Equity market rallies on ‘hope’ 26/05/2009
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Equity markets have been given a boost with US consumer confidence data showing its highest reading since September last year. But most of the rise is accounted for in the expectations component: 72.3 from 51.0 prior. The present situation has increased to 28.9 from 25.5; still below the January level. So hope wins the day. The current the Case-Shiller Index shows that housing remains in an shocking state. House prices declined 18.7% y/y in March, versus the 18.4% market expectation and the 18.6% fall in the year to February. Meanwhile the $40bn Treasury auction- the bid to cover ratio is 2.94, versus the 3 month average of 2.69.
The US Dollar has been on a rollercoaster ride today giving back all of the gains made against most currencies earlier in European trading. Better than expected Durable Goods figures on Thursday and GDP figures on Friday should lead to a further sell-off in the Dollar as investors look to take advantage of the reflation trade towards riskier assets. Two further Treasury auctions on Wednesday and Thursday hold some event risk, although if they prove as successful as today, the sell-0ff witnessed last week should not be repeated. The issue of US creditworthiness will not have gone away, but it will be a background consideration for the time being in the FX market.
Dollar recovers, but Sterling’s a buy 26/05/2009
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The US Dollar has staged a recovery this week, clawing back some of its losses against most main G10 currencies, following what was beginning to look like a run on the US Dollar the end of last week. Although some return to the dollar was likely,with strong technical signals showing that the currency looked oversold, lower oil and equity futures have demonstrated the dampening down of optimism, and the testing of up to three nuclear missiles by North Korea has added geopolitical risk to the equation. A report on the German banking system in today’s UK Daily Telegraph, cited a German banking regulator, who said that Germany’s banks will blow up ‘like a grenade’ unless they take advantage of the government’s bad bank plans to prepare for the next stage of the crisis. EURUSD experienced the greatest sell-off in the European morning, falling from 1.4024 to 1.3867. GBPUSD fell 1.5950 to 1.5775. AUDUSD trade down from 0.7827 to 0.7725. All currencies subsequently gained against the USD later in the morning.
Concerns that the US may conceivably lose its AAA status following the S&P report on the UK and increasingly vocal concerns by the the Chinese led to nervous selling of the dollar last week. Although the dollar has recovered the spotlight will remain on the reserve currency, with analysts and investors keenly listening to comments from Bank of China officials about future purchases of the huge amounts of US government debt being issued. Over the next three days $101bn of US Treasuries, including $40bn today of 2 year notes, are being auctioned. How successful that sale is will be key to market sentiment over the greenback. Two other significant pieces of economic data out today are the Case-Shiller Index, expected at -18.% and Consumer Confidence, expected at 42.0. Although there are signs of a slowdown in house price declines and consumer confidence rose last month, risks are still firmly to the downside. The problem of trading EURUSD is that this also applies to the Eurozone. Sterling, on the other hand has so much bad news priced in- witness its remarkable recovery following the S&P report, that the currency is still a buy. A very light week for UK offers little event risk.
Best Trade:
Sell EURGBP: Spot: 0.8765, Target 0.8670 (200 Day SMA), then 0.8570. Stop at 0.8820
The Shock to the System 26/05/2009
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The FT’s Gideon Rachman points out the potentially dramatic change to the British standard of living over the next few years, which British politicians are trying to conceal from the volatile British electorate.
The end of the USD reserve status? 22/05/2009
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The US Dollar is under relentless pressure in the morning of European trading. EURUSD was trading up to 1.3975 level just before 8am, GBPUSD touched just below the 1.5900 level- a level last seen in November 2008, and AUDUSD earlier touched 0.78240 a level last seen in October 2008. The JPY also benefitted from USD weakness, trading down to 93.86 following comments from the Japanese Finance Minister, who said that he was not considering FX intervention. With little in the way of data later today and a long weekend ahead for the UK and US, position squaring and poor liquidity should bring heightened volatility, with a chance of a USD bounce. However, longer term the run on the USD may have started.
The market rally is in its eleventh week and in many respects the last week has seen the greatest level of confidence that conditions are returning to normal. This is witnessed in the steady rise in commodities, an improvement in funding conditions- with TED spreads back to pre-August 2007 levels- and the return to beta currencies in the FX market. Equity markets have had a rocky week but the growing conviction that, given the 35% rise in the S&P since March, we have passed the bottom has led real money investors out of the safety of the US dollar. Other, emerging market, regions around the world appear to be bouncing back quicker than the US, increasing demand for their assets. There has also been much chatter from the Chinese about the future of the US Dollar and its reserve currency status. Earlier this week the FT reported that Brazil and China are working to use their own currencies in trade transactions rather than the USD. The icing on the cake came yesterday when S&P downgrading its view of the UK from Stable to Negative, warning that there was a 1 in 3 chance of having its AAA status downgraded. The UK and US are entering into the same level of fiscal deficit, both are undertaking a massive expansion in debt as a percentage of GDP and both have similar overreliance on the consumer and housing, supports to the economy that are no longer there. Although the UK is a much smaller country and has none of the reserve currency status privileges the US currently enjoys there are serious long term concerns about the level of US debt. This combined with the geopolitical move among emerging market economies to move away from the dollar, and the benign climate, encouraging central banks and investors to move out of dollars, could trigger a run on the dollar. Treasury Secretary Geithner has restated the commitment to a ‘strong dollar’. It is difficult to see what measures he can take to demonstrate this at the moment.
BNP cautions against premature carry trade talk 20/05/2009
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According to BNP Paribas
1) Banks’ balance sheet de-leveraging due to frozen money markets. Non-US banks held a $10trn USD-denominated funding position – the globe’s biggest carry trade. Reduction of USD-denominated liabilities by non-US banks created USD demand.
2) EM FX volatility surpassed that of G10.
3) Pressure for Asian currency appreciation blew Bretton Woods II to pieces. What’s in store for 2009? Sharp deleverages historically imply a very prolonged period of underperformance. Hence, do not expect carry trades to return quickly
FX Update 20/05/2009
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JPY: Headline Q1 GDP -4.0% q/q – better than expected. Q4 2008 GDP revised down to -3.8% q/q
AUD: Surprising -4.3% fall in consumer confidence in May, sharp fall from +8.3% in April
GBP: CBI Industrial Trends survey shows slight improvement in May to -56 from -57 previously
GBP: BoE minutes shows unanimous decision by MPC to leave rates on hold. Talk of further QE measures
EUR: German producer prices in April fell 2.7% m/m- the fastest in 22 years
EUR: Spanish GDP fell -1.9% in Q1, the biggest contraction in half a century
CAD: Canadian consumer prices in April fell to 0.4% y/y- its lowest level in 14 years
US Dollar weakness set the tone today, with the greenback falling sharply against most G10 currencies, as currency markets ignored mostly bearish economic data, instead following stocks and commodities higher. The fall in volatility, as represented in the VIX index, helped to add weight to the idea that credit markets were returning to normal and the search for yield could resume. In a further boost to confidence, although one that was not entirely unexpected, US Treasury Secretary Geithner today announced the timetable, starting July, for the PPIP program to help rid banks of toxic assets. Currency markets, which had started slowly in the European morning session erupted with the USD dollar selling off sharply. A return to the demand for yield and expectations for a favourable economic climate helped all high yielding currencies, like the financial services dependent GBP, export dependent EUR and commodity based AUD. All three currencies were sharply higher, with EURUSD gaining about 100 pips in an hour, GBPUSD gaining 230pips, and AUDUSD gaining about 70pips. GBPUSD has one more technical obstacle- 1.5724- before targeting 1.60. The Japanese yen was a relatively latecomer in strengthening against the USD. As an ultra- low yielding safe haven currency the JPY was unlikely to capitalise in this market environment, but USDJPY managed to push below the 95 level, losing 100 pips from the open of European trading. The yen was probably helped by the better than expected Q1 GDP data, another sign that the economic decline is bottoming out .
Given how little effect poor economic data around the world had on sentiment today it appears as though the market is focusing on volatility, Libor, and the TED-spread. These measures alone suggest that the market has returned to pre-Lehman days. For currency markets the carry trade is set return. How that will manifest itself is difficult to say in these early days, although surely one of the more interesting trades suggested comes from Deutsche Bank- Short AUDBRL.
Mad Max time, baby 19/05/2009
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A journalistic and typically rambling but fantastic essay in this week’s New Yorker on the financial crisis. It shares my scepticism about the recent rally, which I believe is a false dawn. The article, which relies heavily on interviews with senior market practitioners, focuses on the scale of the current crisis and changes that need to take place before the world economy returns to stability. This is a slow lingering cancer that marks the end of US economic hegemony, the end of the US dollar as the world’s reserve currency, the end of our modern day Western reliance on leverage, and a fundamental change in Western society- and that doesn’t touch on difficulties associated with that change. This is seriously worth a read.
“Mad Max time, baby,” the financier said, before double-checking that the mute button was indeed on.
The voice went on, “If the long bond starts rising, we’re done. That’s the Armageddon scenario.” Someone mentioned a jobless rate of up to twenty per cent. “How awful is that going to be?” one voice said. There ensued talk of riots in China and Greece, and the relative merits of gold and canned food.
There was no anxiety or even amazement in their voices, just a kind of war-room self-satisfaction. A voice said, “Capitalism without bankruptcy is like Christianity without Hell.”
The financier had heard enough. He was eager for some air. Without signing off, he grabbed his coat and walked out. The streets were busy; nothing seemed amiss.
FX Update 19/05/2009
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News
EUR: German ZEW, which measures investor and analyst confidence rose to 31.1 in May from 13 in April; highest in 3 years
GBP: UK Consumer Price Index was 2.3%y/y vs 2.4% consensus forecast
AUD: Minutes from the RBA meeting, “economic stimulus has been applied by supporting demand”, likely to keep rates at 3% in 2009
Commentary
Risk has made a full fledged return to the market, as positive market friendly news in the US at the end of Monday helped drive equity markets higher. The MSCI Asia Index closed up 2.75%. Given the strong inverted correlation between the USD and JPY, the currency market took its cue and by early European trading the market witnessed a sell-off, particularly against Sterling. GBPUSD reached new highs, trading above the 1.54 handle. Sterling even rallied against the USD following weaker than expected CPI figures. Despite the pair trading around its Purchasing Power Parity level the market is, according to flow data, still oversold in Sterling. More positive economic data out of the UK, crucially Retail Sales figures later this week, could see Sterling reaching new levels against the USD, perhaps aiming towards the 1.60 level. This will certainly be in play if GBPUSD breaks a key 200 SMA resistance level of 1.5586. The EUR also rallied against the USD, but has been the less favoured currency. Economic data from the Eurozone is a real cause for concern and the feeling is that EURUSD is gaining not only from a weakening USD but as a result of FX reserve diversification; the rally in commodities and pick up in activity in China is allowing emerging market economies to once again build up their economies. Although green shoots indicators are increasingly apparent around world, optimistic indicators in the Eurozone come from solely from sentiment surveys. The Germany ZEW is a perfect example. The survey measures investor and analyst sentiment; in other words not participants in the ‘real’ economy. Today it posted a sharply higher reading for May, from April. This was mostly due to renewed confidence in the banking sector. It is unlikely that this confidence will continue to keep on the same trajectory, particularly given that European banks are in a much weaker position than was previously thought and no US style stress test has been agreed on in principle, let alone implemented. Given that the Eurozone is so dependent on exports, rather than domestic demand, for governments in the region will be concerned about much more appreciation in EURUSD. Nevertheless, the pair is likely to grind, cautiously, higher as improved market sentiment and the beginnings of a momentum away from the reserve status of the Dollar will weaken the US currency more than European authorities can manage. After all, the ECB will be extremely reluctant to outdo the Fed in aggressive monetary easing.
FX Review of the Day 18/05/2009
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JPY: Vice Finance Minister Sugimato warns against excessive moves in currency markets. JPY negative
GBP: Rightmove house price survey says house prices increased 2.4% in May. GBP positive
INR: Conclusive victory by Congress party in Indian general election. Stock market rallies 18% on news
The Indian general election was the unlikely trigger for a return to risk appetite this week, with the Congress party scoring a decisive win, ensuring the continuation of a program of pro-market reforms. Global commodity markets rallied on the back on the news, as did the Indian stock market, by 18%. Sentiment was given a further boost in the UK with a surprisingly positive report on the housing market. The Rightmove house price survey showed a rise in May of 2.4%. Sterling made significant gains against the USD, with Cable rising from 1.5117 to a end at the 1.5350 level. Sterling also gained against the Euro, with EURGBP falling below the technically significant 0.886 level. The EUR did gain about 100pips against the USD with EURUSD trading at the 1.3560 level. This was mainly as a result of USD weakness, rather than EUR strength; the Eurozone is still reeling from Friday’s shocking GDP figures. Investors moved strongly out of US Treasuries; the yield on the 10 year note rocketed 9 bps to 3.22%. At the same time credit spreads are returning to pre-August 2007 levels. As a further boost to the notion that conditions are returning to normal, Treasury Secretary Tim Geithner said that the government would not seek to impose a cap on executive compensation.
Currency Review 15/05/2009
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News
- EUR: German GDP grew by -3.8% q/q (-6.9% y/y) in Q1, vs expected -3.0% (-6.0 y/y)
- EUR: European GDP grew -2.5% q/q (-4.6%y/y) in Q1 vs expected -2.0% vs (-4.1% y/y)
- EUR: Consumer Price Index for April was 0.6% y/y
- JPY: Wholesale prices fell 3.8% y/y vs expected -3.0%
- CNY: FDI fell 22.5% y/y in April
Commentary
Headline GDP figures tend not to create much of an impression in the markets, given that the components of the figures tend to be factored in in the months leading up to the figure. As a result, it is also rare for the headline figure to be much outside the consensus forecast. It is therefore quite a shock that q1 German and Eurozone GDP figures were so much worse than expected. The most important component, German GDP posted a dismal -3.8% fall in output in the first quarter alone; the worst reading since 1945. It is perhaps surprising therefore that the currency market response was not more dramatic. EURUSD initially fell to just below the 1.3600 level from an overnight high of 1.3650. Enough green shoots appear to have emerged for the market to be more focused on forward looking data, consigning the first quarter of this year to the rubbish bin. Important US data out later today- including Industrial production, Empire State Manufacturing Index and the University of Michigan survey will determine how much longer the good news story seizes market sentiment. As I have stated before the wheels will come off this recent rally. When that happens the USD and increasingly the JPY will benefit.
Brave New World 