Risk appetite remains on very nervous legs after the US S&P500 failed to regain the 200-day moving average and closed on a low note, opening today at yet another low for the cycle. These are the kind of conditions that keep on keeping on until they stop and as long as we remain below this moving average - especially with increasing volatility, we should keep a bunker mentality. We'll peek out again and have a look around if risk manages to close strongly at the end of the day and/or if the authorities move to improve liquidity. In FX, it is clear that the positioning coming into this situation - short the Euro against everything - is still feeling the squeeze and could continue to do so as long as risk is on its knees.
US Senate passes new financial regulation bill
It is perhaps no coincidence that the market is in such a sour mood as the US senate today passed major new legislation regulating the financial services industry. This is a major step towards both of the houses of Congress agreeing on a final version of the law. There are still some questions about the fate of banks' derivatives business, but the main thrust of the legislation is a strong new "consumer protection" effort that is going to keep credit very crimped relative to the last two decades or more and attempt to establish a "financial stability oversight council" that will try to identify any systemic risks/too big to fail companies or hedge funds in the system to prevent systemic failure risks. It will also require that most hedge funds and private equity group register with the SEC. As always, one wonders how effective any new government bureaucracy can possibly be when the entire financial system was led into the 2008-09 disaster right under the unwitting nose of both the SEC and the Fed. It is tough to be optimistic about this program's success, and for now, this is a risk negative due to the costs to the industry to become compliant.
It is perhaps no coincidence that the market is in such a sour mood as the US senate today passed major new legislation regulating the financial services industry. This is a major step towards both of the houses of Congress agreeing on a final version of the law. There are still some questions about the fate of banks' derivatives business, but the main thrust of the legislation is a strong new "consumer protection" effort that is going to keep credit very crimped relative to the last two decades or more and attempt to establish a "financial stability oversight council" that will try to identify any systemic risks/too big to fail companies or hedge funds in the system to prevent systemic failure risks. It will also require that most hedge funds and private equity group register with the SEC. As always, one wonders how effective any new government bureaucracy can possibly be when the entire financial system was led into the 2008-09 disaster right under the unwitting nose of both the SEC and the Fed. It is tough to be optimistic about this program's success, and for now, this is a risk negative due to the costs to the industry to become compliant.
Spanish austerity - an oxymoron?
Spain was out today trying to shore up its fiscal credibility with a 5% wage cut for government workers, the first time that public sector wages have been cut since the 1970's. The government now predicts that growth will only reach 1.3% next year, a downward adjustment from the 1.7% previously forecast. They also project a 6% of GDP budget shortfall for 2011 compares to 10%+ this year. We all know what government projections are worth at this point, however, and the more important question for Spain is whether the market begins to extend more trust in its public debt after the recent touch and go debt auction. Spanish CDS prices have been marching higher again in recent days, though they haven't yet reached the highs from the early May peak. Of course, now a general strike threatens in Spain and the ongoing fear will be that the populace is unwilling to take the austerity needed to get Spain's fiscal house back in order.
Spain was out today trying to shore up its fiscal credibility with a 5% wage cut for government workers, the first time that public sector wages have been cut since the 1970's. The government now predicts that growth will only reach 1.3% next year, a downward adjustment from the 1.7% previously forecast. They also project a 6% of GDP budget shortfall for 2011 compares to 10%+ this year. We all know what government projections are worth at this point, however, and the more important question for Spain is whether the market begins to extend more trust in its public debt after the recent touch and go debt auction. Spanish CDS prices have been marching higher again in recent days, though they haven't yet reached the highs from the early May peak. Of course, now a general strike threatens in Spain and the ongoing fear will be that the populace is unwilling to take the austerity needed to get Spain's fiscal house back in order.
Canadian Retail Sales
CAD has been especially weak over the last 24 hours. Today's very strong Mar. retail sales did little to support the currency with the current risk meltdown definitely at the top of the agenda. The Canadian June 2011 STIR is trading higher 10 points higher as of this writing from yesterday's close and shows that the market has now priced back out all of the tightening that it had tried to price in since late February - about 80+ bps in all. CAD should remain weak as long as market is in risk off mode. The 1.0780/1.0800 area in USDCAD has been a pivotal one since all the way back in the summer of 2007, so we should keep our eyes out for a possible acceleration through that level if it gives way - the next major technical resistance are is 1.1120.
CAD has been especially weak over the last 24 hours. Today's very strong Mar. retail sales did little to support the currency with the current risk meltdown definitely at the top of the agenda. The Canadian June 2011 STIR is trading higher 10 points higher as of this writing from yesterday's close and shows that the market has now priced back out all of the tightening that it had tried to price in since late February - about 80+ bps in all. CAD should remain weak as long as market is in risk off mode. The 1.0780/1.0800 area in USDCAD has been a pivotal one since all the way back in the summer of 2007, so we should keep our eyes out for a possible acceleration through that level if it gives way - the next major technical resistance are is 1.1120.
Looking ahead
Given the current volatility and evaporating liquidity, it is highly likely that the major governments move soon to boost market liquidity and put a lid on the situation - perhaps over the weekend. While the EUR/USD rate seems to have stabilized quite impressively due to the squeeze on short EUR positions, the G3 crosses vs. other currencies (especially less liquid currencies like NOK, not to mention EM) have experienced the worst volatility since the post-Lehman environment. The environment is very fluid right now and the seemingly never ending spike in long US and German treasuries shows just how fearful this market has become. Bunds are pressing down toward a 2.50% yield, far below the slightly sub-3.0% levels of the post-Lehman crisis. At the US open, risk is trying to make a stand - if we are able to close at relatively unchanged levels or better, we'll have made a first step at taking the momentum out of the risk bear for the short term.
Given the current volatility and evaporating liquidity, it is highly likely that the major governments move soon to boost market liquidity and put a lid on the situation - perhaps over the weekend. While the EUR/USD rate seems to have stabilized quite impressively due to the squeeze on short EUR positions, the G3 crosses vs. other currencies (especially less liquid currencies like NOK, not to mention EM) have experienced the worst volatility since the post-Lehman environment. The environment is very fluid right now and the seemingly never ending spike in long US and German treasuries shows just how fearful this market has become. Bunds are pressing down toward a 2.50% yield, far below the slightly sub-3.0% levels of the post-Lehman crisis. At the US open, risk is trying to make a stand - if we are able to close at relatively unchanged levels or better, we'll have made a first step at taking the momentum out of the risk bear for the short term.
Stay very careful out there as intraday ranges are likely to remain extremely high for now.
Economic Data Highlights
- New Zealand Apr. Credit Card Spending fell -1.2% MoM and rose +1.9% YoY
- New Zealand May ANZ Consumer Confidence out at 126 vs. 121.9 in Apr.
- Japan Bank of Japan Target Rate unchanged at 0.10% as expected
- Germany Preliminary May PMI Services fell to 53.7 vs. 55.4 expected and 55.2 in Apr.
- Germany Preliminary May PMI Manufacturing out at 58.3 vs. 61.1 expected and 61.5 in Apr.
- Germany May IFO fell to 101.5 vs. 101.9 expected and 101.6 in Apr.
- EuroZone Mar. Current Account out at +1.7B vs. -4.5B in Feb.
- EuroZone Preliminary May PMI Services out at 56.0 vs. 55.6 expected and 55.6 in Apr.
- EuroZone Preliminary May PMI Manufacturing out at 55.9 vs. 57.4 expected and 57.4 in Apr.
- UK Q1 Total Business Investment rose 6.0% QoQ vs. -0.6% expected
- UK Apr. Public Sector Net Borrowing at 10.0B vs. 10.9B expected
- UK Apr. Major Banks Mortgage Approvals out at 47k vs. 54k expected and 52k in Mar.
- Canada Apr. CPI out at +0.3% MoM and +1.8% YoY vs. +0.2%/+1.7% expected, respectively
- Canada Apr. Core CPI out at +0.3% and +1.9% YoY vs. +0.2%/+1.8% expected, respectively
- Canada Mar. Retail Sales out at +2.1% MoM and +1.7% less Autos, vs. +0.1%/+0.4% expected, respectively.
Upcoming Economic Calendar Highlights
- US Fed's Dudley to Speak (2300)
- Australia Apr. New Motor Vehicle Sales (Mon 0130)
- Japan BoJ Monthly Report (Mon 0500)
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