Will Asian indices change our negativity?

Consumer confidence and good old fashion greed will save the day, not a ‘falling off a cliff’ remark from the Oracle of Omaha. Investor’s nerves are frayed and optimism is probably approaching an all time low. Sensationalism and irresponsible reporting will not win anyone any medals in these tough times as global equity indices find it difficult enough to remain on the right side of positive.

The US$ is weaker in the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies, in another ‘volatile’ trading range.

The green of Asian equities has again fueled the demand for higher yielding assets, the USD and JPY where the biggest losers in the O/N session. The market currently perceives that European investors will need to convert 1st Q earnings, thus supporting their currency at the moment. Japan with a GDP -12.2%, once again expects that this evening’s data will highlight its ‘economic vulnerability’ and be JPY negative. Analysts anticipate that machinery order slumped again in Jan (-4.9%). Little data yesterday gave the US currency lack of market direction. More than usual investors cling to the hope that equities will show some sort of reprieve. Side line economy bashing continues to deflate investor’s confidence. Capital markets desperately seek some positive consistency to snap us out of this ‘viral negativity’!

The US$ currently is lower against the EUR +0.93%, GBP +0.32%, CHF +0.69% and JPY +0.18%. The commodity currencies are stronger this morning, CAD +0.69% and AUD +1.46%. The loonie fell to its lowest level in nearly 5-years as concern that the global outlook may worsen led investors to take refuge in the greenback. Year-to-date it has declined -6.5%, after a record -18% loss last year vs. its southern partner. The recession is depleting demand for commodities. Nearly 50% of all its export revenue is commodity based. Also contributing to the currency demise was yesterday’s sharper than expected drop in Canadian Housing starts (135k vs. 154k, -12.3% m/m). Horrible figures that will not change any time soon. According to some analysts, the pace of new-home construction has declined by about -50% from it’s high of +273k under construction in Sept. 2007. But, more importantly, due to the strength and conservative nature of the Canada’s financial system the economy will probably be able to avoid most of what has occurred south of the border. Last week the BOC slashed borrowing costs by 50bp to 0.5% and indicated further easing which has not helped the currency’s cause. The highlight of this week’s data will be Friday’s employment report where analysts expect a further loss of -50k jobs. Traders continue to look for better levels to sell the CAD$ in the short term.

Finally, despite weaker domestic data, the AUD$ found some life and crawled from its weekly lows (0.6404) as Asian equities revived the demand for higher yielding assets. Gains have been capped as we wait for the unemployment reports for down under. In the O/N session business confidence and falling job ads data impeded further strength of the currency as traders continue to look to sell into rallies at the moment.

Crude is higher O/N ($47.18 up +11c). As Mar. 15th approaches, investors continue to speculate that OPEC will announce another production cut. This bullish commodity market has only one supporter and that’s OPEC. They pump about 40% of the world’s oil and have cut production 3-times since Sept. to slow the slump in prices and prevent a glut on world markets. Yesterday crude prices reached a 6-week high. Venezuela said that the ‘dramatic drop in prices has been greater than warranted by the decline in global demand’. OPEC’s Secretary General said that they must remove another +800k barrels a day to reduce output by -4.2m since their objectives were established last Sept. Some analysts do not expect this bullish run to be sustainable despite the market anticipating that OPEC will cut production further at this weekend’s meeting. If they do decide to reduce production targets this month, the technical charts indicate that prices may rise to $55 a barrel. However, the world is awash with the black-stuff, it’s the storage problems that are causing concerns. This will lead to prices remaining under pressure in the longer term. Last week’s surprising EIA report showed an unexpected decline in US crude, this support cannot be sustainable as ‘demand destruction’ remains. Crude oil supplies fell -757k barrels to +350.6m vs. an expected rise of +1m barrels. Refineries operated at 83.1% of capacity, up +1.8% from the last report. Meanwhile gas inventories rose +168k barrels to +215.5m vs. an expected decline of -800k. Stockpiles of distillate fuels (heating oil and diesel), climbed +1.66m barrels to +143.3m. Analysts had expected a +1m decline. A tad surprising was to see Gold trade lower yesterday after a 2-session rally. Speculators were happy to book profits and shy away from the safer heaven asset class. Look for investors buy the ‘yellow metal’ on deeper pull backs as inconsistent equity indices will once again boost its demand ($911).

The Nikkei closed 7,054 down -31. The DAX index in Europe was at 3,748 up +57; the FTSE (UK) currently is 3,563 up +21. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 5bp yesterday (2.93%) and are little changed in the O/N session. As anticipated Treasury prices fell as traders prepare for this week funding requirements. The Treasury will auction a record $34b in 3-year notes today, $18b in 10-year notes tomorrow and $11b in 30-year bonds on Thursday. Once again supply concerns remain the order of the day!

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