Sterling has H1N1 Symptoms!

Financial and economic problems are bad enough, but, GBP is expected to see renewed threats from ‘H1N1. This week alone it’s reported that there has been +55k new cases, with 29 deaths to date, and expectations that by Aug. +100k Britons will be infected ‘daily’. Health agencies are estimating that this could result in +65k deaths. Kicking the currency while its down is the IMF, who has publicly questioned and vocalized its concerns on the state of the public finances on the currency. To think we thought it was safe to go back into the water! Do not be surprised to see North American bourses underperform on the back of the bombings in Jakarta and BOFA and CITI’s earnings. They are the most unlikely candidates to be the ‘go-to backup’ for Goldman and JPMorgan!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy and again illiquid’ O/N.

Buyer beware! Do not trust the ‘seasonal’ in yesterday’s claims data. Despite initial claims coming in with a lower than expected print (+522k vs. +569) and continuing claims plummeting (+6.273m vs. +6.915m) many analysts are dismissing the report with respect to little faith in the ‘standard seasonal adjustment factors’ that are being applied in this unique environment. Historically it’s unusual to have a period this time of year where seasonally adjusted initial claims collapse, while unadjusted rises. The same can be said for continuing claims. The reason being this month tends to carry ‘auto sector’ shutdowns for their retooling stage for next years production. Economists will preach that those seasonal adjustments are based on ‘normal conditions’. This year being an anomaly, where layoff have occurred throughout the year and more intense since May. Conclusion, any improvement in the data is overstated because of the ‘seasonal’ hiccup. On the face of it, the job’s situation is probably beyond the worst rate of losses, but and it’s a big but, losses remain heightened beyond what is being interpreted!

The USD$ currently is higher against the EUR -0.42%, GBP -0.88%, CHF -0.42% and lower against JPY +0.10%. The commodity currencies are weaker this morning, CAD -0.18% and AUD -0.69%. Despite May Canadian factory sales dropping -6% (double expectation) earlier in the week, data south of the border has helped push the currency to its highest level in over a month and outperform all G10 currencies. However, further fears of another financial flop had investors yesterday paring higher yielding currency position and seeking some risk aversion protection. 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. This morning investors will have to chew on Canadian CPI data for fodder!

The AUD fell in the O/N session and again pared some of its weekly advance vs. both the USD and JPY, after two explosions in Jakarta prompted investors to shift some of their portfolio in risk aversion mode by purchasing US Treasuries. Depending on how equities and commodities do in the North American session, some investors are seeing this as an opportunity to own the currency (0.8006).

Crude is lower in the O/N session ($61.64 down -38c). 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. The ‘black-stuff’ also got a helping hand from Roubini stating that the recession ‘could’ end this year. Already this weeks both the 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 14% 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 dependent on advancing equities. Gold managed to pare some of its initial losses yesterday on the back of the USD, however higher oil prices boosted the ‘yellow metal’s’ appeal as an alternative investment and hedge against inflation ($936).

The Nikkei closed at 9,395 up +51. The DAX index in Europe was at 5,001 up +44; the FTSE (UK) currently is 4,385 +24. The early call for the open of key US indices is lower. The 10-year Treasury’s eased 2bp yesterday (3.55%) and is little changed in the O/N session. For the first time this week treasuries found a bid on the back of CIT’s rumored bankruptcy issues. With the potential of no Fed bailout and Philly Fed Manufacturing index contracting at a faster pace yesterday than forecasted has investors once again seeking shelter in safer asset classes.

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