Perception has Risk-appetite advancing!

200 small and medium-sized US banks must raise another $24bn to meet the capital standards set by the US government in its stress tests. Out of the 7,500 regional banks that make up the US financial bank bone, it’s expected that 500 will close this year! Geithner has said that it he does not intend to extend the stress tests beyond the 19-all ready named institutions. There is no way that the US government went through this exercise not to use it as a future model for financial stability!

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

Plans by MSNY, JPMorgan and Goldman Sachs to refund a combined $45b of government funds continue to lift global equities and risk appetite. Already this week we have witnessed that optimism over the Indian elections results have encouraged market participants to invest into emerging markets. All these developments are having a huge impact on the FX-carry or riskier trades. With front end Libor rates collapsing and the mere fact that institutions are willing to pay back their ‘loans’, perception wise we could be in for strong violent risk rally!

The USD$ currently is lower against the EUR +0.45%, GBP +0.83%, CHF +0.21% and higher against JPY -0.31%. The commodity currencies are stronger this morning, CAD +0.45% and AUD +0.84%. Despite it being a national holiday and the financial markets closed in Canada the loonie roared like a lion as fickle investors decided to strap on more risk and in doing so accumulated more higher yielding currencies like the AUD, NZD and CAD. In one session, the currency managed to mirror last weeks violently achieved gains. Since the middle of Mar. at the loonies’ 54-month low, the commodity currency advanced +11% vs. its largest trading partner. A portion of its recent strength has been attributed to excessive optimism rather than on fundamentals. One should expect global euphoria to dampen, with that investors can expect to see better levels to own this commodity currency. The country’s fundamentals are strong when compared to other G7 partners, but it exports 70%+ of its goods and services south and 50% of that revenue is commodity based. Expect to see the USD/CAD to grind higher from its new lows achieved in the O/N session!

The AUD in the O/N session managed to print its highest print in over a week mostly on the back of Asian equities trading aggressively higher, couple with verbal support from RBA governor Stevens believing that a ‘recovery will be witnessed by the end of the year’. The appetite for the higher-yielding assets (AUD, NZD and CAD) is being renewed quickly, as global data continues to surprise the market on the high side, capital markets are not really being positioned for that. Analysts believe we are on our way to 0.8000c in the short term (0.7745).

Crude is higher in the O/N session ($60.05 up +106c). There are a number of reasons which gave the black stuff a stronger bid yesterday. Firstly, the Nigerian militant group (MEND) via e-mail, threaten to block waterways used for energy exports. Secondly, a Sunoco refinery fire may curtail some US northeast operations. Finally, with equities rallying, by default this will help commodities. The fundamentals for the commodity are bleak. Lat week the IEA forecasted that world oil consumption this year will fall the most in over 28-years. The fundamentals warrant a much deeper pull back. The IEA cut their daily estimates to +83.2m barrels, which is down -3%, y/y. That’s -230k less than last month’s estimates. Last weeks EIA report revealed an unexpected decline in inventories, as imports plunged to the lowest level in 8-months. Crude supplies fell -4.63m barrels to +370.6m vs. an expected increase of +1m barrels (imports fell -12% to +8.71m). Earlier the API reports showed that supplies dropped by -3.13m barrels, w/w. Yes, it was a bullish headline number, but, record high inventory levels continue to be the negative variable in the price equation. Year-to-date, crude prices have advanced +33%, mostly on the back of a high percentage of OPEC members conforming to the last 9-months of production cuts. OPEC surprised everyone and stated that they boosted oil production last month for the 1st time since July. (+967k barrels a day over quota). They are now adhering to 77% of their self imposed cuts to production, the previous month it was 82%. There remains a strong correlation between equities and oil. Yesterday, Gold had it largest daily pullback this month, as gains in global equity markets eroded the appeal of the ‘yellow metal’ as an alternative asset ($922).

The Nikkei closed 9,290 up +251. The DAX index in Europe was at 4,733 up +81; the FTSE (UK) currently is 4,487 up +40. The early call for the open of key US indices is higher. The 10-year Treasury backed up 5bp yesterday (3.20%) and a further 5bp in the O/N session (3.25%). Prices remain under pressure on the back of recent fundamental data contracting less than expected and easing investor’s concerns that the US economy falling deeper into this recession. The outlook looks negative for treasury prices as the US’s record pace of borrowing will push yields much higher as their buy-back policy is too small to have the opposite effect (+300b buy-back vs. some estimates of +3.25t borrowing requirement).

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