Social discontent to leave a stain on Capital Markets!

Week two for Obama and already companies have pledged deeper employment cuts as earning and losses continue to pile up during his watch. He is moving with speed, something that other world leaders should heed, enthusiasm to overcome is probably all that’s required to ‘right any ship’. Other Governments with familiar faces are doing battle on two fronts, the countries economic survival and what seems to be more important their own party’s survival in power. Canada’s PM presents a budget to the house tomorrow, 2 months after nearly losing a vote of no confidence. They are been reactive. Iceland is up in arms seeking to overthrow their government; The UK’s Gordon brown has started to blame foreign banks for their economic demise. Iberia, Greece, Latvia, Ireland have such disdain for their own governments that’s sooner or later boiling point will be reached!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

With the lack of economic data to chew on last Friday, investors were headline watching and continue to remain uneasy about the global economy, this was very much in evident by the uptick in commodity prices. Investors continue to be flocking towards the ‘store of value’. The US FI market is bracing itself for large issues and duration maturities which last week pushed Long Bond yield up a record 43bp. Most of this will be used for the record stimulus package, lets find buyers first! Democratic societies like Iceland are trying to overthrow their government, it’s unusual to experience civil unrest, but, this area is fast becoming a breeding ground for other similar economies, who assume they correctly or incorrectly are suffering under their government’s leadership (Greece, Portugal for example). In fact for Europeans, governments must bow to Brussels and Frankfurt first! BOE member Blanchflower does paint a happy picture this morning; he anticipates that the UK economy to conspire to obtain the levels of their US counterparts and that unemployment will rise to +3m or above. I know his objective is to ‘sugar coat most things’ but the UK certainly does not see any light anywhere at the moment! Not surprisingly, he believes that in the medium term he is upbeat about ‘prospects’ and Capital Markets were wrong to think the UK was doing worse than the Euro-zone. A bold statement, as the world continues to liquidate their Sterling positions.

In the FT this morning, it indicates that Sakakibara (former top currency analysts for the Finance Ministry) is suggesting that the BOJ could intervene in currency markets to help exporters before too long and that the moves could be seen if the JPY moves much above USD/JPY 85. More food for thought!

The US$ currently is higher against the EUR -0.20%, GBP -0.78%, CHF -0.43% and JPY -0.35%. The commodity currencies are mixed this morning, CAD +0.48% and AUD -0.46%. USD dollar bulls got a thumping on Friday as the loonie soared nearly +2.5c vs. its southern neighbor. Most speculators were caught flat footed and were looking for excuses to understand the sudden ‘love affair’ with the CAD currency. The strength for the commodity currency may be attributed to various variables, apart from the obvious, robust commodity prices (see below), whispers of M&A transactions with specific dealers pre-dealing the transaction probably took place. Fundamental data of late has been very much disappointing, but the Governments announcement of their expected deficit numbers ahead of tomorrow’s budget, pales in comparison with so many economies makes the currency much more attractive (government deficit of $30B next year). Despite Canadian retail sales data slumping last week, the loony has found some legs ahead of the Governments announcements tomorrow. Compared to a year-ago, total retail sales are down -0.4% while retail sales ex-autos were up by only +0.8% y/y. In volume terms, real retail sales were up by only +1% y/y. With Governor Carney cutting borrowing costs last week by 50bp as expected to 1%, traders continue to bet that the BOC will repeat their actions next month and then remain on hold for the remainder of the year. After last Fridays strong gain, do not be surprised to see some investors to pare position and book some profit this morning!

The AUD dollar was little changed in the O/N session as the government contemplates a bigger stimulus package to kick start their economy. Recently a loss in global equity markets has convinced investors to shy away from higher yielding currencies (0.6542), and all this despite robust commodity prices! The fear of a deeper recession has analysts speculating that the RBA will be forced to push borrowing costs below 2%. Temporarily this has taken the shine off the currency; investors continue to be better buyers on pull backs.

Crude is lower O/N ($45.97 down -50c). Finally, the black-stuff found some traction on the last day of last week as investors speculated that global stockpiles would decline as OPEC implements its promised production cuts. Investors have also helped push crude prices to a 2-week high whilst purchasing commodities as an alternative to equities and government debt. It is expected that OPEC will curb supplies by -5.4% this month to +26.15m barrels a day. Crude was able to climb +9.2% on the week, thus pushing prices up +4.2% for the year and now only down -47% y/y! It’s expected after these cuts that it will take a few months to rid this excess supply. All this despite last weeks anticipated EIA report. As anticipated it rose for the 15th time out of the last 17-weeks last week. Inventories rose +6.1m barrels to +332.7m, the highest level since Aug. 2007. Analysts had expected stocks to rise by +1.4m barrels. Refineries have reduced operating rates by a further -2% as fuel consumption erodes. Refineries operated at 83.3% of capacity, the lowest for the week in 18-years. The 4-week weekly averaged +19.4m barrels a day, down -4.7%, y/y. Gas stocks also increased significantly, they jumped +6.48m barrels to +220m vs. an expected rise of only +1.8m barrels. Demand destruction has thus far led to the -47% decline y/y. Last week OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. Once again Gold advanced aggressively on Friday and even printed a 3-month high as global equities once again came under pressure, thus persuading investors to seek a safer heaven and purchase the yellow metal as a store of value ($902).

The Nikkei closed 7,682 down -63. The DAX index in Europe was at 4,187 up +8; the FTSE (UK) currently is 4,083 down -31. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 4bp on Friday (2.62%) and are little changed in the O/N session. The front end of the US yield curve remained better bid as global equities remain under pressure. The 2-10’s spread is unchanged at 182bp. Unlike longer maturities, where a great deal of supply is expected this week (+$78b to finance US stimulus package), continues to weigh on longer debt product who managed to have the biggest weekly loss in over 20-years last week. Long bond yields rallied +43bp over the last 5-business days ahead of the new issued debt!

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