The appetite for riskier assets probably gives Canadian bears an opportunity to add to their positions. Already this week the loonie has managed to print a new 6-week low as global equities and riskier assets took it on the chin. The depth of the ‘doom and gloom’ will continue to weigh on the currency as pessimism expressed in lower equity markets has nervous investors unsettled about wagering the ‘farm’.

The AUD is now heading for a weekly drop vs. its green counterparty currency as concern over banks’ vulnerability to worsening eastern European economies pushed down higher-yielding assets. Falling bourses has investors reducing their risk appetite for now. We are trying to decipher all the recently introduced stimulus packages, look for traders to play the percentage game and sell the currency on rallies (0.6385).

Crude is lower O/N ($38.71 down -88c). The Crude Bears were blindsided by yesterday’s weekly EIA report. Expecting stocks to rise for the 19th time in 21-weeks the market rallied as supplies fell -138k barrels to +350.6m last week vs. an anticipated increase of +3.2m barrels. Commodities also got a helping hand from a buoyant EUR yesterday who took the shine off the greenback and encouraged investors to want to own commodities as a ‘store of value’. It seems finally that this years OPEC production cuts are making an impact. Imports of crude declined -859k barrels a day to +8.79m, the lowest level since Sept. 2008. Once again there is renewed appetite for the black-stuff despite earlier fears this week encouraged investors to liquidate any risky positions. There will be no sustainable rally witnessed until we see global demand increase or inventory levels ‘consistently’ pared due to the OPEC production cuts. Year-to-date, crude is down 22%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. Finally we are witnessing an impact. A risk aversion strategy has investors looking a ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remain under pressure ($980). Investors are gravitating towards precious metals as a safe heaven asset class.

The Nikkei closed 7,416 down -141. The DAX index in Europe was at 4,100 down -115; the FTSE (UK) currently is 3,938 down -80. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 5bp yesterday (2.83%) and are little changed in the O/N session. After this weeks already rapid advance, the front end of the FI market happily gave up some ground after yesterdays PPI data hinted of higher inflation. With another record FI product need to be issued next week, the US would require higher yields to attract outside interest. The US treasury plans to sell $40b 2-ys, a record $32b of 5-ys notes and a record $22b of 7-ys notes. The total of $94b exceeds the previous record of $78b in a week in late Jan!

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