‘Flu’ cannot sicken Confidence index surprise!

Currencies trade back to ‘pre-swine’ levels as fear subsides with the WHO comments suggesting that this issue is considerably less serious than previously expected. Over reacting is definitely better than no action. Market anticipates that today’s FOMC meeting will be a non-event with rates being so low and a slew of quantitative methods already being announced. It seems that 6 out of the 19 financial institutions require additional cash under the Stress test methodology. Which 6? Do not know, but Citi and BoA is expected to plead their cases. Trichet says the EUR is the currency of choice in a financial crisis. Is he talking up his long EUR position!!!

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

Yesterday according to S&P/Case-Shiller home price index, US home prices fell at a slower pace in Feb. (falling -18.63%, y/y, vs. a -19% decline in Jan., more importantly it is the first improvement in prices in 4-years). Not bad, but we are not out of the woods by any stretch of the imagination, as inventories still remain high, demand remains quite weak and housing activity is still close to record lows. The skeptics amongst us would say that house prices have fallen so far that it is not surprising to see some improvement. Analysts expect it to be mild over the next few quarters. The optimist would say that lower mortgage rates, government tax credits for first-time homebuyers and other government support is beginning to lift sales in both the new and existing home market. This has got to put some downward pressure on inventories eventually.

A good feel boost was seen in US consumer confidence. It jumped over +13 points this month (+39.2 vs. +26.9-the largest gain in more than 3-years), as expectations of recovery over the next 6-months improved substantially. It’s worth noting that some analysts believe that the uptick in recent sentiment is probably due to the more positive data releases earlier this month combined with ‘bullish’ equity market during the same period, which has gingerly pointed to some sort of recovery just around the corner. On the flip side, weaker fundamental releases at the tail end of this month mixed with the recent ’swine outbreak’ may increase again fears of economic derailment and by default perhaps we should not be looking for a similar confidence surge next month! It worth noting that labor differential remained at -40. Consumers continue to expect further job cuts and limited hiring, which will lead to further spending weakness. They also expect business conditions to remain weak in this current environment (23.7), but are more optimistic on future conditions (+49.5 vs. +30.2). Despite the uncertainties surrounding the auto industry, +4.8% are potentially planning to buy a car over the next 6-months, with +2.2% expected to buy a new car while +1.9% was looking to a used car (+4.8% is only slightly lower than the +5.8% y/y print).

The USD$ currently is weaker against the EUR +0.32%, GBP +0.59%, CHF +0.22% and stronger against the JPY -0.22%. The commodity currencies are considerable stronger this morning, CAD +0.77% and AUD +1.10%. The loonie remained vulnerable for a 2nd-day yesterday as investors gravitated towards some sort of risk aversion trading strategies as fears that the ‘unstoppable’ virus would curtail a recovery in the global economy any time soon. With commodities being sold you expected better buying of USD on pull backs. However, with fears abetting about the severity of the swine flu, riskier currencies are trading back towards pre-swine levels as speculators ‘dump’ the USD as a safe heaven trading strategy. CAD once again has appreciated very quickly O/N. Do not be surprised to see some profit taking occurring if fears that the swine flu may take a firmer grip on this global recession.

Renewed optimism after business confidence numbers exceeded expectations in NZD and improved by the most in 16-years last night sent the AUD higher and ending its 2-days of losses. Concerns’ easing about the swine flu has investors willing once again to buy into riskier trading strategies. Expect most currencies to be trading back to pre-swine levels (0.7169).

Crude is higher in the O/N session ($50.28 up +36c). Crude fell for a 2nd-day yesterday on concerns that global fuel demand will drop as the ‘swine-flu’ outbreak will curtail travel and delay the recovery from this global recession. The O/N session has pared some of its losses mainly due to the weakening of the greenback. This morning we also have the weekly EIA report to contend with. The WHO raised its global pandemic alert to a 4, the highest in 4-years. The fear of this outbreak impeding economic growth could have us experiencing only the 3rd losing week in 11 this week. Yesterday’s surprising US fundamental data did manage to pare some of the black-stuffs earlier losses. Speculators anticipate that this mornings EIA report will once again show that demand destruction is alive and kicking. Already this week the Algerian Oil Minister Khelil stated that non-OPEC members have left the market oversupplied by about +720k barrels a day, which also contributes to the black-stuffs weaker prices. Last weeks EIA inventory report was an ugly bearish headline for the black-stuff. The report showed that stocks rose +3.86m barrels to +370.6m (the highest level in 19-years) vs. an expected increase of +2.5m. The report revealed that supplies were up in every category. The 4-week total average fuel demand slipped -6.5%, y/y to +18.5m barrels. Gas stockpiles rose +802k to +217.3m vs. an expected decline of -700k barrels. Finally, the supply of distillate fuel (heating oil and diesel), climbed +2.68m barrels to +142.3m, the biggest increase since the 1st week of this year. Last weekend the Secretary General for OPEC (they supply 40% of the world’s oil) el-Badri said that they will reduce oil production again if necessary to support prices. OPEC next meets on May 28th. So far the organization has had 83% compliance to its production cut quotas by its members. Not to be left out in the cold, Gold is not immune to the ‘swine effects’ as its heads towards its sharpest drop in 3-weeks this week. Demand destruction remains healthy on the back of this potential pandemic curtailing ‘this’ global economic recovery ($892).

The Nikkei closed 8,493 down -232 (holiday). The DAX index in Europe was at 4,634 up +27; the FTSE (UK) currently is 4,117 up +21. The early call for the open of key US indices is higher. The 10-year Treasury’s backed up 9bp yesterday (2.99%) and a further 2bp in the O/N session (3.01%). It’s all about ample supply vs. buy-back’s that have dictated FI prices of late. Yesterday a surprising US confidence number combined with a record selling of US 5-year product at a higher than expected yield gave enough ammo to dealers to cheapen up the curve. PIMCO said that the Fed may increase the buy-back program if 10-year yields consistently trade through the 3-3.10% level. Treasury will sell a record $26b of 7-year debt today, and also announce how much it plans to offer in auctions next week (3’s, 10’s and 30-year). One can expect the market to cheapen the curve back through last week high-yields, well north of 3%.

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