Questions for the day?

We are paying for higher oil-How does that help the global economy to grow?

The Russians have no appetite for US Treasury’s, leading to higher yields, higher financing-How does that help the Global economy?

Unemployment rates creeping up-How does that help the Global Economy?

Global Trade is becoming more negative-How does that help?

With the US GDP and Fed tax receipts at about $14t and $2.4t respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises. How is all this capable of pushing equities to such lofty heights?

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s US trade numbers did not give one a warm and fuzzy feeling. April’s deficit widened for a 2nd – consecutive month as the US economy continues to contract (-$29.2b vs. -28.5b, +2.2%). Exports are now at their lowest level in 3-years. Analysts fear that imports could be the first to experience a stronger uptick this year, that’s assuming that the US economy will rebound within the same timeframe. However, exports are expected to suffer until a recovery takes hold amongst the US’s largest trading partners (Japan and Germany). This scenario of course will only widen the deficit even further. Perhaps even more of an eye sore yesterday was the Mortgage Bankers Association’s index of applications to purchase a home or refinance dropped -7.2%, w/w, to 611 vs. 658.7. Over the past week, mortgage rates have backed up to their highest levels this year which will only deepen this ongoing housing slump and dissuade potential ‘new’ home buyers. The Fed buy-back program is failing to keep long rates down and with the threat of other CB’s following Russia’s lead in diluting their US reserves will only put pressure on rates to back up even further!

Already pointed out this in Tuesday commentary, there is growing concern within the ECB about ‘mounting difficulties’ at 25-banks in the Euro-zone. This morning’s UK Telegraph is quoting ECB member Krusec, it states that members ECB fears a banking crisis in 2010. A recent poll amongst fund managers showed that 30% said there will be defaults in several Euro-states. The lack of transparency amongst Euro-zone financials will only prolong this recession. Recent voting results for the European parliament are only a hint of what’s to follow in the region!

The USD$ currently is lower against the EUR +0.01%, GBP +0.18%, CHF +0.03% and JPY +0.39%. The commodity currencies are stronger this morning, CAD +0.34% and AUD +0.80%. The loonie had everything going against it yesterday and I am sure the BOC were relieved. Its Trade balance posted a deficit (-0.2% vs. +1.0%), the TSX pared earlier gains and finally the greenback found some much needed love despite some CB talking about USD asset diversification. Already this month, the currency has dropped -2.2% vs. its largest trading partner after advancing +9.3% in May, the most in at least 59-years. Last weeks employment report point to a moderately worse domestic environment due to the concentration on full-time job losses (-58.7k) and cooling of wages levels. Analysts expect the losses to put further downward pressure on future cash flows and disposable incomes. If there is no spending then there will be no growth. Expect the market to continue to sell CAD on USD pullbacks for now.

The AUD rallied for a 3rd-consecutive day after Government reports showed that the economy lost fewer jobs last month than analysts had predicted (-1.7k vs. -30k, m/m). Its partner in crime the NZD also got a boost in the O/N session after Governor Bollard at the RBNZ left key borrowing costs unchanged at 2.50%. He indicated that the economy would improve by year end and dealers are now adding to their bets that interest rates will rise in the next 12-months. As commodity prices remain robust, look for better buying opportunities on pullbacks to own the AUD (0.8136).

Crude is higher in the O/N session ($71.85 up +52c). Crude oils prices remind one of the ‘energizer bunnies’ they keep on going and going! Yesterday it managed to rise to a new 7-month high after the API reported that US stockpiles dropped last week (-6m barrels vs. +0.4k expected rise), as refiners ramped up production. The large drawdown is stronger evidence that weak demand is perhaps bottoming, couple this with the EIA raising its 2009 demand forecast for the 1st-time since Sept. has the market setting it sights on the $75 price that OPEC members wishfully predicted last month. Analysts expect that the market is perhaps once again getting ahead of itself and pricing in the fact that high levels of global inventories are going to fall pretty fast in the 3rd and 4th Q if OPEC can maintain their current output levels. They are currently complying with its Sept. production cuts, which are running at aprox. 77%. The weaker greenback is of course helping all commodities and there does not seem to be any reprieve for the currency in the short term. Yesterday’s EIA report supported the API’s earlier findings. Inventories of oil dropped -4.38m barrels to +361.6m, w/w. Gas stocks declined for a 7th consecutive week, another bearish report telling us that production levels are much lower than we originally perceived. OPEC next meet on Sept 9th and yesterday the Kuwaiti member indicated that they would not increase production until prices hit $100 a barrel. They produce 40% of the world’s oil. Will the run-up in prices derail our ‘fragile global economy’ for recovery any time soon? The ‘yellow metal’ has rebounded from its lowest level in 2-weeks as the decline in the USD has increased the appeal for precious metal as an alternative investment strategy and a stronger hedge against inflation ($957).

The Nikkei closed 9,981 down -10. The DAX index in Europe was at 5,077 up +27; the FTSE (UK) currently is 4,451 up +15. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 7bp yesterday (3.94%) and are little changed in the O/N session. The longer end of the US yield curve managed to back up to Nov.’s lofty heights on the back of dealers cheapening the curve to take down another $19b of 10-year Government bonds (it was not a good auction). Even the Russians added their weight to the falling prices after the CB indicated they are prepared to dilute some of their holdings and switch into IMF bonds. Despite the 10-17 year buy back ($2.5b), treasuries remain heavy ahead of today $11b long bond auction.

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