Risk appetite on the Boil or have we turned it down to a Simmer?

Safer heaven assets managed to stop some of their bleeding after CIT, once the largest independent commercial lender, said it probably will not receive a Fed bailout, fueling speculation that the entity would file for bankruptcy. This is another reminder that the financial system still has ‘issues’. A record amount of foreclosures reported in the 1st-half of the year and New Zealand long term debt being downgraded has turned down the heat to a simmer on risk appetite. The S&P 500 has advanced +6.1% so far this week as companies posted much better-than-expected results. It’s the biggest 3-day rally since touching the 12-year lows in early Mar. Are we faring better? Credit companies reported that defaults and delinquencies were lower in June than expected. All eyes will be on Tiger and US unemployment claims and one of them will be a surprise!

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

A plethora of US data yesterday fuelled US equities and encouraged investors to embrace risk once again. Markets remain thin and volatility very much heightened. Currency trading ranges have been wide and painful for some. Not much of a surprise given the PPI numbers earlier in the week, but US CPI advanced (+0.7% vs. +0.6%) more than forecasted last month, led by a jump in energy costs that overshadowed slower price gains for other goods. Core-CPI rose +0.2% as expected. However, comparing y/y, prices have fallen -1.4%, this remains the biggest drop in half-a-century. It’s a fact that consumers continue to purchase less and with business paring investments has forced companies to reconsider how to burn off inventories. They are doing this by deeper incentives and capping prices in order to shift their goods. Most have not been passing along the higher energy costs that the economy was lumped with over the last few months. However, the market is seeing gas prices fall this month and by default should indicate that energy costs will moderate for the remainder of the year. The reality is with little wage increase pressures and higher unemployment numbers, inflation will be a non-starter.

The Empire Manufacturing Index fell at the slowest pace in 12-months in July (-0.6% vs. -5.3%) bolstered by the largest gain in new orders since Dec. 2007. Any reading below zero indicates that the economy is contracting, however, the headline indicates at a much slower pace. A dramatic fall in inventories will probably help the manufacturing sector from continuing its freefall. But, do not expect companies to turn on the production switch so fast, as they struggle with the fallout of rising unemployment and the continuous destruction of family wealth. Let’s see if other regions report similar results. It’s worth noting that polled executives turned less optimistic about the future. The sub-component outlook metric fell to 34 from 47.8 m/m.

Yes, there are Green shoots, but be weary of early frost warnings. US industrial production fell last month at the slowest pace in 8-months (-0.4% vs. -0.6%). Another tidbit of positive data, less negative is deemed a positive result for Capital Markets. The previous month was also revised down 1/10 to -1.2%. Not so good was the Capacity Utilization rate (the % of available resources being utilized by manufacturers) falling to its lowest level in 42-years (+68% vs. +68.2%). With the first half of the year being dedicated to slashing inventories, perhaps government incentives may now begin to have an impact on the consumer spending and production levels. In reality, job assurance and job losses will continue to have a huge impact on the pace of growth. Lets see what today’s unemployment claims bring us!

The USD$ currently is higher against the EUR -0.12%, GBP -0.25%, CHF -0.14% and lower against JPY +0.62%. The commodity currencies are weaker this morning, CAD -0.41% and AUD -0.68%. Despite May Canadian factory sales dropping -6% (double expectation), data south of the border helped to push the currency to its highest level in over a month. The loonie, so far this month, remains the best performing currency vs. the USD as increased risk taking and higher commodity prices heard the USD through all support levels. Better than expected unemployment numbers, combined with a more optimistic BOC business survey and a rocking real estate sector have the Canada ‘Bears’ contemplating throwing in the towel. Technically below 1.1144, the currency will once again be back in ‘Bull’ territory. The loonies’ appreciation has been violent and swift. Do not be surprised to see some sort of retracement and USD profit taking.

Fitch downgrading New Zealand’ long term credit rating to negative coupled with the RBA stating that they ‘intervened’ by selling $1.5b worth of their own currency for reserve management transactions in June has pressured both currencies in the O/N session. Dealers are speculating that the Aussi Cbank has been leaning on the currency in the 80c range. Equities and commodities finding it difficult to gain traction have pressurized long commodity currency trade positions. Look for sellers on upticks (0.7976).

Crude is lower in the O/N session ($61.14 down -40c). Higher equities means higher oil prices. Higher risk tolerance means a weaker USD, equals higher oil prices. A fall in inventories translates into higher oil prices. This weeks EIA and API reports showed a bigger than forecasted decline in inventories on the back of refineries increasing their operating rates. Stocks fell -2.81m barrels to +344.5m w/w, vs. an expected drop of -2.1m. Refineries operated at +87.9% of capacity, the most in 11-months. On the other hand, gas inventories climbed +1.44m barrels to +214.6m, the highest in 3-months vs. an expected increase of +0.875m. On the face of it a bullish report, couple this with Nigeria’s main rebel group (MEND) threatening to end its 60-day cease-fire gave the black stuff extra legs yesterday. On-going militia action has cut production by 20% in the region. Oil has retreated 15% from this month’s high. Technically, prices had got ahead of fundamentals in a big way over the past few months, and recent movements seem to have filled in the gap. Of course recent strength is highly dependant on advancing equities. Will global bourses keep up the momentum in this report ‘earnings’ season? Gold managed to print 2-week highs yesterday as a weaker USD and higher oil prices boosted the ‘yellow metal’s’ appeal as an alternative investment and hedge against inflation. The O/N session has managed to pare some of the advances as bourses trade in the ‘red’ and USD rises ($936).

The Nikkei closed at 9,344 up +75. The DAX index in Europe was at 4,927 down -1; the FTSE (UK) currently is 4,339 -7. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 11bp yesterday (3.57%) and is little changed in the O/N session. Prices fell for a 3rd-consectuative day and all on the back of global equities extending their rally and US industrial production numbers falling at a slower pace. This has resulted in investors curtailing their demand for the ‘safer asset’. Let’s see what this morning’s claim numbers have in store for us!

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