The next down wave is here!

A stronger USD and a stronger JPY is counter intuitive to a ‘risk loving world’. The one that many analysts are policy makers believe is happening. Equities continue to get ahead of themselves and the consumer seems to be buying into this somewhat false hope. We have two upcoming events to overcome, firstly, the ECB meeting and secondly the stress tests. With the ECB, we will finally get to see first hand how disjointed they truly are. Such negativity will only pressurize the EUR further. Then there are the Bank stress tests, a marketer’s nightmare, how and who will they need to convince to require more capitalization

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

A small win with the confidence numbers on Friday. US consumer sentiment advanced to its highest level since the fallout of Lehman, which according to policy makers may have been the height of this recession (61.9 vs. 57.3). This is definitely stronger evidence that the US recession may be waning, at least amongst the ‘psyche of the masses’. This confidence booster may encourage consumers to open up the coffers and spend, they represent close to 70% of the economy. If so, then perhaps Bernanke and Obama’s timeline is very much in play to exit this recession. The US economy is still weak but it’s not declining at quite the rapid pace it was earlier. Despite fundamentals contracting at a slower pace, we still have many hurdles to clear, Banks stress tests, how will this be reported? Who needs more capitalization? Employment concerns, monthly reports and averages remain too high, contraction does not equate with equity rally. People are not spending, how do we boost that? Let’s hope we are not experiencing another ‘man made’ illusion!

The USD$ currently is higher against the EUR -0.56%, GBP -1.25%, CHF -0.34% and lower against JPY +0.08%. The commodity currencies are weaker this morning, CAD -0.68% and AUD -1.38%. The loonie ended the week under pressure as a Government report on inflation came in less than expected (+0.2% vv. +0.7%). Already last week traders have been burned at the bottom of the loonies’ 3-month high mid-week. The market will be transfixed on tomorrows BOC announcement. Already there has been a rumor of a Medley report revealing that the BOC will slash 25bp and initiate quantitative easing measures. Markets remain thin and volatile and somewhat at the mercy of commodities and equities. BOC governor Carney is due to announce guidelines on April 23rd about quantitative easing (Cbanks buy government debt to try to revive economic growth). To date, markets have witnessed quantitative easing policy’s depreciating home currencies significantly when their governments started the program (BOE, BOJ, and Fed). Expect traders to be better buyers of USD on pull backs once again.

The AUD continues to remain under pressure against the crosses, especially JPY, on the back of China saying its economy expanded at the slowest pace in almost 10-years earlier in the week (+6.1% vs. +6.8%). This has raised concerns that the global recession will deepen and investors will avoid the riskier assets. With European policy makers unable to come to a consensus has only heightened the recession fears. For now, look for traders to continue to sell on upticks (0.7088).

Crude is lower in the O/N session ($49.35 down -98c). Oil once again stayed close to home on Friday, if anything, ended the week better bid on the back of Chinese reports stating that Chinese refineries boosted processing rates for the 1st-time in 5-months. This is a good indication that ‘their’ economic stimulus measures are improving fuel demand. They refined 6.92m barrels a day, that up +0.7%, y/y. Again, we may be getting ahead of ourselves, a strong USD and so-so equity market combined with record inventory levels doe not justify higher oil prices just yet. Last week’s EIA report showed that inventory levels had climbed to a new 19-year high. Crude stocks advanced +5.67m barrels to +366.7m vs. an expected +1.76m, the highest levels since Sept. 1990. More importantly, demand destruction remains an issue with total daily demand averaging +187m barrels over the past 4-weeks, that’s down – 5.2%, y/y. Gas inventories declined -944k barrels to +216.5m, while distillate fuels (includes heating oil and diesel), fell -1.17m barrels to +139.6m. US Refineries are operating at +80.4% of capacity, down -1.5%, w/w, and the lowest level in 7-months. The fundamental data is abysmal. OPEC for an 8th-consecutative month cut its forecast for oil demand this year; they lowered it by -430k barrels a day to +84.18m and expect demand in industrialized countries to fall even further, while developing economies are likely to see only minor growth. They next meet on May 28th to review production quotas. Until we see inventories decline substantially and sustainable demand destruction, there will not be a sustainable price gain. Finally Gold is loosing its luster. It was difficult to comprehend why this commodity was holding in so well with inflation a non-issue and no need for investors to purchase any for a hedge play. With the threat of the IMF needing to offload 3500+ tons of the yellow metal, expect the market to sell on upticks ($869).

The Nikkei closed 8,924 up +17. The DAX index in Europe was at 4,569 down -107; the FTSE (UK) currently is 4,059 down -34. The 10-year Treasury’s backed up 4bp on Friday (2.90%) and is little changed in the O/N session. Selling was the name of the game on the back of better corporation and Bank earnings, data, hedge trades related to bond supply and finally technical breaches in the futures. Couple all this with concerns about future US government supply, it’s starting to weigh on treasuries despite their buy-back program ($300b, to date $55b). There is a glimmer of hope that the US economy may be stabilizing and investors are willing to put on risk. We can expect longer dated securities to remain range bound until the market can figure out this demand vs. supply debate. Remember there is no price pressures in the US, eventually speculators will want to have some yield in their portfolios.

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