Stressed Thinking about the Tests? Liar, of course you are

Market participants are starved for anything of substance. This morning’s Euro-zone composite PMI (56.7) could be the first of many interesting appetizers. Proof perhaps that the region may be ‘evading the threat of a double-dip apparently facing the US and UK’. The headline print suggests that the region is on course for 2nd Q gains of +0.8%. The market will take that after the +0.2% in the 1st Q. The increase reflects rises in both the manufacturing and services indices, proof that the export-led recovery is broadening into the domestic economy. However, the bubble busters’ are telling us that the index has ‘tended to over-predict the official GDP figures in recent quarters’. Secondly and disproportionately, the headline print was again driven by a sharp rise in the German PMI (highest level in three years). Finally, more importantly, ‘fiscal tightening in large parts of the region has yet to be felt’. Nowadays’ it’s not possible to bask in the glory for a moment without someone trying to blindside you. With such underlying negativity on a positive print, one can only be but stressed about ‘the’ tests!

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

Bernanke’s prepared Congressional comments were a disappointment to the market. In a nut shell, their take was that helicopter Ben was more concerned about ‘draining liquidity’ as opposed to providing further stimulus. Basically, investors and dealers took Ben’s statements as being too ‘hawkish’ in a climate of unconvincing recovery. The Fed remains prepared ‘to act as needed to aid growth, even as they get ready to eventually raise interest rates from almost zero and shrink a record balance sheet’. Importantly, he did not elaborate on the steps that policy makers might take to increase monetary stimulus in a bid to keep the economy growing and reduce the unemployment rate. He believes that the current policy is ‘already quite simulative’ and added that they do ‘have options, but they are going to be unconventional options’. Ben reinforced that they are not going to make any significant changes in the near term. The market is again back to focusing on regional growth, any excuse to sell the dollar.

The USD$ is lower against the EUR +0.33%, GBP +0.25%, CHF +0.68% and JPY +0.57%. The commodity currencies are stronger this morning, CAD +0.28% and AUD +0.30%. Yesterday, Canadian headline wholesale trade declined -0.1% in May, on the heels of a revised decline of -0.2% the previous month. Digging deeper, there was a notably sharp decline of -29.5% in the agricultural sub-sector. This happened to offset the collective gains in all of the other sub-sectors. It’s also worth noting that inventories expanded for the third time in the past four months (+1.7%-biggest increase in 2.5-years). The headline may have been somewhat bearish, but, the details say otherwise. The data did not prevent the loonie from rallying to a new weekly high. Stronger commodity prices and a widening interest rate differential with its largest trading partner has longer term bulls adding to their positions, especially since the dollar stalled after its over extended rally above the 1.0500 print earlier in the week. This week’s Canadian retail sales and inflation data combined with today’s BOC MPC report should provide some fireworks. The expected BOC rate hike was followed by a somewhat dovish communiqué. According to Carney ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. This week’s 25bp hike will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q. The market will take time out and digest tomorrows Euro-zone’s stress tests before ‘throwing all in’.

The AUD is finding it difficult to maintain traction after earlier falling vs. all its major trading partners after Bernanke said that the US economic outlook remains ‘unusually uncertain’ damping demand for higher-yielding growth currencies. Also taking the shine of the currency was watching the Australian business confidence index dropping in the 2nd Q to 3 points from 17. Against the JPY, the currency is struggling on speculation that the slowing global economy will deter the RBA from raising interest rates next month. Fundamental analysts believe it would take another rate hike for the currency to trade again in the 90’s and technically it’s a sell on approaching these levels. Already this week, the minutes of the RBA’s July meeting showed that policy makers plan to use the results of EU bank stress tests and local inflation figures to decide whether to resume the most aggressive round of interest-rate increases. Governor Steven’s indicated that the election, called by PM Gillard, would not impact the Aug. 3 interest-rate decision and that the medium-term picture for Australia is ‘fairly positive’. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.8838).

Crude is little changed in the O/N session ($76.97 up +40c). Crude prices did an about turn and headed lower on the back of a surprising weekly EIA report yesterday. The market had been expecting a drawdown on inventories yet again. However, not so, stocks showed a surprise increase, reporting a rise of +400k barrels of oil for the week whilst the market had been expecting a headline decline of -1.6m. The dovish report continued with its gas inventories rising +1.1m barrels and its stockpiles of distillates (diesel and heating oil) doubling expectations to +3.9m barrels. Before the release, buoyant corporate earnings had raised market optimism over the strength of the US economic recovery and pushed oil up to new weekly highs. All last week the market was hung up on the growth concerns of the world’s two biggest consumers as China’s economic growth eased and the Fed said that the ‘US outlook had softened’. Once again technically, the gas markets numbers show ‘lackluster demand and will put pressure on the entire energy complex’. We continue to remain range bound with the price action as the market looks for vindication.

The safe-haven interest that happened to push gold to record prices last month is failing to materialize, as investors liquidate their holdings of precious metal amid uncertain markets. The metal is fighting its technical 100-day moving average. Dealers expect investors to pull the trigger and pare their remaining long positions on a break of the moving average (below $1,178). The rebound in the EUR has reduced, somewhat, the demand for the ‘yellow metal’ as a haven against European-debt concerns. A positive equity market, bullied by the seasonal earning’s reports initially helped the commodity. Now, equities are having trouble of their own. With Moody’s downgrading Ireland and Portugal, it was expected to highlight the fragility of the sovereign debt issues, but, that has not materialized. Big picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. Despite this, longer term view, market concerns over global economic growth should support the ‘yellow’ metal prices on much deeper pull backs. However, that been said, weaker longs firstly need to be taken out of the market. Year-to-date, the commodity has gained +7.8% and is in danger of giving up more ($1,187 -$4.30).

The Nikkei closed at 9,220 down -58. The DAX index in Europe was at 6,018 up +20; the FTSE (UK) currently is 5,227 up +13. The early call for the open of key US indices is higher. The US 10-year eased 3bp yesterday (2.90%) and is little changed in the O/N session. Treasuries prices remain better bid on the back of softer weekly US data and on Bernanke’s commitment to keeping rates low for an ‘extended period of time’ in his Senate HH testimony yesterday. The shorter end of the yield curve continues to print new record low yields. The US government is expected to announce smaller tranches of 2’s, 5’s and 7’s for auction next week for a third consecutive month. Current market sentiment has dealers wanting to be better buyers on pull backs, as the market foresees a flatter yield curve as analysts predict that 10’s to yield 2.75% by year-end. In reality, the markets seek direction as it seems to be tiring of watching equities go walkabout.

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