The Only Gold Indicator You Need

The Only Gold Indicator You Need

By Dr. Steve Sjuggerud

Wednesday, April 28, 2010

"So… where's the big gold bull market?" I asked John Doody over lunch yesterday.

John writes the excellent Gold Stock Analyst newsletter, where he takes a deep look into gold and the major gold stocks every month. Before starting the newsletter in the early 1990s, John was an economics professor. Right now, John and I are at a conference on Maryland's Eastern Shore.

"John, if gold is so great now, then why hasn't it soared this year?" I asked him. "It's only up like 5%."

John replied. "That's a good question… In my opinion, the primary driver of the gold price is real interest rates that investors earn on their cash."

In short, if investors earn nothing on their cash, then gold goes up. If investors earn high rates of interest on their cash, then gold goes down. As the chart below shows, that's the only gold indicatory you need to know.

Importantly, we're talking about the "real" rate of interest – after inflation. John defines the real interest rate as the interest rate on risk-free 90-day Treasury bills MINUS the inflation rate. That's a good estimate of your "real" return on cash.

As John explained, when the real interest rate is negative – when inflation is higher than risk-free interest – "cash loses purchasing power and buys fewer goods than it bought earlier in the year. When that happens, for protection, investors buy gold and drive its price higher."

Now, take another look at the chart. John explained, "Today's gold bull market and 1970s gold bull market were eras of negative real interest rates. But importantly, for 2010 to date, the real interest rate has been barely negative, as shown by the chart's red-circled area."

With the real interest rate at about 0%, gold isn't moving anywhere. And John pointed out that the Fed rarely raises interest rates as elections approach. So interest rates should stay where they are.

But eventually, John says, "A pickup in the economy will be the key to higher inflation. With the U.S. economy slowly on the mend, we could see inflation. Real interest rates would go negative and gold would rise."

One thing I like about John is, he's not the typical gold bug. He's not taking some moral stand against the government or digging a bunker full of freeze-dried food.

John simply looks at the facts. The facts say you need to own gold when the "real" interest rate is negative… almost regardless of the what's in the news.

His work shows that gold goes up when the bank's paying you nothing. That's where we are now… and that's what you need to know. John believes if the economy starts to recover before the election and inflation shows its head, the situation could get better from here for gold.

In short, gold looks good now, with low rates. And it could look better soon…

Invest accordingly,

Steve.

P.S. John has written Gold Stock Analyst for over a dozen years. He delivers the facts on gold each month, covering 75 precious metals stocks. His "Top Ten" list has an incredible track record of success. For more on Financial Forecast Free Newsletter, click here. 

Gold Pulls Back after a 2-day Rally, Correlation with USD Turns Positive

Crude oil price extend gains above 84 in European session as investor concern about a European fiscal crisis eased temporarily. Stocks and bonds drift higher while the euro continues to recover from a 1-year low. Currently trading at 84.3, the front-month contract of WTI crude oil price surges another +1.3% after Wednesday's rise of +0.95%.

Now that the market expects negotiations between Greece, the EU and the IMF regarding the rescue package will be speeded up as the sovereign crisis is quickly spreading to other countries in the Eurozone. According to Reuters news, austerity measures being discussed between the parties include raising VAT by 2-4% from 21%, reduction in salary bonuses and state sector wage supplements. Taxed on fuel, tobacco and alcohol may also be increased by at least 10%. While none the measures are confirmed, the market anticipates more details will be released over the weekend.

Corporate earnings and economic indicators catch more attention today. In the Eurozone, economic confidence rose to 100.6 in April from 97.9 in March. The market has anticipated a milder improvement to 99.4. Other confidence readings also beat forecasts. For instance, industrial confidence improved to -7 (consensus: -8) from -10 and services confidence rose to 5 (consensus: 3) from 1.

European stocks soar as driven by encouraging earnings results. Banco Santander, the biggest Spanish Bank, reported +5.7% y/y increase in net income in 1Q10. Unilever, the world's second largest food company reported a jump of net income, by +33% y/y, in first quarter. Moreover, Repsol YPE, the biggest oil company in Spain, said the company's upstream division will expand 3-4% per year through 2010.

Gold pulls back after soaring for 2 days as concerns over European sovereign debt moderated. Currently trading at 1169, the benchmark contract for gold slides -0.24% from Wednesday's close but remains at this year's high.

There have been speculations that gold will make new record highs as the yellow metal's appeal as a safe haven increases. the chart below shows that the correlation between gold and USD has changed since the beginning of the year. Movements between the 2 have become more positively correlated recently. The 2010-high (1175.3) made yesterday was just -4% below the all-time high of 1227.5. Whether gold can advance further and reach a new high this year depends on evolvement of the deficit problems in the Eurozone as well as other countries bearing huge debts, and investment flows into ETFs.

Crude Oil Remains Pressure, Movement Directed by Sentiment

Mounting fears about sovereign crisis in Greece and contagion to other European countries continue to hurt sentiment. While stabilized, the near-term outlook in the market remains weak and is prone to further selloff. Currently trading at 82.3, the front-month contract of WTI crude oil price plunged to as low as 81.29 earlier on the day. Gold changes little after rising against the tide yesterday.

Downgrades of Greece and Portugal yesterday overshadowed the meeting today between German Chancellor Angela Merkel, the heads of the IMF and ECB officials. Despite hopes that the leaders would announced something positive after the meeting, i.e. approval of a bailout to Greece, investors actually realized there is a long way to go for the deficit problems to be resolved. Therefore, we believe, although short-term spike in the euro may occur in case of an on-time approval of loans, the currency will remain under pressure in the long-term.

Fiscal problems in the 16-nation Eurozone have also overshadowed the FOMC meeting today. The Fed will likely keep the policy rate unchanged at 0-0.25% and reiterate to maintain interest rates at 'exceptionally low levels' for 'an extended period'. The stance is warranted. While US economic outlook has shown pronounced improvement since the last meeting, especially in consumer spending and housing market, employment situation remained vulnerable while inflationary pressure was stagnant. That said we expect the Fed will slightly upgrade its assessment on economic outlook - using more upbeat wordings in describing economic outlook.

VIX, or commonly known as fear index, closed at 22.81, the highest level since February 2010, yesterday. The close relationship between crude oil price and risk appetite suggests we may see oil price weaken further if more negative news emerges.

Gold's performance in recent days has reinforced our views that investors have been treating it as a safe haven against fiat currencies. Demand for gold increased in various areas. SPDR, the biggest gold ETF, reported an increase of +195.7K oz of holdings on Monday, followed by another 19.58K oz on Tuesday. These were the first increases since April 9. Coins demand was also robust yesterday.

Liquidation continues for a second day in other members of the precious metal complex. After losing -1.03% Tuesday, silver falls another -0.8% today. PGMs got hurt even more severely with platinum losing -2% and palladium sliding most than -4% these 2 days. The selloffs are understandable as the rally since March has driven platinum and palladium +9% and +27% higher respectively. A meaningful correction is indeed healthy for PGMs' long-term price outlook.

FX Update: Risk bulls pretending yesterday didn't happen.

FX Update: Risk bulls pretending yesterday didn't happen.

The bulls are mounting a valiant charge after yesterday's swoon in risk appetite in pre-New York session trading, with AUDUSD retracing half and more of its losses and EURUSD poking its head back above 1.3200 resistance after breaking that level as support in yesterday's trading. But is the bulls' determination bravery or insanity?

EuroZone Contagion
A number of factors point to reason for caution here. The EuroZone contagion situation is white-hot: Greek 2-year yields have reached junk yields close to 18% after yesterday's downgrade of Greek debt to junk status. The simultaneous downgrade of Portuguese debt provided further fuel for contagion fears and spreads there are widening dangerously. Irish debt spreads have also taken off, with the 2-year trading close to 400 bps above the German Schatz today. Most worrying, Spanish spreads have begun to stir as well. And while the EuroZone might be able to deal with a Portuguese rescue situation (smaller problem than Greece), it won't be able to deal with a Spanish situation of any significant size, so Spain will need to move to reassure markets that it is shoring up its finances very quickly to avoid the hinges coming off the entire EuroZone project. Increasing the contagion risk - Spanish banks are the biggest holders of Portuguese debt.

Fortunately for Spain, they are starting at a much better place in terms of total public debt to the size of the economy - though their shorter term fiscal shortfalls are of similar magnitude relative to GDP. Trichet is on a mission to Berlin to talk with German authorities to get some kind of rescue package moving as German politicians are handicapped by an outraged populace during election season. Another provocative piece from the Telegraph's Evans-Pritchard discussed the potential for an ECB "nuclear option". Worth a read. S&P has forecast that bond investors in Greece shouldn't expect to recover more than 50 cents on the Euro for their sovereign debt holdings.

Chart: EuroZone debt spreads
Contagion is upon us. The most important spread to watch now is the spread for Spain.

Risk spike - but already fading fast?
A move like yesterday saw all risk metrics rising in the wrong direction for the bulls, besides the VIX spiking higher to the highest level since mid February, FX volatility made a similar leap higher for obvious reasons. Junk bond spreads widened and wiped out a month and more of tightening, as did emerging market spreads. Commodities took a dislike to the situation as well, with copper suddenly falling off its pedestal, and oil making a try at recent lows. The copper correction saw Australia BHP Billiton gap lower, drawing more oxygen from the AUD fundamentals.

Still, as we are writing this, Bunds are undergoing a very sharp correction lower, echoed by US treasuries, and this is seeing the higher yielding currencies make a valiant attempt at pretending yesterday never happened. One reason bunds might be falling is that traders who have been engaging in a spread trade with other European debt, might be thinking that it is a good idea to reduce exposure to Euro debt in general, as Bund yields almost touched an all-time low yesterday.  The retreat in US bonds has USDJPY pushing back at 94.00 after trading below 93.00 yesterday.

Chart: NZDJPY
NZDJPY has been one of the most volatile pairs as yesterday's risk hiccup was the pair two figures lower. Today, the pair is posting a massive reversal higher - driven more by the reversal in bond yields, it seems, rather than other risk indicators, which have failed to catch up with the bond market just yet. NZD traders should keep an eye on the RBNZ tonight and the Trade data also set for release later.

Stumbling sterling
Sterling is stumbling with every sign of the Liberal Democrats advancing in the polls and the prospects of a hung parliament. The fact that sterling can't advance here while the Euro looks in dire straits speaks to the weakness of the currency and it looks like we have established a trading range here before the election that is fast approaching on May 6, a week from tomorrow. The short term resistance is just above 0.8700 in EURGBP and around 1.5300 for the short term in GBPUSD.

FOMC preview
Markets have enough to react to without the FOMC today, and we wonder whether it will have much of an impact. With super low inflation data and very slow improvement/stagnation in employment numbers, the Fed is not likely in any kind of mood to rock the boat here and our expectation is for a virtually unchanged statement, that might be celebrated briefly for its implications on continued easy liquidity and the speculation that this drives, but then the market will get back down to sorting through the implications of the EuroZone situation and worries over the financial reform debate. It's either that scenario, or a scenario in which the new bears, and red-eared bulls who capitulated yesterday and are scrambling to re-establish their longs continue to bid up risk all day long, only to find more caution on the other side of the FOMC.

RBNZ preview
The RBNZ is up within a few hours of the Fed. No change is expected to the 2.50% rate, but the market is looking for guidance on when the first rate hike might take place, with the market looking for the July meeting as the most likely point for a move. Yesterday's action in NZD suggests traders need one eye or more on the general situation in risk as much as the meeting itself. One of the more interesting NZD crosses to watch of late is AUDNZD, which is attempting to establish a real downtrend again. The 1.2950 area is important resistance there, while 1.2800 is the current support. NZDUSD has been all over the map on the latest market events, but needs to close down through the 200-day moving average it has surfed along for weeks now to nourish any bearish hopes.

Looking ahead
Plenty to watch with this volatile market and two central bank meetings on tap later in the day. Later today, watch for the results of a $42 billion 5-year US treasury note auction after yields spiked lower yesterday. Tomorrow we have a 7-year auction.

Stay careful out there.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out at -49 vs. -48 expected and -50 last week
• Japan Mar. Retail Trade rose +0.8% MoM and +4.7% YoY vs. -0.6/+3.6% expected, respectively
• Australia Q1 Consumer Prices rose +0.9% QoQ and +2.9% YoY vs. +0.8/+2.8% expected, respectively
• Australia Q1 Trimmed Mean CPI rose +0.8% QoQ and +3.0% YoY vs. +0.6/+2.9% expected, respectively
• New Zealand Apr. NBNZ Business Confidence rose to 49.5 vs. 42.5 in Mar.
• Sweden Mar. Unemployment Rate fell to 9.1% vs. 9.5% expected and 9.3% in Feb.
• Germany Apr. Consumer Price Index fell -0.1% MoM and rose 1.0% YoY vs. +0.2/+1.2% expected, respectively
• Canada Feb. House Price Index rose 9.9% YoY vs. +7.5% in Jan.

Upcoming Economic Calendar Highlights

• US Weekly DOE Crude Oil and Product Inventories (1430)
• US FOMC Rate Decision and Monetary Policy Statement (1815)
• New Zealand RBNZ Cash Rate decision (2100)
• New Zealand Mar. Trade Balance (2245)

FX Closing Note: FOMC says "pass", but markets try to react, anyway

The FOMC statement could not be more in line with basic expectations today and more boring to read.... The initial description of the economy was upgraded in very minor ways: employment was described as "beginning to improve" rather than "stabilizing", etc... The following key phrase about the Fed's intentions was kept completely unchanged:

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Even Hoenig's dissent related to the above statement was unchanged from the last time around.

The statement dropped the reference to the $1.25 trillion in mortgage purchases and $175 billion in agency debt since those asset purchase programs expired at the end of March. Of the possible scenarios we mentioned in this morning's FOMC preview:

"...our expectation is for a virtually unchanged statement, that might be celebrated briefly for its implications on continued easy liquidity and the speculation that this drives, but then the market will get back down to sorting through the implications of the EuroZone situation and worries over the financial reform debate. It's either that scenario, or a scenario in which the new bears, and red-eared bulls who capitulated yesterday and are scrambling to re-establish their longs continue to bid up risk all day long, only to find more caution on the other side of the FOMC."

It looks like in the wake of the FOMC statement we are getting the "brief celebration" of the implications of the still-dovish Fed. So the question is whether we see renewal of caution already in the next 24 hours, or if the market wants to get back to its old rallying ways immediately.

In other news today
Dominating the action today was another downgrade of sovereign debt with a downgrade of Spain's bonds to AA and putting the outlook on negative. If only the S&P had been so vigilant on sub-prime CDO's ! The Spanish downgrade pushed EURUSD all the way down to 1.3115 at one point before it recovered for a renewed attempt at the 1.3200 resistance after the FOMC meeting. In the US, a first vote to open up debate on the financial reform bill failed in the Senate, but they may try to stage another vote on whether to open up debate as early as this evening.

Casting about for Perspective
All in all, this has been a remarkable couple of days for FX, with rates reversing more rapidly than in almost any other market. The likes of AUDUSD and NZDJPY, etc.. came completely unglued yesterday, apparently as only the most speculative hands were shaken out of their positions, and today has seen an attempt to re-establish those long risk positions.  The JPY rally attempt from yesterday has likewise been roundly and thoroughly rejected, with even the suffering EUR able to post massive gains on the day against the low yielder as bond market frantically sold off today after the panicky accumulation yesterday. The US 5-year treasury yield saw yields at a higher than expected 2.54%, much higher than the benchmark close for the 5-year at around 2.42% yesterday.

Chart: USDJPY
Despite the weak USD, the very weak bond market guaranteed an even weaker JPY today, and USDJPY and most other JPY crosses reversed most or all of yesterday's losses. Note that the pair found support at the TenKan line. 94.77 is the high for the cycle.

Still, it is hard to believe that the bulls can simply pick up where they left off considering the magnitude of issues at stake. Other risk markets are also been far slower to attempt a comeback, so one can at least speak of an arbitrage opportunity in, say, equities vs. FX pairs positively correlated with risk.

Looking ahead
Remember that the RBNZ is up very shortly - NZD traders must be getting tired after NZDUSD has rushed from 0.7100 to 0.7250, then back to 0.7100 and now at 0.7200 in just three days. The last couple of moves in risk aversion show a speculative market that is nervous and positioned very heavily long in the commodity currencies. If a more sustainable move in risk aversion ever materializes, yesterday is a preview of the kind of action we can expect.

Tomorrow we have a heavy data schedule for Sweden, German employment figures, and Norway's March Retail Sales data in Europe. Traders need to watch out for the announcement of a Greek rescue package at any time, which will guarantee wild swings in EUR crosses, even if it's hard to come up with a positive scenario for Europe from this whole problem.

Be careful out there.

FX Closing Note: Risk doesn't like what's going on here.

Today saw triple threat come into play: a significant additional sell-off in Chinese equities (that we neglected to mention this morning's late Europe/Early US update), S&P cut its ratings on Greek debt to junk and cut Portugal's debt a notch as well, and the Senate committee's grilling of current and former Goldman Sachs executives took a decidedly aggressive and at times nasty edge. This saw a capitulation in risk in the currency market and a strong surge in the most liquid bond markets.

There are enough optimists out there to keep Goldman stock from falling farther today, but other financial stocks were off about 3% on the day, and the S&P 500 index lost some  2.5% or more on the day as well, it's worse performance since early February (which was itself a capitulation sell-off that saw the bottom in the market for the cycle the next day).

The impact on risk appetite was certainly felt in currencies, and most intensively, of course, by the commodity currencies. CAD, SEK, and NZD led the downside among the G-10, and the previous two days of a very sharp rally in NZDUSD was wiped out today in one fell swoop.  The two strongest currencies were the markets two favorite safe havens, the greenback and Japanese yen.

Chart: NZDUSD
Today's risk aversion took a heavy toll on NZD as the RBNZ meeting approaches. This kind of reversal could be a hard one for the bulls to overcome. Next focus is on the 200-day moving average, which has been in place incessantly since about mid-March

EURUSD, of course, fell sharply as well, though positioning in the market is rather clear: people are already very short EUR and very long currencies like SEK, AUD, CAD, and NZD, so the EUR was actually flat to positive vs. these currencies on the day, which suggests that the short term potential for the Euro to fall further in an environment where risk is selling off is minimal to non-existent.

There is no mystery to what is going on here: risk loathes the kind of uncertainty brought on by the latest events , especially by a panicky outlook on Greece - and the general agreement forming here is that this is a lose-lose situation for Europe. The new wrinkle as we mentioned this morning is the idea of a haircut on Greece's creditors, that will help prevent the EU/IMF from having to take as large a position in digging Greece out of its financial hole. This of course helps to lighten the load on the public sector, but private banks that invested heavily in Greek debt will be burned, especially German banks, and possibly to the tune of tens of billions of Euros, if this is the settlement that is reached in the coming days (time compression is being forced by the market action here).

Elsewhere
There wasn't much of an elsewhere today with the Goldman hearings in progress, but US Consumer Confidence surged much more than expected, though the present situation part of the index remains very low at 28.6. Let's see if the weekly ABC number up after the US close today gives any further color to this number - it has been a disappointment the last two weeks.

Looking ahead
Tomorrow will tell us whether this is a short term panicky move or whether we get a more lasting sell-off. We've got the FOMC up tomorrow - with baseline expectations for no real change in the Fed stance. Meanwhile, we have the Goldman, Greece, and China to busy ourselves with. Have we seen a bottom in volatility?

Be more careful than ever out there. Greatest risk is often after a period of incessant declines, as the bull rally can suck the oxygen out of the market and have scared away and broken the back of all the bears.

Oil Plunges Below 84. Risk Appetite Wanes on Greece and Chinese Tightening

Crude oil extends weakness in European session despite stronger-than-expected economic data and robust corporate earnings results. While sovereign crisis over peripheral European countries remain the hottest topic, worries over tightening in China and expectations of crude stock builds are weighing on the market. Currently trading at 83.2, the front-month contract of WTI crude oil will likely lose for a second day.

Realizing the problem in Greece will take longer-than-previously-expected to resolve, investors dump the euro as well as other 'growth' assets. Investments in the dollar and benchmark European stock indices opening lower. Apart from sovereign risks in the 16-nation Eurozone, stocks are down amid worries over deeper tightening measures in China. Investors concern China's cooling measures in its property market will dampen economic growth. China Vanke, China's largest developer, said profit plummeted -53% y/y in 1Q10.

These worries overshadowed strong earnings results and European economic data. BP, the biggest oil and gas producer in the Gulf of Mexico, reported a +14% increase in net income to $6.08B in 1Q10, with helps of high crude oil price and pick-up in refinery margins. Other big oil companies will be reporting their first quarter earnings later in the week. Royal Dutch Shell will report tomorrow and Exxon Mobil on April 29.

In Germany, Gfk consumer sentiment improved to 3.8 in May, compared with consensus of 3.2. April's reading was also revised up to 3.4 from 3.2. In Switzerland, consumption indicator rose to 1.71 in March from 1.2 in February. Later in the US session, the Conference Board will probably report that consumer confidence rose to 53.7 in April from 52.5 a month ago. S&P/Case-Shiller Composite 20 Index is expected to have recorded annual gain of +0.8% in February, following a drop of -0.7% in January.

Despite narrow-trading, gold's near-term outlook remains weak. Although sovereign crisis in the Eurozone has attracted gold buying, severe selloff in the euro and strength in USD are indeed detrimental to the yellow metal.

The Fed will be holding a 2-day FOMC meeting to discuss about economic and monetary outlook. While it's widely the Fed will leave the policy rate unchanged at 0-0.25% and maintain the guidance that exceptionally low level of interest rates will be kept for an extended period, the focus is on the members' economic outlook. Given recent strong economic data, it's likely that the Fed will sound more upbeat on US' recovery and growth.

Market interpretations of the Fed statement will have impacts on gold price. The more hawkish the statement is, the earlier the Fed will implement the first rate hike. This is positive for the dollar but negative for gold.

Silver Daily Technical Outlook

Comex Silver (SI)

With 4 hours MACD crossed below signal line, Silver's recovery from 17.49 might have completed at 18.42 already. Intraday bias is turned neutral for the moment. Break of 17.845 minor support will affirm this case and flip intraday bias back to the downside for 17.49 and possibly below. Also, note that sustained trading below near term trend line support, now at 17.5 will argue that whole rise from 14.65 has finished too and will turn focus to 16.55/62 support zone (50% retracement of 14.65 to 18.605 at 16.62) for confirmation. On the upside, above 18.42 will bring another rise. But after all, we'd expect upside to be limited by 18.605 resistance and bring another fall.

In the bigger picture, note that at this point, there is no clear confirmation that medium term rally from 8.4 is finished yet. However, such rally is viewed as part of the consolidation patter that start at 21.44 (2008 high). Hence, even in case of a new high above 19.50, we'd continue to look for reversal signal as silver enters into 19.55/21.44 resistance zone. On the downside, sustained break of 16.55 support, will in turn revive the case that 19.50 is already the medium term top and will turn focus to 14.65 key support level for confirmation.

Comex Silver Continuous Contract 4 Hours Chart 

Comex Silver Continuous Contract Daily Chart 

Yen weakness - a conundrum

Nick Beecroft, Senior Foreign Exchange Consultant

USD/JPY remains very highly correlated with the short-term yield differential between dollars and yen, and this may explain the yen’s recent slightly puzzling weakness.

With rumours abounding that the Chinese authorities are about to allow some strengthening of the Renminbi, one might have expected the yen to be displaying some sympathetic strength, (on the day of the last ‘step-change’ revaluation of the Renminbi, on 21^st July 2005, the yen appreciated strongly from 112.90 to close at 110.26, although over the next six months it gave back those gains, and more), however, as the expectation of a Chinese move has grown over the last couple of weeks, the yen has weakened against the dollar, from 91.60 to around 94.00.

This despite Greece’s travails and the attendant strains upon the Euro, which might have been expected to promote the usual knee-jerk, safe-haven buying of yen.

Maybe the explanation lies in the market’s suspicions about the outcomes of two key central Bank meetings this week. In the States, the Fed’s FOMC meets on Tuesday and Wednesday, and the Bank of Japan announces the results of its monthly meeting on Friday.

With some slightly more encouraging economic releases in the US, and with Japan still mired in deflation, nervous dollar/ yen shorts are covering their positions in case the FED changes the all important phrase stating that rates are likely to stay, “…exceptionally low…for an extended period” and/or the BOJ is finally persuaded to increase Quantitative Easing measures to combat deflation. 

A double-whammy of such moves would provide a serious boost to dollar/yen, given the market’s focus on the short-term interest differential.

In fact, I expect neither to happen. The FED is increasingly worried that deflation might hit America as the year progresses, as evidenced by the last FED minutes, and the BOJ seems set on its preferred course of complacent inaction until too late.

Or do we underestimate the BOJ? Maybe they’re keeping their powder dry specifically because they want some ammunition at their disposal to combat any yen strength which may follow a Chinese move?

FX Closing Note: Euro squeeze to close the week

The Euro was almost the strongest currency of the day, with only the Swedish krona among the G-10 currencies managing a stronger performance on the day. While Greek debt spreads rewidened after an initial very sizable tightening earlier in the day, the Euro bears apparently decided to take their chips off the table ahead of the weekend, perhaps due to the uncertainty on whether some kind of temporary loan might see the Greeks through short term funding challenges until they can access the full rescue package some time in the future. A potential major roadblock to that eventuality is the need for an okay from the German parliament while Germany finds itself in the middle of election season and the Greece issue is a very hot potato indeed. See more on this issue in this Reuters story.

Chart: EURUSD
Regardless of the reason for today's comeback in EURUSD, technicals are technicals until proven otherwise. So today's candlestick is a rather bullish one as it reverses the attempt to take out the 1.3267 previous low and keeps the pair supported as long as the new low around 1.3200 holds. There could be more room for a relief rally back to the high of the previous range in the short term if the Greece rescue plan brings down not only E. But the wider fall-out for the EuroZone, politically and financially is still a great unknown and a long term issue that is unlikely to be laid to rest for an awfully long time to come.

 

Risk comes back again again again
US equity markets apparently tried to focus on the positive implications of a weaker US dollar and the very strong durable goods orders and new home sales and managed to rally to a new high close for the cycle today. This of course wiped out the bearish implications we discussed this morning for AUDUSD, which at the time was trading down through key support and the rising trendline, but which closed the day with an impressive bullish hammer reversal. Still, in other crosses, the Aussie showed less strength and the bearish implications for AUDNZD remain intact for the moment. Next week's RBNZ meeting is the next watershed event risk for that currency pair

Looking ahead
Today's close created a bullish hammer formation in risk broadly speaking, so we look to early next week for either confirmation or rejection of this development. Besides the overview of next week's key event risks we outlined in this morning's report, we also have huge US treasury auction on tap, to the tune of $129 billion dollars in 5-year TIPS (Monday) and 3-,5-, and 7-year notes (Tuesday through Thursday). The last auction of longer dated securities saw a key rejection in the strong rise of long interest rates in early April. Will we see continued strong demand for treasuries at this part of the curve or are the bond vigilantes on the loose?

Watch out for weekend developments from the G-20 and on the Greek financial rescue situation and stay careful out there as always.
Have a great weekend!

FX Closing Note: The nine-headed risk Hydra sprouts two more heads

Equity bears face a Hydra of risk bulls, as every sell-off in risk is simply met with a new wave of double-down buying. This is an absolutely amazing market to observe and gave us cause to have a look back at past equity market rallies, and how long they can find sustenance before facing significant correction (a significant correction defined as a couple of weeks or more of at least back and forth activity and not necessarily even a strong sell-off). Our unscientific conclusion is that approximately three months is the common outer limit for the best bullish episodes in the market.

By that measure therefore, this rally began on the fifth of February and is getting very long in the tooth as we would be closing in on the end of the third month over the next couple of weeks. There have only been two clear episodes in the equity markets that lasted longer than that in the last 15+ years of US equity market history. So we are in extreme territory, folks, and within a week or two should expect markets to at least go sideways, if we are to believe the statistical evidence from the long time series.

Chart: Volatility and AUDUSD
Here is a look at FX and US equity market volatility (white and green lines, respectively) and the USD/AUD rate. From this, it appears that AUDUSD will need to see a continuation in the already remarkable, massive decline in volatility (or to put another way - sustained higher market complacency) in order for it to continue to grind higher. 

Chart: AUDUSD and rate differentials
Clearly, the AUDUSD view is being driven as much by the rate differential view as anything else. As we pointed out recently, a number of indicators suggest Aussie is a bit expensive here, particularly Chinese equities and BHP Billiton stock, but the interest rate view is still very supportive and is a key component supporting AUDUSD at these levels. Today, this is perhaps doubly so after the rally in treasuries has been turned back in today's US session, thus aborting the JPY rally.  The chart below shows AUDUSD (green) vs. the spread in the June 2011 STIRs for the two countries.

Looking ahead
EURUSD didn't manage much of a rally off the day's lows, which are the lows for the cycle as Greek 10-year yields are above 8.75% at the close of the session today. A break lower sets up a possible go at the 1.3000 level if the Greek situation is allowed to worsen and/or if risk aversion settles over the market. USDCAD looks interesting tomorrow with the data on tap there (Canada Mar. CPI and Feb. Retail Sales) energy prices avoiding a meltdown in today's trade and rallying strongly off the lows. Also watch out of the German IFO survey tomorrow in Europe.

Watch out for a potential revaluation of the Chinese yuan tonight - something that could be a psychological game changer here after it has been so heavily discussed. The timing would be good for the Chinese to get this out of the way here ahead of the weekend's G-20 meeting, though we have no special insight into their thinking on this matter, and they might not decide to move for another month or more.

Stay careful out there.

Commodities Extend Weakness as Investors Avoid Risks

Oil prices extend weakness for a third consecutive day as global risk aversion jumps amid Goldman's case. WTI crude oil price slides to 80.8 in European session, after plummeting -2.69% to 83.24 last Friday. Declines in heating oil and gasoline also accelerate with losses of -3% and -2% respectively.

After disclosing production of 29.26M bpd in March (+5.6% y/y), OPEC will probably increase shipment, by +0.9%, in the 4 weeks ending on May 1. This further increases oil supply which is already in a surplus in the market. Member countries are boosting production regardless insufficient demand.

In an interview over the weekend, Qatar's oil minister Abdullah bin Hamad al-Attiyah said there's no need for a special meeting before its October meeting but he mentioned that recent rally in oil price was is 'not related at all to there being a shortage...We see that inventories are at their highest'.

Natural gas has fallen in consolidative phase since April. However, resumption of inventory builds indicates risk of price is to the downside. Gas supply will likely remain ample in coming years as large producers are not going to cut output despite slump in prices.

Although Algeria's energy minister Chakib Khelil plans to seek commitments from 11 gas exporting nations to reduce output, both Russia and Qatar, respectively the biggest and the third-biggest holders of the world's reserves, will probably refuse to collaborate.

Gold price slides due to broad-based decline in commodities and weakness in the Euro. Currently trading at 1130, the benchmark contract fell to as low as 1124 earlier today. Despite the fall, gold's performance is relatively resilient when compared with oil prices. Some investors buy gold as they lose confidence on currencies on Greece's issue.

Talks on Greece involving the European Commission, the IMF and the European Central Bank have been delayed until April 21 as a volcanic ash cloud disrupted air travel. The market expects the EU and the IMF will impose tough conditions for the rescue package for Greece. The spread between Greek and German 10-year government debt widened +32 bps to 462 bps, the highest level since October 1998.

FX Closing Note: Risk attempts to make comeback

In the wake of volcanic ash clouds and the Goldman Sachs fraud charges, and despite the overnight blowup in Chinese equity markets after authorities there announced new, strict measures aimed at choking off the real estate bubble, risk is impressively refusing to give up the fight and is making a stand late in the North American session with predictable results for FX: the USD rally has faded a bit and AUDUSD is pressing at the important 0.9220 resistance again as we are writing this. JPY crosses, meanwhile, are posting almost across the board hammer formation as this morning’s lows were unable to hold into the close and bond markets eased lower. The US 10-year future, to take an example, had erased almost all of the Goldman-Sachs induced run-up news from Friday. The reversal in USDJPY is an important one and sets up better odds for a further rally in coming days.

It came forward from apparently reputable, yet unnamed, sources today that SEC commissioners voted 3-2 (along party lines) to approved the decision to sue Goldman.

Bank of Canada preview
A number of factors have driven USDCAD all the way to the parity level and even slightly beyond for the cycle: an increasingly hawkish Bank of Canada that has made it clear that it will hike rates beginning soon and a market that has responded to this and now priced in some 150 bps or more of policy tightening in the coming year. There are three more drivers for a strong Canadian dollar at the moment: 1) the Bank of Canada has expressed far less concern about the strength of the currency in this cycle than it did in the past cycle of strengthening, 2) oil prices (at least until the last couple of trading days) have been very strong and 3) Canada's bank almost completely bypassed the financial crisis due to strictre regulation and the Canadian fiscal and debt positions are among the best of the major countries.

Of course, over the last couple of days, the USDCAD has suddenly been derailed by a sharp consolidation in risk appetite, which has included a sharp rally in Bankers Acceptance STIRS and a sharp sell-off in oil and CAD has been one of the most negatively affected currencies, just as it was one of the strongest currencies when risk appetite expands.

This all sets up a potentially large reaction to the decision tomorrow: there are two major factors to consider: the status of risk appetite and the BoC rhetoric: No change in guidance (disappointing the sizable minority looking for a more aggressive statement) plus a continued souring in risk appetite could make for USDCAD trading above 1.0300 in a hurry. A hint that the Bank is looking to time its first hike for the June 1 meeting and global risk markets suddenly back on a rally track would see us back at parity in a flash. Regardless of the immediate outcome, the parity level may be a tough one to crack for a while unless we see 10% more upside in global equity markets from the recent top and a 90 dollar/barrel oil price. A "mixed signal" situation could confuse the CAD bulls and bears in equal measure. Our view is that CAD is getting overvalued, with the admission that strong risk appetite in the near term can continue to keep valuations stretched to even-more-stretched.

Chart: USDCAD vs. oil prices
A fairly clear price relationship here. The move back below 84 dollars/barrel is a clear disappointment for the CAD bulls and is technically interesting for oil traders.

Chart: USDCAD vs. March 2011 STIRs
The market has gotten very aggressive on its forward view of the Bank of Canada's actions, which gives strong fundamental support. Of course, the Bank of Canada will have to follow the market's script and continue to find justification for this view in the months to come.

Riksbank also on tap
Besides the Bank of Canada meeting tomorrow, we also have a Riksbank meeting on tap. The Riksbank is looking to hike in approximately the same time frame and concern is riding high there about the potential for a new housing bubble. EURSEK has not been doing much of anything for the last seven weeks as the market doesn't seem to have a view on that pair. Could the meeting tomorrow shock the market out of its complacency and either see a sharp rally or sell-off out of the range? While the market's forecast for Riksbank has been relatively stable of late, a rash of relatively weak data is preventing the krona from rallying strongly vs. the Euro, including a poor recent showing in Retail Sales, a low print for the latest inflation data, and a fall in average house price data in March.

Looking ahead
Also on tap we have the New Zealand consumer prices for Q1 and the RBA minutes in the Asian session. AUDNZD is beginning to look “reversalish” again, though it still needs a close through 1.2950 and then 1.2820 to speak of outright bear market potential.

UK inflation (CPI/RPI) is also on tap tomorrow after GBPUSD has made a fairly sharp comeback attempt in today's trade and looks to close above the 55-day moving average after trading more than 100 pips below it at one point today.

EURUSD made a stand at important levels and remains above the final Fibo retracement supports on the throwback sell-off. More bullish confirmation for that pair would come with a move back above the 55-day moving average, which would kick the 1.3800+ attempt scenario back into high gear, while a close below 1.3400 would dampen expectations again.

Stay on your toes out there. The Chinese stock market drop yesterday received less attention than it should have. A clamp down on construction in China could have tremendous consequences for commodity markets and companies that provide materials for the Chinese building spree.

FX Update: Big issues for FX to chew on this week!

The ash cloud from the Icelandic volcano swirling over Europe has not only delayed millions of tourists from reaching their destinations, but all manner of business has ground to a halt, including fresh bailout talks scheduled between Greek authorities and the EU/IMF. The calling of these talks had sparked some outrage in Greece, where some in the populace are now fearful of even more dramatic austerity measures aimed at clamping down on spending. These fears were justified when the EU's Juncker that new austerity measures would be discussed at the talks. The talks have been rescheduled for Wednesday rather than today.

Spreads on Greek debt were at their widest since the entire debt debacle began  in earnest late last year, with Greek 10-year spreads to Bunds trading at over 450 bps as of this writing. Interestingly, the contagion story is getting some traction as well, as Portuguese spreads have widened out to 150 bps - close to their February peak. There were no real clear signs of distress in the other "PIIGS" countries' debt. Outside of EURUSD and EURJPY, which were driven lower by the general boost to the USD and JPY from risk aversion, however, EUR was holding its own in other crosses - either suggesting divergence and an opportunity to take advantage of mispricing (the cynical angle on the Euro) or showing a bit of resilience (the contrarian angle).

Goldman
The Goldman Sachs fraud charges are being endless discussed. That actual story will take a long time to reach a conclusion - in the meantime, the focus is on the risk of contagion to other investment banks and a deeper investigation of Goldman Sachs itself, the poster child of Wall Street investment banks. As some have pointed out, (and we agree now that we have gained a little 20/20 hindsight from sitting on this story all weekend) it is rather amazing that it took this long for the SEC to come up with something and that it only went after Goldman on a specific deal, rather than charges of more broad market manipulation. This suggest a rather weak SEC effort, unless the regulatory agency is using this case as a Trojan horse to get inside Goldman's books and widen its . For now, the SEC case has seemingly sparked action by UK and European officials, who appear to be on the warpath against Goldman as well (see this story for more).

Good old risk aversion
The action since Friday has shown us how the chips will fall if this move into risk aversion continues, with the strongest currencies suddenly becoming the weakest currencies and vice versa. AUDUSD was down through key support, and the USDCAD downtrend is finding itself seriously challenged as well. The biggest fireworks have been in the JPY crosses, where the JPY shorts are getting squeezed on the sharp fall in bond yields, though that fall is seeing some fairly sharp consolidation as we are writing this.

Chart:USDJPY
USDJPY finds support close to 0.618 Fibo retracement of the recent wave and ahead of the critical 55-day and 200-day moving averages. Ichimoku cloud support is a bit lower toward 91.00 and doesn't begin rising until the end of the month. It is important for USDJPY to find support in this area if it wants to keep the already struggling bullish outlook alive.

Looking ahead

Three big issues on the front burner
We've got quite the trio of market risks at present: the EuroZone periphery, or PIIGS story, the brand new Goldman Sachs story, and the possibly imminent Chinese Yuan revaluation. It would seem the market has enough to chew on for the moment to cap any risk appetite for now and the risk bulls can expect a rangebound market at best. The question going forward is whether the situation only results in a couple of weeks of consolidation or whether it has wider implications. Certainly, the economic fundamentals need to make a strong case for continued recovery for the market's confidence not to wobble significantly in the near term.

Or is it four issues?
If we are to add a fourth issue at the moment, it is the upcoming UK election. Today's GBP weakness may have been triggered partially by the situation with the Icelandic volcano, but possibly also by the newfound strength of the Liberal Democrats, who are taking votes from both of the other two major parties and thus increasing the chances of a hung parliament.

Maybe even five?
Finally, the volcanic ash cloud is pummeling energy prices as jet fuel and other inventories pile up due to lack of demand, though it appears the volcano is emitting ash at lower levels now and the cloud may clear in the coming few days, proving a very temporary event. USDCAD is the primary "energy pair" to trade in FX at the moment. If the volcano goes haywire again, however, the broader market can't ignore the implications on global growth, and not just energy prices. It is very serious business to have most of the airspace in the world's economic zone completely shut down.

RBA Minutes
With the Aussie longs a bit weak in the knees on this bout of risk aversion, watch out for the RBA minutes set for release in the Asian session tonight.

Economic Data Highlights

• New Zealand Mar. Performance of Services Index out at 57.3 vs. 53.7 in Feb.
• UK Apr. Rightmove House Prices out at +2.6% MoM and +6.0% YoY
• Japan Mar. Consumer Confidence out at 41.0 vs. 40.0 in Feb.
  Japan Mar. Nationwide Department Store Sales out at -3.5% YoY vs. -5.4% in Feb.
• EuroZone Feb. Construction Output fell -15.2% YoY vs. -10.6% in Jan.
• Canada Feb. International Securities Transactions out at 6.7B vs. 9.0B expected and 11.8B in Jan.

Upcoming Economic Calendar Highlights

• US Fed's Evans to Speak (1300)
• US Fed's Bernanke to Speak on Financial Literacy (1300)
• US Mar. Leading Indicators (1400)
• US Fed's Duke to Speak (1300)
• New Zealand Q1 Consumer Prices (2245)
• Australia RBA April Minutes (0130)

Shocking video exposes biggest government fraud of the past 20 years

By David Galland in Casey's Daily Dispatch:

David Rosenberg of Gluskin Sheff can almost always be counted on for a useful observation or two, and his letter today is no exception. In it, he comments on the basis for the strong rise in U.S. corporate profits. It's his observation, so I'll let him make it...

THE PROFIT PICTURE - THE REAL STORY

Total U.S. corporate profits (national accounts basis) rose 30.6% YoY in Q4, a huge swing from the -25.1% trend a year ago.

Almost the entire story is in the financial sector where profits have soared 240%, which is unprecedented. With the banks shrinking their asset base, the surge in earnings has been due to the ability to 'extend and pretend' post the FASB 157 changes a year ago and the ability to play a super steep yield curve.

Financial sector profits have accounted for 85% of the overall increase in corporate earnings. Total nonfinancial earnings are up the grand total of 5.2% on a YoY basis, though this is still much better than the -17.9% pace a year ago.

As something of a set piece on that theme, check out this rare video on mainstream financial media - from MSNBC - that goes into an unaccustomed level of detail over the scam the Feds are running in cahoots with the financial institutions.

Of course, upon being required to think - even with the facts being carefully laid at his feet - the average Joe's eyes will gloss over and thoughts of Fed machinations will be replaced with those of a nice cold beer. But it's encouraging to see the scam getting some wider coverage nonetheless.

No Matter What, Buy Gold

No Matter What, Buy Gold
Dear Reader,

“Stocks skid after Goldman charge. Volatility spikes...” read Friday’s headlines.

My recommendation — forget about trying to trade the day-to-day noise you hear from the mainstream.

Instead... buy gold. In almost any form. But, no matter what, Buy Gold...

And then put it aside and forget about it.

For over a year now I’ve been working on a report that lists the best ways for you to buy gold. In it, you’ll learn about gold’s untold story... and the shocking new role it could play in your financial survival.

So please, do yourself a favor this weekend and read this report. Afterwards, drop me a line. I’d love to know what you think…

Click here for the full report.

Until we meet again...
Byron King
Gold and Energy Expert

FX Closing: US government dishes up an exogenous shock

The rally in risk derailed suddenly today as the SEC charged Goldman Sachs with fraud. The SEC charges essentially that hedge fund legend John Paulson was allowed to piece together the most miserable toxic mortgage paper he could find and then sold that product to unwitting investors without telling them  who the counterparty shorting it was. A conflict of interest, to say the least. The details on the case can be found everywhere, as this is by far the biggest story to hit the wires in a long time. As we wrote in our monthly report published just yesterday: "There are few conclusions to draw from the indicators...at present, other than there are no apparent immediate causes for alarm, suggesting that any move into risk aversion would require some kind of exogenous, anticipated shock." Well, here's your shock, market - let's test your mettle now...

Our two cents on this situation will inevitably be drowned out by the endless commentary this issue is generating, but this feels like "a big deal" that won't simply be wiped away in a matter of days, even if risk bulls and those who have been endlessly frustrated looking for a dip in the action think they have found their golden moment to go long on Monday. That's because, if the rally in risk were purely built on healthy fundamentals and organic growth, we could write this off as an ephemeral confidence shaker. But the rally is built as much on easy liquidity and increasingly extreme complacency as it is on the real prospects for economic improvement.

The market does not like the uncertainty of an SEC on the warpath - there will be more cases. Going straight after a Paulson/Goldman Sachs deal smacks of the agency wanting to go high profile, and  of SEC charges go to the heart of the economies greatest liquidity generators, who may fell the need to hoard cash to fend off lawsuits and settlements and whose more "daring" activities in the spirit of the cowboy days of five years ago, may be heavily curtailed by corporate risk managers.

Chart: AUDUSD
A huge dip in one of the more consistently risk-sensitive FX pairs today: AUDUSD. A very key zone around 0.9220 almost came into play today. A move and close through this area early next week would help to confirm the bearish divergence in the stochastics and one would think that this Goldman Sachs story has opened up a large enough can of worms in risk appetite to trigger a pullback to the previous major wave low around 0.9000. 

Looking ahead:
This news could take some time for the market to sort through the implications. It may more or less mean the end of the risk rally if economic indicators flatten out again - the key in coming days will be to judge movements in the risk universe, as well as the markets reaction patterns to incoming data. Monday could see considerable swings as investors sort through this story over the weekend and decide on a course of action.

Be extra careful out there.

Crude Oil Retreats as Investors Take Profts After Strong Rally

Crude oil price retreats following the strong rally yesterday. The front-month WTI contract slides to 85.4, down -0.51% from Wednesday's close, in European session.

In its monthly report in April, the OPEC made only mild changes in global oil demand/supply balance. The organization controlling the world's 40% oil exports anticipated demand will increase +0.9% y/y to 85.2 bpd in 2010, following a contraction to 84.4M bpd last year. While demand forecast was inline with previous projection, the OPEC expected non-OPEC supply will rise slightly to 51.5M bpd, thus lowering the needs of OPEC production.

The OPEC also reported the 12 members in the group produced 29.263Mbpd of crude oil last month, compared with 29.291M bpd in February. However, OPEC's production increased to 26.923M bpd from 26.74M bpd in February, further reducing the compliance to 52.9% (previous: 54.9%.

Gold edges lower as the euro plummets after EU's economy commissioner said that deficit problems in Greece, as well as periphery European countries, may trigger deflation around the 16-nation region Eurozone. Moreover, although EU's approval of a loan to Greece has boosted optimism for some days, the market indeed worried Greece would activate it to avoid a default. Even if Greece may weather the sovereign crisis after tapping the fund, it may not be able to solve the problem. Rather it may just help delay the problem.

Concerning macroeconomic development, the market continues to anticipate strong data from the US. Initial jobless claims probably dropped to 440K in the week ended April 10 from 460K in the prior week. Empire State Manufacturing Index is expected to have improved to 24 in Arpil while industrial production should have gained +0.7% m/m in March.

FX Update: Mixed US data sees US bonds, JPY rally.

Risk appetite rose strongly yet again on mixed economic data from the US and its effect on bond yields, which dropped afresh after at first trying to sell-off on strong regional manufacturing surveys. Equities seem to feel that the glass is one-third full rather than two-thirds empty after today's set of data, which showed regional manufacturing surveys continuing to surge while the initial claims number in seven weeks and saw a disappointing industrial production number. We have complained in the past about risk celebrating poor economic data simply because of rate implications. At some point, the silliness has to stop. And in fact, as noon approaches in the NY trading session, the spike to new highs for the cycle in in the S&P looked in danger of a reversal.

The ridiculously strong Chinese growth number was met with some enthusiasm for risk as well, but the key Aussie-correlated stock BHP Billiton jumped higher on the open only to end the day at its low price for the session, suggesting a market somewhat immune to positive Chinese growth news. But this data is yet another indicator of the pressure on the Chinese to cool their economy.

European spreads and EURGBP
Greek debt spreads were wide again early, but had come sharply tighter by the end of the European session, with Portuguese spreads doing the same (noise level on Portugal being the next domino are increasing of late.) The Euro crosses were generally lower after traders were unimpressed with EURUSD's close above the 55-day moving average. EURGBP is seeing a dramatic swoon back towards 0.8750 after the throwback test higher of the 55/200 day moving average. Pound strength was driven by new polls showing a strong lead by Conservatives for critical swing seats. The key for that pair as the election approaches is the recent low at 0.8700 and the rising line of consolidation not far below this area.

Chart: USDCAD
USDCAD is criss-crossing parity after the Loonie ran sharply to the strong side in recent weeks on the BoC rattling its cage on the end of accommodative rates (first hike likely set for July) and after oil rallied to above 85 dollars per barrel. But from here on out, it would seem that the CAD needs the perfect combination of factors (more of the same in an already technically stretched and heavily positioned market) for the downside to continue. It's tough to judge the significance of the lack of follow-through when the currency pair is trading around such an obviously important psychological level at parity, but the momentum is beginning to run out for the pair. The first real threat to the downtrend, however, doesn't arrive until the pair closes solidly north of the 1.0060 area and then the 1.0225 previous major market low. An equity and oil price correction would be coincident/triggering indicators for such a development. The next BoC meeting is up next Tuesday.

US Consumption - not really on the mend?
 In light of yesterday's strong US Retail Sales numbers, David Rosenberg of Gluskin-Sheff has pointed out in an interview yesterday that one powerful contributor to still reasonably positive consumption numbers of late in the US is the "strategic default" in which US homeowners are purposefully defaulting on their mortgages due to hopelessly under-water mortgages, thus freeing up funds for day to day needs and other purchases in general that show up in the retail sales numbers. This is not exactly a positive source of "organic growth", as Mr. Rosenberg points out. Stagnant wages and unemployment levels certainly aren't the source of any boost, either. Where is the incremental demand increase going to come from a year out from here?

Looking ahead
The US NAHB is out shortly and has double dipped as we head into the last couple of months of the extended tax incentives for homebuyers. This is one of the more leading indicators on US housing, and continues to suggest a rather moribund housing market, with the risk that the index drops even further for several months after the tax incentives expire at the end of April. Equity extraction from housing is dead, banks aren't lending and consumers are increasing their savings while being paid less as oil prices rise. Is this a recipe for a consumption revival? Once US public stimulus begins winding down in the second half of this year, the growth numbers are likely to disappoint.

A bit more in the here and now, the next points on the economic calendar include a speech from the SNB's Jordan a bit later, another few Fed appearances, and then New Zealand house sales and house prices. Tomorrow we close out the week with US March Housing Starts and Building Permits and the preliminary April University of Michigan Confidence data.

Be careful out there.

Economic Data Highlights

• Norway Mar. Trade Balance out at 29B vs. 32.4B in Feb.
• Sweden AMV Unemployment Rate out at 5.2% vs. 5.4% expected and 5.5% in Feb.
• US Weekly Initial Jobless Claims rose to 484k vs. 440 expected and 460k last week
• US Weekly Continuing Claims out at 4639k vs. 4580k expected and 4566k last week
• US Apr. Empire Manufacturing out at 31.86 vs. 24 expected and 33.86 in Apr.
• US Feb. Net Long term TIC Flows out at +$47.1B vs. +$29.7B expected and +$15B in Jan.
• US Feb. Total Net TIC Flows out at +$9.0B vs. -$10.2B in Jan. (latter number was revised +$23.2B from original release)
• US Mar. Industrial Production out at +0.1% MoM vs. +0.7% expected
• US Mar. Capacity Utilization out at 73.2% vs. 73.3% expected and 73.0% in Feb.
• US Apr. Philadelphia Fed out at 20.2 vs. 20.0 expected nd 18.9 in Mar.

Economic Calendar Highlights

• US Apr. NAHB Housing Market Index (1700)
• Switzerland SNB's Jordan to Speak (1730)
• US Fed's Lockhart to Speak (1740)
• US Economic Adviser Paul Volcker to Speak (1900)
• US Fed's Lacker to Speak (!915)
• New Zealand Mar. REINZ House Sales and Housing Price Index (2200)
• US Fed's Yellen to Speak (0115)

Weekly Fundamental Outlook for Energies and Metals - Gold Rallied to a New 2010-High

Last week was eventful as the market was flooded with economic data, rate decisions from central banks (RBA, ECB and BOE) and fast-changing sentiment towards Greece's issue. The Fed also released the minutes for March's FOMC meeting. Regarding oil-specific news, official data on US oil inventory was disappointing while the Energy Department revised slightly downward its demand forecasts.

The market started strongly after Easter holidays as investors received strong manufacturing data from various economies. Oil and metal prices advanced to highest levels in a year amid confidence on global economic growth outlook. However, the rallies were not sustainable and high volatility was triggered by mixed sentiment towards Greece's issue.

The latest news on Greece is that Fitch Rating, on Friday, cut the country's long-term foreign and local currency issuer default ratings, by 2 levels, to BBB- from BBB+ with 'negative' outlook. Interestingly, the euro did not tumble after the news. Rather, it jumped +1.06% against the dollar and +0.8% against Japanese yen amid speculations that the EU/IMF alliance, despite Germany's objection, will provide loans at below-market rates to the debt-stricken economy.

Crude Oil

Crude oil extended rally earlier in the week after price broke the 83.95- resistance on April 1 as US employment data beat market expectations. Bullishness was supported by strong PMI readings in the US, Europe, China and India. The front-month WTI contract surged to 87.09, an 18-month high, on Tuesday before disappointing inventory data and renewed concerns over Greece triggered selloff. The black gold fell for 3 consecutive days last week and settled at 84.92 Friday, barely up +0.06% over the week.

According to the US Energy Department (EIA) crude oil inventory rose for a 10th consecutive week, by +1.98 mmb, to 356.2 mmb. Although utilization rate increased by more than +2%, it was offset by surge in imports (+5.5%).

Disappointedly, distillate stockpile also rose while the market had anticipated an over +1 mmb draw. The build was driven by +13.1% increase in production which was partly compensated by -52.2% drop in imports. The build has brought distillate inventory +24% above 5-year average.

Decline in gasoline stockpile, however, exceeded market expectations. The draw was in spite of rises in both production and imports during the week. Demand improved slightly.

The report indicates the US energy market remains fragile and that recent rally in crude oil price has been driven by robust sentiment.

In another report, the US Energy Department revised slightly lower its forecasts on 2010 and 2011 global oil demand to 85.66M bpd (previous: 85.71M bpd) and 86.87M bpd (previous: 86.69M bpd), respectively. The Department revised it assessment for Europe downward and this was partly compensated by upward revision in Asian demand outlook. The International Energy Department and OPEC will publish their forecasts next week. We do not expect significant changes in outlook.

News reported that Saudi Arabian Oil Co., the world's largest state-owned oil company, will supply full volumes of crude oil to Asia for loading in May, after a -10% cut on nominated volumes in April. The company's decision to provide full volumes is viewed by some market participants as a means to take down oil prices.

Saudi Arabia cut its production by -0.024M bpd to 8.117M bpd in February. However, this remained +0.066M bpd above its daily production target of 8.051M bpd. OPEC's compliance with its quotas dropped to 53.2% in February from 55.9% in the prior month, according the group. 11 members of the group decided to limit production to 26.84M bpd late 2008 to rescue oil price.

Natural Gas

Gas price rose for the first time in 4 days but this should not change the long-term downtrend. The benchmark contract lost -0.39% on weekly basis. Risk to gas is to the downside as a break below 4 dollar has worsened the outlook.

Lack of encouraging fundamentals will allow price to go lower. According to the US Energy Department, gas stockpiles rose 31 bcf to 1669 bcf in the week ended April 2, compared with market expectations of a +28 bcf increase. The build has widened the inventory gap to 5-year average to 12% from 11% in the prior week.

In the Short-term Energy Report, EIA forecast total natural gas consumption to increase by +1.9% to 63.8 Bcf/d in 2010, followed by a decline of -0.6% in 2011. EIA revised up gas consumption in the electric power sector for the second month in April. However, it stated that the revision reflected expectations that 'lower natural gas prices relative to coal prices will increase the utilization of natural-gas-fired generating facilities in the baseload power supply'.

EIA's forecast for 2011 reflected consumption declines in all sectors except the industrial sector. 'The projected return to near-normal weather reduces consumption in the residential and commercial sectors, while higher natural gas prices reverse the coal-to-gas switching trend observed in 2009 and forecast to continue in 2010. Consumption in the industrial sector, supported by continued economic growth, is projected to increase by +1.7% in 2011'.
Concerning production, EIA expects total marketed natural gas production to increase +0.7% to 60.9 Bcf/d in 2010, followed by a drop of -1.2% in 2011. EIA anticipated domestic production growth would decline (by -0.5 Bcf/d) in 2010 in March's projection.

In fact, accuracy of EIA's forecasts is doubtful. Earlier in the week, the US Energy Department said that some of its gas output numbers were inflated in the monthly release as new drilling techniques and booming of small shale gas producers have increased difficulties of estimating the data. The Department will use more up-to-date data to estimate natural gas output, starting with the next report due out on April 29. The news suggests that the actual gas supply in the US may not be as huge as previously thought and this helped boost gas price. Another reason for the price rally was certainly strong US economic data.

Precious Metals

Gold extended its 7-day winning streak Friday amid euro’s strength and/or Greece’s woe. The benchmark contract soared to a 4-month high at 1165.8 before settling at 1161.9, gaining +0.78% and +3.18% on daily and weekly basis respectively.

While it seems contradictory to say gold benefits from both euro's strength and Greece's sovereign crisis, this is what we are experiencing currently. The key factor driving gold high is investors' seeking of a shelter from fiat currency in the midst of uncertainty and huge fiscal deficits in major economies.

Recent rally has brought gold to a new 2010-high against the dollar and a record high against the euro. While we are impressed by gold's strength in the face of slumps in the euro, we caution a price correction in the near-term.

It's widely known that gold and EURUSD are highly correlated. However, recent gold strength despite euro's weakness has derailed the relationship. Should the correlation resume we would see selloff in gold, given our view that the euro will remain under pressure. Nevertheless, we remain bullish in the long-term outlook for gold and advise to buy on pullbacks.

Physical demand in gold was strong last week. Bullion holdings in SPDR Gold Trust, the world's largest gold exchange-traded fund, hit an all-time high of 36, 666, 045 oz as of April 8 April, surpassing the level of 36, 460,190 oz recorded on 1 June 2009. This signaled retail investors have resumed interest in gold investment.

Both platinum and palladium were strong with prices surging above 1700 and 500 respectively. PGMs outperformed gold and silver in 1Q10 and the situation may persist as we enter into the second quarter. While investment demands are crucial for pushing prices higher, fundamentals in platinum and palladium are strong. Apart from global growth in industrial activities, as well as recovery in auto sector, especially in the US and China, implementation of tighter emission legislation globally should further boost auto-catalyst demand, thus tightening PGM supplies.