Trichet and Co. What are you going to do for me?

Capital Markets expect the ECB to keep rates unchanged this morning. Investors will be focusing intently on Trichet and Co.’s message on Greece and what it will do to stop the problems infecting countries such as Portugal, Ireland and Spain. With policy makers behind the curve, there is a market risk that ECB will implement nothing because they feel it’s too soon to act. Where is the confidence in that? The ‘impending’ bailout is failing to reduce Greek bond yields, and yields of other ‘contagion tarnished’ economies. It’s been suggested that the ECB may have to step in and buy government bonds to restore confidence, support banks and lower borrowing costs. But, they would be breaching their own EUR-area rules that ban the ECB from helping governments finance budgets deficits. It seems its not just Greece, but all of EURO is a ‘special case’, if the currency is to survive. Whether they implement any of these changes or not, it’s clear that conventional monetary policy will ‘need to remain extremely loose for a very long time’.

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.

Ahead of today’ plethora of data and a UK general election, yesterday’s data had minimal impact on the market that’s fixated with potential contagion issue and defaults in Europe. The private payroll ADP employment report managed to record a modest gain (+32k vs. +30k) with upward revisions to the previous months. Analyst’s note that small businesses, the engine of US job growth, continue to underperform. Given the fact that ADP came in close to expectation, the market whisper for tomorrows NFP estimates remain somewhat unchanged (+175k). The ADP prints for previous months were revised up to show small gains for Feb. (+3k) and Mar. (+19k) vs. the negative -20k that was reported. Worrisome of course is the poor performance from the smaller firms. Firms with fewer than 50 employees showed gains of only +1k in Mar., with a net decline of -4k over the last three-months.

The ISM non-manufacturing PMI continued to expand in Apr., albeit, at the same pace of growth recorded in the previous month (55.4). Despite the similar print, business activity improved (60.3), reaching its highest level in 4-years. Combining this with the weekly strength reported in the ISM manufacturing index on Monday is proof of a strong accelerating economy. Prices paid, inventories and imports also experienced an increase on the month. This is in contrast to new-orders, which declined and remains in contraction territory. The weakness may be explained by softer foreign demand, as new-export orders also dipped slightly during the month. Employment declined slightly on the month, remaining below 50. This suggests we are capable of seeing weaker services employment growth in tomorrow’s payrolls print. Expect the Fed to be watching the prices paid component closely, at 64 it’s the highest print in 2-years.

The USD$ is higher against the EUR -0.20%, GBP -0.35%, CHF -0.18% and lower against JPY +0.16%. The commodity currencies are weaker this morning, CAD -0.66% and AUD -0.15%. Harbored fear is pressurizing growth currencies. The loonie remains on the back foot vs. the greenback and contained vs. its other major trading partners as global bourses and commodity losses encouraged traders to reduce positions in currencies related to economic growth. Investors favor Government bonds. The long CAD positions, taken on expectations that the BOC will hike rates sooner rather than later, are been squeezed out as global sentiment turns on Europe and on the fact that Governor Carney may not be in a hurry to hike. Weak domestic currency long’s are been trumped by risk aversion strategies. Will we get a breather? Technically, the dollar wants to continue to grind higher despite interest rate hikes wanting to provide some sort of ceiling. Until the market gets some clarity on the contagion fears, the trend will remain intact. Fundamentally, North America is beginning to produce some stellar numbers, however, China and Europe will dictate growth currencies next move. For now, it’s difficult to want to add to CAD longs with the current sentiment. Medium term cash positions are looking for a 1.06-1.07 as an entry trigger point.

The AUD fell to a two-month low vs. the dollar in the O/N session after the announced headline retail sales print increased by less than half as much as the market expected (+0.3% vs. +0.8%). Now that the RBA has got the expected rate hike out of the way earlier this week, capital markets are focusing on ‘surety of funds’ strategies because of European contagion debt fears. Obviously growth and commodity based currencies have been bearing the brunt of market sentiment. Thus, it’s not surprising to see the AUD trade at its lows in the O/N session on concerns that global growth may falter and on market speculation that the RBA will cool the pace of future interest-rate and dampening the demand for riskier assets. The currency has traded under pressure since Governor Stevens said borrowing costs are around ‘average’, thus signaling that it may slow the pace of advances (+4.50). Also providing pressure to the currency is softer global bourses coupled with weaker commodity prices. For now the market expects to be a better seller of the currency on rallies (0.9040).

Crude is little changed in the O/N session ($80.03 up +6c). Oil has extended its downward spiral as the EUR plummeted against the greenback on concern that Greece’s bailout may have to be extended to other nations. At one point during yesterday’s trading session the commodity happened to shave -4.3% of it value. Not helping its cause was the weekly EIA headline print gain of +2.76m barrels, w/w (the highest levels in 11-months). Up until this week, prices have been supported on ‘expectations that demand will climb as economies rebound’. Finally, the market seems to be relying on fundamentals and the huge oversupply of the commodity. The increase in crude inventories left supplies +5.4% higher than the five-year average. Stocks were expected to rise by only +1m barrels. Imports of crude climbed +2.8% to +9.95m barrels a day (the highest level in 10-months), while fuel imports surged +9.9% to +3.1m bpd. Even at Cushing, where West Texas crude is stored, rose +4.9% to +36.2m barrels (the highest level in 6-years). Increased stored supplies, at these rates, can only but depress medium term prices. Refineries operated at +89.6% of capacity, up +0.7% w/w. On the flip side, the oil spill in the Gulf is beginning to raise concerns about the long term production effects in the region. Analysts remain concerned that the European contagion issues will dominate risk aversion and push crude even lower now that we temporarily breached that psychological $80 print.

In the grand scheme of things, gold is wanted by investors despite the dollar’s rally and questionable global growth. The ‘yellow metal’ climbed on speculation that investors seek an alternative to slumping equity and currency markets. With the EUR continuing to trade under pressure on fears that the bailout package for Greece will not win support from the region’s governments, managed to push the commodity to record new highs in both the EUR and CHF. Contagion fears are expected to provide a floor for the commodity in the short term. Last month the commodity climbed +5.9% as investors sought surety to hedge against financial turmoil in Europe. In reality, investors continue to prefer the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors wanting an alternative to an ‘on going weakening’ of the EUR ($1,178).

The Nikkei closed at 10,695 down -361. The DAX index in Europe was at 5,989 up +31; the FTSE (UK) currently is 5,367 up +26. The early call for the open of key US indices is higher. The fixed income market gave it all back and then some. The US 10-year eased another 3bp yesterday (3.58%) and is little changed in the O/N session. Treasury prices remain steadfast on concerns that a rescue plan for Greece has not been contained. This Europe’s debt crisis continues to promote trading strategies that seek ‘surety of funds’. Bonds have pared some of their gains on a stronger private employment ADP report. However, any pull-backs remain well supported. Other factor’s also supporting FI prices is the fear that Moody’s is on the verge of cutting Portugal’s Aa2 rating and that the US treasury announced that it will sell only $78b in notes and bonds next week, the first reduction in coupon sizes in three-years. The ‘flight to quality’ remains the trading theme for the moment. Contagion equates to lower yields. Let’s see what Trichet and Co. have to say for themselves in this mornings ‘rate’ minutes.

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