Weekly Oil Inventory day, will it help?

The USD$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range, ahead of the US ADP non-farm employment report.

Global equities remain entrenched in a ‘bear’ market fueled by the effects of higher oil prices will have on corporate profits. Capital markets remain on tender hooks ahead of ‘terrifying’ Thursdays ECB’s rate announcements and US non-farm payroll reports in this holiday shortened week in North America. The twin evils of ‘no’ growth and inflation (stagflation) are providing a numbing headache for CBankers.

Yesterday, US manufacturing unexpectedly expanded last month (50.2 vs. 49.6- the 1st time in 5). Analysts believe that this may be attributed to rising exports numbers of late due to a weaker USD$, coupled with the recent government tax rebate cheques, which seem to be helping companies weather the housing slump and elevated energy costs. The true optimist will believe that the US may be able to avoid a deep and long drawn out economic slowdown despite a housing slump and food and energy coasts soaring. A pessimist will tell you that the rebates are not infinite and consumers will curtail spending as soaring costs eat into their disposable incomes. The sub-component of prices paid advanced to 91.5 vs. 87, m/m (the highest in a decade), while the employment index fell to 43.7 from 45.5 in May. (Year to date the US economy has shed -324k jobs and market consensus has tomorrow’s data adding to that total).

The US $ currently is lower against the EUR +0.09% and higher against GBP -0.42%, CHF –0.02% and JPY -0.33%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.45%. A national holiday yesterday did little for the loonie. Despite record commodity prices the loonie lost ground as investors become concerned with Canada’s growth. With higher fuel prices the consumer is expected to cut spending and company’s investment as the economy suffers a similar fate to that of its southern neighbor. Commodity prices have been masking the plight of a slowing Canadian economy. Monday’s rise in GDP m/m surprised market watchers to the top side (+0.4% vs. -0.2%). Analysts believe on face value the report ‘overstates the resilience of the Canadian economy’. A strike at a US parts plant (Feb-May) disrupted production in Canada, its end signaled more normal conditions and caused a large +7% rise in motor vehicle production that had distorted the headline gain. Worse is anticipated for both the US and Canadian economies for the 3rd Q. By default this should continue to weigh on the loonies value short term. The market expects the CAD$ will remain guilty by proximity and association with the US economy (more than 75% of its exports head south of the border). Technically and fundamentally the loonie should be stronger, but, perception seems to have the upper hand at the moment. Earlier this week RBA governor Stevens left borrowing costs on hold at 7.25%. He expects economic growth rate to slow as the highest borrowing costs in 12 years and record gas prices force households to cut spending. But, last nights Retail Sales surprised the market (+0.7% vs. -0.1%), has persuaded traders to add to their bets that the RBA will have to hike rates sooner than anticipated (0.9600).

Crude is higher O/N ($141.93 up +96c). More rhetoric and geo-political concerns continue to give crude a ‘leg up’. Yesterday, the IEA indicated that global supplies may not keep up with demand over the next 5-years. They believe that spare OPEC capacity will shrink in this time and keep the market ‘tight’. On the political front, some news agencies reported that Israel may attack Iran by year end if they acquire enough uranium to build a weapon. Iraq is currently OPEC’s second largest producer and this will surely disrupt Mideast supplies. Analysts and market watchers believe that Israel’s intentions are very clear and it will keep the ‘black gold’s’ prices high for some time. Year to date, crude has climbed nearly 50%, as the greenback struggles against most of its trading partners despite global policy makers seeking assurance from the US to support a strong USD$ policy. The fear that Trichet may hike rates tomorrow (4.00%) will only add to the pressure on the USD$ and by default speculators will continue to purchase commodities. No matter what the reason is commodity prices will remain elevated for some time unless a coordinated cohesive policy to tackle the situation is jointly established. Libya has threatened to cut production and OPEC’s President predicting that crude prices could hit $170 a barrel by summers end does not help the situation. Qatar over the w/d indicated that they will not side with the Saudis; they do no plan to increase production, along with Libya they believe that the world is over supplied. President Khelil from OPEC believes that if the ECB hiked rates (similar to a Fed ease) the net result would be another surge in oil prices. Certain OPEC members like Qatar believe it’s not necessarily a supply issue but a refinery process concern. Expect geo-political concerns to continue to influence the market in the short term. Gold reversed course and rallied yesterday as Mideast geo-political concerns and a weaker USD$ had traders seeking the safety of the ‘yellow’ metal for now ($940).

The Nikkei closed at 13,286 down -176. The DAX index in Europe was at 6,340 up +24; the FTSE (UK) currently is 5,516 up +36. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 1bp yesterday (3.96%) and backed up 4bp O/N (4.00%). Treasury prices overall remain better bid as global equities continue to steer investors to seek shelter in the fixed income asset class as the fear of ‘credit’ losses worsen. Some analysts expect bonds to continue their rally in the 3rd Q.

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