FX Update: Market trying to shrug off Egypt

With a heavy week of data ahead, market is trying to shrug off the uncertainty surrounding Egypt and the potential for regional contagion - succeeding in some places to overcome uncertainty and certainly failing in other areas. What are we to make of the mixed market message?

With all eyes still on Egypt and the potential for regional contagion, major markets are trying to get back to pre-Friday levels, and have been mostly successful in G-10 FX country, at least, though the damage is still quite evident in some of the emerging market currencies, and the equity market comeback is less pronounced. It seems FX is serving as a high beta indicator in these markets, meaning that we should, more than ever, have our eyes out for confirming indicators from equity, bond and other markets before taking moves in FX at face value.

Odds and Ends
New Zealand trade data showed a huge shortfall in the trade balance relative to expectations, as historically, the trade balance turns more favorable at this time of year due to the southern hemisphere’s summer/fall harvest. A large surge in Imports was the reason for the shortfall due to importation of a number of aircraft, so we shouldn’t read too much into this data point.

New Zealand Building Permits, on the other hand, fell over a cliff and suggest that housing activity in New Zealand continues to decline sharply. The data saw the NZD generally weaker overnight in many crosses, though the forward rate expectations hardly budged, falling only a couple of bps.

The US PCE Core inflation data came out at +0.7% YoY. This is a record low in the data series, which stretches back to 1960 and is often considered the Fed’s favorite price data series, so the release saw the USD weaker on the rate implications. Meanwhile, ECB rate expectations arched back higher as the merciless Euro squeeze suddenly reappeared and interest rate spreads at the front of the curve stretched to a new wide level.

Chart: EURUSD
The Friday swoon in EURUSD has fully reversed as the low US inflation data on the one hand and Trichet belief that the ECB rate and commodity prices should have something to do with each other (while PIGS crisis is seemingly irrelevant) on the other hand sees the Euro-US rate spread squeezing to new highs for the cycle. The EuroZone periphery must adore Trichet for his visionary management of expectations and the strong currency that ensures a deflationary death grip on their economies. 

Remember that this is end of the month fixing, though market moves from this source may be rather muted due to relatively small changes in the world equity and bond markets for the month.

Looking ahead
Up shortly we have the US Chicago PMI, which is the final regional manufacturing survey of the month ahead of tomorrow’s national ISM survey. The other surveys have been strong, if slightly less so than expected. Last month’s 66.8 reading tied the highest reading since 1994, so a little mean reversion is inevitable.

Tonight, watch out for the RBA Cash Target decision, with the vast majority expecting no change to the interest rate (and rightly so, especially given the events in the Middle East at the moment.) and year-forward expectations not even fully pricing in a move to 5.0%. The AUD is back on the bid today on copper prices rising sharply again from Friday’s close and the healthy bounce in risk appetite. This is a fairly heavy week for Australian data as well, with the NAB and manufacturing surveys also out tonight, New Home Sales Wednesday, and services industry survey, building approvals and trade balance on Thursday. Among the G-10 currencies, AUD is almost tied with CAD for title of weakest currency over the last five trading days.

A very busy week ahead elsewhere as well, with the two US ISM’s up, tomorrow (manufacturing) and Wednesday (non-manufacturing), the ECB on Thursday, and the US employment report Friday. In China, the Chinese New Year holiday hits full swing mid-week and the Chinese markets will be closed from February 2 to February 8. It will be interesting to see how the Chinese authorities get back down to business at the end of the holiday, as there is still the potential/likelihood for plenty of policy action there for dealing with the overheating/unbalanced economy.

The market action is bizarre in places. Why on earth has copper rallied as EM is in the dumps? Why is the market so persistently taking the Euro higher here. Why are AUD and CAD rallying so vigorously this morning. Did Egypt happen for some markets and not others? This is confusing if not nonsensical and a very healthy dose of caution is warranted here.

Economic Data Highlights

• New Zealand Dec. Building Permits fell -18.6% MoM  vs. -1.3% expected
• New Zealand Dec. Trade Balance out at -250M vs. +50M expected and -186M in Nov.
• Japan Nomura/JMMA manufacturing PMI out at 51.4 vs. 48.3 in Dec.
• Australia Dec. RP Data-Rismark House Price Index fell -0.7% MoM and was up +0.2% YoY vs. -0.2% YoY in Nov.
• Japan Dec. Industrial Production out at +3.1% MoM and +4.6% YoY vs. +2.8%/4.4% expected, respectively and vs. +5.8% YoY in Nov.
• Japan Dec. Housing Starts rose +7.5% YoY vs. +4.6% expected and +6.8% in Nov.
• Japan Dec. Construction Orders rose +13.1% YoY vs. +1.1% expected and vs. -5.3% in Nov.
• Germany Dec. Retail Sales frell -0.3% MoM and -1.3% YoY vs. +2.0%/+1.1% expected, respectively and vs. +2.0% YoY in Nov.
• Norway Dec. Retail Sales fell -2.0% MoM and rose +2.6% YoY vs. -1.0%/+3.6% expected, respectively and vs. +8.7% YoY in Nov.
• EuroZone Jan. CPI estimate rose to 2.4% vs. +2.3% expected and vs. 2.2% in Dec.
• Canada Nov. Gross Domestic Product out at +0.4% MoM and +3.0% YoY vs. +3.4% YoY in Oct.
• Canada Dec. Industrial Product Pricesrose +0.7% MoM vs. +0.6% expected
• Canada Dec. Raw Materials Price Index rose +4.2% MoM vs. +4.0% expected
• US Dec. Personal Income rose +0.4% MoM as expected
• US Dec. Personal Spending rose +0.7% MoM as expected
• US  Dec. PCE Core was flat at 0.0% MoM and +0.7% YoY vs. +0.1%/+0.8% expected, respectively and vs. +0.8% YoY in Nov.
• US Dec. PCE Deflator out at +1.2% YoY vs. +1.3% expected and 1.1% in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

• US Jan. Chicago PMI (1445)
• US Jan. NAPM – Milwaukee (1500)
• US Jan. Dallas Fed Manufacturing Activity (1530)
• UK BoE’s Haldane to Speak (1700)
• US Fed’s Lockhart to Speak (1700)
• New Zealand Q4 Private Wages and Average Hourly Earnings (2145)
• Australia Jan. AiG Performance of Manufacturing Index (2230)
• Australia Dec. NAB Business Confidence (0030)
• Australia Q4 House Price Index (0030)
• China Jan. PMI Manufacturing (0100)
• Japan Dec. Labor Cash Earnings (0130)
• China Jan. HSBC Manufacturing PMI (0230)
• Australia RBA Cash Target (0330)

Wake-up Call - Macro Kickoff: US consumers are back

Macro Kickoff: US consumers are back

The US economy is shifting into a higher gear as we go into an eventful week. The Middle East will likely draw headlines, but we also have ISM Manufacturing, Nonfarm Payrolls, and an ECB rate meeting.

Canadian economy expanded in November?
We kick the week off with gross domestic product from Canada and personal income and spending from the US all three of which are expected to increase on the month. We look for economic activity in Canada to grow 0.2 percent month-on-month on top of the 0.2 percent in October. Should our forecast be met it would take the annualised growth rate to 2.4 percent so far in the fourth quarter, a clear improvement on the disappointing 1 percent recorded in the third quarter even though it would mean that the economy slowed to 2.8 percent on a year-on-year basis in November from 3.3 percent in October. Consensus is a tad more optimistic regarding today’s report and look for a growth rate of 0.3 percent month-on-month. The numbers have generally been strong in November in Canada with employment up another 15K, housing starts up to 187K from 172K, and industrial product price up 0.5 percent month-on-month (note this is not seasonally adjusted).

The US consumer finally gets her act together
When it comes to spending the US consumer is back to what she does best, consume, with the GDP report indicating a 4.4 percent annualised quarterly growth rate (slightly above our own bullish 4.2 percent and consensus’ 4 percent ). While there may yet be several changes to fourth quarter GDP, we can for now say that the consumer seems to be doing exactly what is needed, taking over and continuing the previously inventory-led GDP growth.

This is likely to be reflected in today’s income-and-spending combo where we look for a 0.5 percent monthly surge in each, meaning that the savings rate would be more or less unaltered; which suggests that while the consumer may be increasing consumption again some dollars remain unspent as private deleveraging is still very much a part of everyday life in the US.

Other releases today
An hour and 15 minutes after the income and spending report from the US we get to take a look at manufacturing sector in Chicago, which is generally a reasonable indicator of tomorrow’s ISM Manufacturing report. However, the Chicago PMI has been overly bullish of late, likely a reflection of the improvements in the auto industry. [Note that Chicago PMI is released three minutes earlier to subscribers at 14:42 GMT].

As an aside, we note that the annual revisions to the seasonal factors of the ISM surveys saw December’s ISM Manufacturing index be revised higher to 58.5 from 57 earlier while the Non-manufacturing index was unchanged at 57.1 in December while non-manufacturing employment was revised up to 52.6 from 50.5.

 Before the US and Canadian economic data the Eurozone presents its initial take on January’s inflation, which is expected to show yet another increase to 2.3 percent year-on-year from 2.2 percent in December. This is particularly interesting given the recent more hawkish (or so the market interpreted them) remarks from the ECB and even more so given that the ECB will take centre stage on Thursday and announce (unchanged, we expect) rates. At the brink of 2011 the market was looking for a hike of 50bps in 2011, but in light of the recent speeches the market is now expecting the ECB to raise rates by 75bps by year-end. We remain happy to take the under on this one for now, but anything is possible as the July 2008 hike to 4.25 percent can attest to.

US GDP in review
While GDP disappointed the market by clocking a 3.2 percent annualised quarterly growth rate below the consensus estimate of 3.5 percent (and below our more optimistic 3.7 percent), the report was a mixed bag with both uplifting and disturbing pieces. First of all, as we mentioned above, consumption grew a massive 4.4 percent; by far the strongest growth rate in this recovery/expansion and a full 2 percentage points above the previous best of 2.4 percent in 3Q10. In particular durable goods led the way with a 21.6 percent surge. Net exports also contributed solidly, mainly due to a 13.6 percent decline in imports, which was caused by a large uptick in the relevant price deflator. Inventories was the main drawback to GDP by subtracting 3.7 percent (real final sales in other words rose a remarkable 7.1 percent).

Given the steep increase in the import price deflator (and the rising inflation evidenced in all other reports on the subject) one wonders why the overall GDP price index is estimated to have slowed to 0.3 percent in the fourth quarter from 2.1 percent a quarter earlier. It will certainly be interesting to see if the price index remains this low in the coming months’ revisions.

Calendar

 

Equity Kickoff: Tensions in Egypt point to lower open

European cash indices will open lower Monday after tensions in Egypt escalated over the weekend. Earnings will, for a moment be set aside as the main driver for equity markets, but earnings season isn't quite over.

The tensions in Egypt accelerated during the weekend and the general fear in markets will be as to whether this will spread into other Middle Eastern countries where uncertainty would result in concerns over oil supply. Markets will generally shift into risk aversion mode, selling off commodities and equities until the tensions have eased.

Ryanair, the European airline sector's enfant terrible, posts earnings today. EPS is expected to expected to be negative, EUR -0.015 per share vs. a prior reading of EUR 0.211 and sales is expected to have dropped from EUR 1,284 mio to EUR 725.000. But we expect Ryanair to have handled the higher oil prices better than Easyjet last week given their its cost structure.

Exxon Mobil is expected to show and EPS improvement from USD 1.44 per share to USD 1.63 and likewise with sales from USD 95,290 mio to USD 100,124 mio. This is mainly driven by higher oil prices, but the company’s profit is also likely to have been helped by the higher volume in the chemical segment which picked up in 2010. DuPont, Exxons main competitor, posted earnings earlier in the season and it surprised rather significantly to the upside, pointing toward this from Exxon too.  On another note, Exxon has recently stated it expects demand for natural gas and oil to be 35% higher in 2030 compared to 2005.

The Best Time in History to Buy a House

The Best Time in History to Buy a House

Right now, is the best time in history to buy a house in America.

Today, I'll show you why… based on a few cold, hard facts.

First off, mortgage rates are lower than they've ever been in American history…

Most investors have only seen a couple decades of mortgages rates on a chart. But my friends at Global Financial Data have databases – including real estate data – that literally go back centuries.

I had dinner with the Global Financial Data team over the weekend. And they told me about their "Winans International" real estate indexes, with housing prices back to the 1800s and mortgage rates going back over a century. I had to share it with you…

Take a look at this chart of mortgage interest rates since 1900:


As you can see, current mortgage rates are the lowest in U.S. history.

When were mortgage rates even close to this low in the past? Just after World War II…

And what happened, just after World War II, when mortgage rates were this low? The greatest postwar boom in housing prices – by far.


Take a look. Mortgage rates bottomed in the mid-1950s, and house prices bottomed about the same time. Then the greatest boom in home prices in our lifetimes started.

Today we have record-low mortgage rates. And we have another thing in our favor…

Homes are more affordable than ever.

Based on the 40-year history of the Housing Affordability Index… houses are more affordable than they've ever been. Take a look…


"Affordability" takes three factors into account: home prices, your income, and mortgage rates.

Home prices have crashed. And mortgage rates are at record lows. But incomes (nationwide) haven't fallen nearly as much… So homes are now more affordable than ever.

"Most people" out there will only tell you the bad news about housing… That's the way it goes in a bear market. People drive looking in the rearview mirror.

Meanwhile, we have some darn compelling facts out there…

Home prices have fallen by a third… and mortgage rates are the lowest in history. Therefore, U.S. homes are more affordable than they've ever been.

You can listen to "most people." Or you can choose to ignore them and stick to these facts.

Based on these facts alone, now may be one of the best times in American history – even the very best time – to buy a house.

Good investing,
Steve

P.S. If you need long-term data like I showed in the charts above, talk to my friends at Global Financial Data. You can find them at www.globalfinancialdata.com

Wealthy Chinese Are Desperate to Buy Your Vacation Home

 

 
 

Should USDCAD be higher?

A little focus on the neglected USDCAD pair, which continues to bide its time below parity. Considering the sell-off in crude prices today and developments in interest rates, should the pair be trading much higher? Today we have a look.

Oil prices are not oil prices
Before we discuss USDCAD versus oil prices, we have to realize that everything depends on which oil prices we are talking about. Canada exports much of its oil to the US, where prices are based off the WTI benchmark, one that is highly dependent on the inventory levels at Cushing, Oklahoma. With an absolute glut there, the price of WTI has been in a virtual freefall for the last week or more. Much of the rest of the world uses prices based on other benchmarks – like North Sea Brent, one of the better known alternative benchmarks. While . This is extraordinary, as Brent is an inferior grade of oil that normally trades for a slight discount to higher crude grades like WTI. Today, in fact, the spread between the two grades was a record 11 dollars a barrel.

Below we  have a look at USDCAD (inverse) versus WTI crude, which suggests that the pressure should be to the downside on the Loonie relative to the greenback.

 Against Brent, the picture is less clear and it would be helpful for USDCAD upside if world oil markets were a bit more in synch as it is easy to argue that the local supply glut in the US is a temporary thing. It is worth noting that today, Brent saw a rather steep sell-off after trading at a new high for the recent cycle.

Interest rate spreads and other factors.
Here, we see more convincing evidence that the pressure is on the CAD to depreciate if we use a measure like the 2-year interest rate spreads, which are much tighter than they were trading two weeks ago, when they were at the widest for the cycle.

Chart: USDCAD vs. 2-year rate spread

As for central bank guidance, while we know that the Fed seems on permanent hold forever, the Bank of Canada is loathe to touch interest rates with the CAD at such strong levels and with its terms of trade heading sharply in the wrong direction over the last couple of years (to an outright trade deficit.) Just today, the BoC’s Carney was out saying that he is comfortable keeping rates at recent low despite food inflation globally and that the “thing that keeps him up at night is that in this rebalancing of global demand, the Canadian current account has swung 6 percentage points of GDP in the last three years, from a 2% surplus to a 4% deficit.” It doesn’t look like we should be pricing in any rate hikes just yet.

As for “other factors”, we can mention relative sovereign debt worries and risk appetite as other relevant factors in this market. In the sovereign debt department, it is understandable that the market has a hard time bidding up the USD when the US has shown so little credibility on the austerity front and continues to show a stark fiscal picture. In the meantime, Canada is considered one of the most fiscally solid countries in the world (partly a mirage because of a vastly leveraged consumer sector, but still the case).  Finally, risk appetite remains very robust at present, and this tends to favor a more pro-cyclical currency like CAD over the USD.

Long story short – by a couple of measures (interest rate spread and WTI oil prices), USDCAD looks underpriced, but we would like to see an expansion in risk aversion and a more pronounced sell-off in non-WTI oil and other pro-cyclical commodities like copper if we are to see USDCAD rally again above and beyond the parity level.

Another story: AUDCAD
On the pro-cyclical commodity front, it is interesting to note the AUDCAD pair, which we plot here relative to the copper/Brent crude oil ratio. Aussie has been in trouble a bit lately, but risk appetite and copper have kept it from a steeper drop. Either of these legs being removed could trigger a tumble in the Aussie – even against CAD, as we suspect the potential downside for copper is larger than for crude. While copper is strong on physical buying related to warehousing and financialization, crude will never be financialized the same way and we wonder how long the copper bubble can continue before it pops (and if all of the commodity price rises are about distrust in fiat currencies, then crude oil should more than keep pace with the red metal.)

Chart: AUDCAD versus copper/oil ratio

FX Update: Japan’s debt downgraded. Should we care?

The S&P downgraded Japan’s sovereign debt one notch and put the outlook on negative due to the country’s debt burden. USDJPY jumped to attention again after yesterday’s sell-off attempt. Is the US next on the bond ratings agencies’ list?

The JPY was sharply weaker today after S&P downgraded Japan’s sovereign debt by a notch. This was after the USDJPY pair played cat and mouse yesterday with key pivot areas around 82.40. There’s hardly been a reaction at all in Japanese interest rates, with the 2-year trading about 2 bps higher and CDS prices some 4 points higher according to a Bloomberg article, so we wonder if the currency market is overshooting here and if the move could be about nervousness in this key pivot area in USDJPY. It does help that pair’s case to the upside that US bonds are sharply lower this morning (in all theory, though, if we are going to talk about sovereign credibility, the US can’t be far in line behind Japan.). But we need a firm sign of panic in the Japanese debt market or in Japanese CDS prices to see the sovereign debt story to develop further.

We’ve talked a long time about Japan’s sovereign debt burden and the apparent impossibility of the country ever digging itself out from under its debt obligations. Japan has the largest public debt load as a percentage of its GDP. At the same time, the market has rarely taken this common knowledge and done anything with it (with Japan more or less trading on straightforward interest rate spreads, though there has been a tendency for Japanese CDS prices to creep higher relative to other major countries) and the bond ratings’ agencies have done little to point out the situation themselves – that is, until last night.
 It’s a bit surprising to see the timing of the S&P announcement, which might have waited for bond yields to head a bit higher first (because as yields rise, the crushing weight of interest rate payments on the Japanese budget becomes rapidly hard to sustain. Despite very low interest rates of the last several years, the country dedicates something like 25% of its budget to interest rate payments. ) The announcement will theoretically affect international and possibly even domestic appetite for Japanese sovereign debt – but we’d prefer to see the proof in the CDS prices and interest rate spreads – we’ll be sure to track this closely in coming weeks and keep you updated. The S&P announcement is only worth the bond market’s reaction to it. If Japanese yields start to show more volatility than, for example, their US counterparts, this would be an interesting follow-up signal. This ticking time bomb will eventually go off.

Chart: USDJPY
USDJPY has been playing cat and mouse with support and resistance levels in a tighter and tighter zone lately. The jump overnight makes it look like the pair wants to jump higher again, but as we discuss above, the reaction in FX has been larger than the reaction elsewhere, so let’s see what the JPY and bond markets do over the next day or two and see if the pair can close north of the 55-day moving average (red line) again.

RBNZ
The RBNZ left its rate unchanged as expected, but its comments on the economy were generally positive and it kept language about the eventual need to remove accommodation. This saw quite a boost in the kiwi, which is much stronger against the hapless Aussie as the AUDNZD pair moves lower toward its 200-day moving average below 1.2800. Forward interest rate expectations jumped a few bps in response to the announcement and NZDUSD pulled back through 0.7700, though we wonder if it is sustainable above that level.  Risk appetite determines the answer to that question.

US data
An extremely lousy US weekly claims report ironically setting up tomorrow’s likely announcement of solid growth for last quarter. The weekly initial jobless claims number showed us that the seasonal bump of firings was simply a bit smaller than expected (perhaps because hirings heading into the holidays were also lousy?) and that we are back to a grim picture in claims. This is very bad news for the US economy/confidence. But how does the market take it? If it is taken as risk negative, we could yet see the USD rally a bit later today. If this sees the market putting on the QE3 trade….but wait, remember the blood pressure….we won’t go there for now, but you get the idea.

The Durable Goods Orders number looks soft, but the nondefense, non-aircraft capital goods number was a strong +1.4%, so actually not that bad there.

Looking ahead
With the FOMC ending as a real fizzler in terms of providing new impetus for market direction (despite having done so on number occasions in recent months), we now shift our attention to tomorrow’s GDP number from the US as the next possible catalyst for a market move. Consensus is looking for 3.5% annualized growth.

Meanwhile, European yields head higher and higher as conditions there get tighter and tigher. Is this a productive way to deal with a sovereign debt crisis? Tight Trichet is on the prowl, and EUR appears ready to ride the spike as high as it can go – but it makes little sense. Perhaps we should watch Brent crude prices as a barometer for when the market decides to back off the ECB (after all, we are trained to believe that Trichet will hike even as an economy falls of a cliff face as was done in the summer of 2008). The US crude prices have been misleading, after all. The rest of the world is looking at almost 100-dollar crude while US inland prices are at 87 dollars. In Europe today, the ECB’s Nowotny said that the market is getting too worked up about the prospect for a larger rescue fund. Is anyone out there listening? Hello?

Be careful out there – these are strange times and I would suspect that the current low implied volatility levels in FX-land are extremely misleading.

Economic Data Highlights

• Japan Dec. Adjusted Merchandise Trade Balance out at ¥707.3B vs. ¥523.9B expected and vs. ¥536B in Nov.
• UK Jan. Hometrack Housing Survey saw prices fall -0.5% MoM and -2.2% YoY vs. -1.6% YoY in Dec.
• Sweden Jan. Consumer Confidence out at 23.7 vs. 21.0 expected and 20.8 in Dec.
• Sweden Q4 Manufacturing Confidence out at 12 vs. 5 expected and 5 in Q3
• Sweden Dec. PPI out at +2.2% MoM and +4.3% YoY vs. +0.6%/+2.9% expected, respectively and vs. +2.2% YoY in Dec.
• Sweden Dec. Unemployment rate rose to 7.4% vs. 7.3% expected and 7.1% in Nov.
• UK Jan. CBI Reported Sales out at 37 vs. 38 expected and 56 in Dec.
• Germany Jan. Preliminary CPI out at -0.5% MoM and +1.9% YoY vs. -0.3%/+2.0% expected and vs. +1.7% YoY in Dec.
• US Dec. Chicago Fed National Activity Index out at 0.03 vs. 0.11 expected and -0.4 in Nov.
• US Dec. Durable Goods Orders out at -2.5% MoM and ex Transportation at +0.5% vs. +1.5%/+0.9% expected, respectively
• US Weekly Initial Jobless Claims out at 454k vs. 405k expected and vs. 403k last week
• US Weekly Continuing Claims out at 3991k vs. 3873k expected and 3897k last week

Upcoming Economic Calendar Highlights (all times GMT)

• US Dec. Pending Home Sales (1500)
• Japan Dec. Jobless Rate (2330)
• Japan Dec. Overall Household Spending (2330)
• Japan Dec. National CPI (2330)
• Japan Dec. Retail Trade (2350)
• UK Jan. GfK Consumer Confidence (0001)
• China MNI Business Condition Survey (0135)

China's President: Dump Dollar for Yuan as Global Currency

By Greg Brown

On the eve of a U.S. visit, Chinese President Hu Jintao made the boldest statement yet on the future of the U.S. dollar as a reserve currency, calling the current global monetary exchange system “a product of the past” while promoting his own country’s currency as a replacement.

In written answers to questions from U.S. media, Hu roundly criticized the U.S. Federal Reserve for unleashing a wave of dollars into the world, prompting sharply rising inflation in places like China and India.

He also rejected the common U.S. complaint that China holds the value of the yuan artificially low to promote exports to support its own rise.

He called on changes to the currency reserve system in place today "to fully reflect the changing status of developing countries in the world economy and finance," reported The Wall Street Journal.

As to the Fed, Hu said that an increased supply of U.S. dollars "has a major impact on global liquidity and capital flows and therefore, the liquidity of the U.S. dollar should be kept at a reasonable and stable level."

The Chinese leader went so far as to suggest an overhaul of the monetary regime in place since the Bretton Woods accord at the end of World War II, creating instead system that is more "fair, just, inclusive and well-managed."

Hu’s stance is a dangerous one to both the United States and to China, considering that a wholesale move by major foreign holders out of U.S. dollar investments would destroy trillions in their foreign reserves while thumping the U.S. economy with much higher borrowing costs.

China’s foreign reserves reached $2.85 trillion in 2010, a total heavily weighted in U.S. dollars in the form of Treasury bonds.

Oil prices, a huge component along with food in rising inflation worldwide, are seen breaking $100 a barrel soon with no sign that major products will hit the brakes. U.S. consumers could see a quick return to $4.50 a gallon gas, slowing the recovery.

Merrill Lynch commodity analyst Sabine Shels told Reuters that the breaking point for the global economy is $120 a barrel, which would mean energy had risen to 9 percent of the total economy.

"Whenever the size of the energy sector in the global economy reached 9 percent, we went into a major crisis," said Schels.

Oil touched $147 in July 2008 just as the market began its historic recent plunge.

source : © Moneynews.

How to Handle the Coming Gold Correction

How to Handle the Coming Gold Correction

By Brian Hunt, editor in chief, Stansberry & Associates

Friday, January 21, 2011

 
It's not natural.

As our friend and master investor Chris Weber recently noted, never in the past 200 years has a widely traded stock market or commodity registered 10 consecutive years of higher prices.

But as of December 31, 2010, gold has. Gold's 10 consecutive years of higher prices is an astounding, once-in-eight-generations occurrence.

Here's the thing: That uninterrupted 10-year uptrend is not a natural state for gold. It's not a natural state for any asset.

Knowing this… and knowing that even the biggest, healthiest multiyear bull markets need to take "breathers," it's as natural to expect gold to correct and end the year lower as it is to expect someone who has run flat out for 10 miles to take break.

How deep could gold's "break" go? Below is a 10-year chart of gold. As you can see, gold could correct all the way down to $1,100 an ounce and remain in the confines of its big bull trend.

 Most people who own gold would freak out about a 20%-plus drop. That's because most people who own gold view it the wrong way. They think it's an investment… and they'd like to get filthy rich from it. That's not how the seasoned investor views gold.

Gold isn't an investment.

A thousand shares of health-care company Johnson & Johnson is an investment. J&J pays a dividend. It's a stable, profitable business that's going to grow its cash flows and distribute a portion of those cash flows to it shareholders.

An income-producing rental property is an investment. Bought at the right price, a rental property will return all your original capital in the form of rent checks.

Gold isn't like those two examples at all. Gold doesn't pay interest or a dividend. It doesn't have profit margins. You can't price it based on earnings.

Gold is money. It's a real, hold-in-your-hand form of wealth. The hot shots on CNBC dismiss gold's role as money as a bubble or a fad. I have to agree with them… It's just a passing fad that has lasted for 5,000 years. It should only last a few thousand more.

Gold has been used for money for thousands of years because it's easily divisible, it's easily transportable, it has intrinsic value, it's durable, and its form is consistent around the world. And as our friend Doug Casey reminds us, it's a good form of money because governments can't print it up on a whim. You can't Bernanke your way to wealth with gold. You have to work and save to accumulate it.

In sum, could gold suffer a big correction from here? Absolutely. It's had an amazing string of gains. Gold is well within its rights to take a break. That break could easily shave hundreds of dollars off its current price.

But when I look at the U.S. government's absolutely stupid "kick the can down the road" approach to our fiscal problems… when I hear howls from special interest groups after even small government spending cuts are suggested… I begin to see a potential gold decline as a huge opportunity to accumulate more real wealth.

That's why if a natural gold correction occurs in 2011, I'll be buying more.

Good investing,

Brian Hunt

FX Update: Quality check on EUR rally

The Euro is rallying on... what? There are a couple of interesting drivers for Euro strength, but  it seems nervous shorts rushing for the exits are the main culprit. Today we look at where the rally faces its next test of it can stay above the new support levels.

Euro noise
A couple of developments today that impinge upon the Euro: the German newspaper Die Zeit was out with an article claiming that Germany is softening up its stance on Greek debt and might be willing to help the country buy back its debt using the EFSF. German officials were out denying the report. Greek rates were all over the map today, but are now almost unchanged from yesterday’s levels.

Elsewhere, the ECB was out trying a verbal back-down from the market’s interpretation of Trichet’s hawkishness on inflation at last Thursday’s ECB meeting, saying that the market over-reacted. Nowotny called interest rates “adequate” and even the hawkish Weber said he expects inflation to remain below ECB targets in the medium term. The market ignored these developments and traded through the important 1.3450 area resistance after yesterday failing to convincingly break that level.

Odds and ends
EU finance ministers are in agreement that bank stress tests must be toughened up in connection with the question of expanding bailout funds. This comes after the failure of the previous round of tests to discover the Anglo Irish bank’s woes and eventual need for a bailout.

Portuguese bond yields remain elevated, with the 10-year still above 7.0% today, close to the top  of the range. Meanwhile, CDS prices on Portuguese debt have declined from as high as 550 recently to 475 yesterday, an indication that default risk is less severe

There was a flap this morning over a supposed announcement from the Swiss government on the franc, which turned out instead to be a statement announcing the intent to freeze the assets of the deposed Tunisian and Ivory Coast presidents. EURCHF hit 1.30 this morning before backing off slightly.

While US Housing Starts disappointed in December (an element of weather there affecting starts, by all accounts), the Building Permits number was extremely strong registering a nearly 17% increase month on month and the highest rate since March of last year. Yesterday’s NAHB survey suggested that buyer interest remains at extremely low levels.
Last night, the weekly US ABC confidence poll dipped back into the longer term range after showing some signs of hope the previous week. One suspects that the holiday and hope for the new year were instrumental in the previous surge, while the reality of higher gasoline prices and the continued lack of job opportunities is the reason for the renewed dip.

Corporate earnings. Very disappointing results from Wells Fargo, which was unable to rearrange reality sufficiently to conjure up a positive number. Goldman Sachs w as in-line with expectations, but missed the revenue target for the quarter. Will this news outweigh the incredible Apple earnings report from yesterday? Or does anything of a fundamental nature matter anymore in the US market in a world of POMO and HFT?

Looking ahead
Well, we have EURUSD through key resistance, though we would question the quality of the drivers for Euro strength here. Most of it must be from the surprise to the bearish positioning, a factor that could drive the pair to the next resistance zones defined by various Fibonacci retracement levels (the 0.618 for the entire sell-off sequence comes in at 1.3740, for example). Still, Euro bears shouldn’t feel comfortable until we close back below the 55-day moving average perhaps (around 1.3350). Elsewhere, AUDUSD rallied through parity again, but faces an interesting 0.618 Fibo resistance at 1.0085 that has so far held. 

Chart: AUDUSD

 A classic chart reversal point coming into play today at the 0.618 Fibo retracement at 1.0085 in AUDUSD. This after the failure of the attempt through the old 1.0164 high (shown with orange line). The bearish confirmation level would come with a close below the recent 0.9805 low.

Hu Jintao is in Washington and USDCNY is at new lows. Not it’s not a coincidence. Look for lots of flattering language and no real attempt to address the Chinese currency’s over-valuation or other substantive issues. A rather long and worthwhile read was published by Paul Tudor Jones back in October of last year on the US-China relationship and the Fed’s (then) planned Qe2. The issues haven’t changed since then, though the market has responded.

On the economic calendar in the coming 24 hours, we have a couple of New Zealand data points out overnight (NZDUSD trading at almost 0.7800 – really?), together with the monthly spate of Chinese data and the Chinese Q4 GDP number. In the US tomorrow, we have the weekly claims data (especially interesting after the huge seasonal spike last week), Dec. Existing Home Sales and Jan. Philly Fed.

Stay careful out there

Economic Data Highlights

• US Weekly ABC Consumer Confidence dipped to -43 vs. -40 expected and -40 last week
• Australia Jan. Westpac Consumer Confidence out at 104.6 vs. 111 expected
• Euro-Zone Nov. Current Account out at -11.2B vs. -9.6B in Oct.
• UK Dec. Jobless Claims Change fell -4.1k vs. 0k expected and -3.2k in Nov.
• UK Nov. Average Weekly Earnings rose 2.1% 3M/YoY vs. 2.2% expected and 2.1% in Oct.
• EuroZone Nov. Construction Output fell -0.9% MoM and -6.8% YoY vs. -5.9% YoY in Oct.
• Canada Nov. Manufacturing Sales fell -0.8% MoM vs. +0.3% expected
• US Dec. Housing Starts out at 529k vs. 550k expected and 553k in Nov.
• US Dec. Building Permits out 635k vs. 554k expected and 544k in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

• Canada Monetary Policy Report (1530)
• UK BoE’s Posen to Speak (1700)
• US Weekly API Crude Oil and Product Inventories (2130)
• New Zealand Dec. Business NZ PMI (2130)
• New Zealand Q4 Consumer Prices (2145)
• New Zealand Jan. ANZ Consumer Confidence Index (0200)
• China Q4 GDP (0200)
• China Dec. CPI (0200)
• China Dec. Producer Price Index (0200)
• China Dec. Industrial Production (0200)
• China Dec. Retail Sales (0200)

Under the Sun of That Dream

Under the Sun of That Dream

“In the end, we will remember not the words of our enemies, but the silence of our friends.”

— Martin Luther King Jr.

My father grew up at the bottom of a hill. My mother lived at the top of that same hill, in Washington Heights, New York City, in the 1950s and 1960s. Both were the products of refugee families.

My mother’s father, an avid reader of the news, left Germany just as the Nazis began to hang signs railing against “Juden!”

My dad came to America in 1954, literally on a banana boat, leaving in the middle of the night, fleeing a coup that would be followed by decades of bloody war in Guatemala. My dad’s father was a well-known journalist with connections in government. They left my grandmother and my two aunts behind to be sent for six months later. My dad was 6 years old.

For years, they lived at the bottom of the hill in New York. It was a slum, and it still is. My grandfather worked at a plastic factory, from which, my dad tells me, he would come home at the end of the day and peel off bits of plastic that had melted onto his face before bed.

The top of the hill, only blocks away, wasn’t so bad. Despite opposition from some family members, my parents married, and there I was raised.

Growing up as a child of a mixed marriage comes to my mind this Martin Luther King Day. Today, as I do most days, I drove to the office on a congested MLK Boulevard. Over lunch, I walked past the downtown library, where flyers promote upcoming meetings offering “An Honest Discussion of Race” — a topic promised again and again everywhere. I stopped attending these lectures years ago when I realized that these talks weren’t all that “honest” and that they were not attended by anyone actually interested in discussing anything.

Among my fondest childhood memories are our Sunday trips down the hill, amazingly steep it seemed, to have lunch at my grandparents’ apartment. There, my grandfather and I would eat a snack on the fire escape and watch young hoodlums in the street below messing with parked cars, harassing passing girls and generally looking for trouble. My grandmother in the kitchen would attempt to pan fry hamburgers for her American grandsons. Bottles of beer — not cans: Sunday was a special day — went around as we watched moonwalks, football games and reruns of Flash Gordon.

I didn’t know it at the time, but the couch we watched TV from was where my dad slept those years he grew up — it was a small apartment for five people, and he never had a bedroom.

But he studied hard. He became a citizen. He learned English and was a star gymnast in his high school. He got a job at the New York Public Library, at one point collecting the works of the recently deceased composer Henry Cowell. He attended City College, and entered the Baruch Graduate School of Business.

He left Baruch after one year to support a wife and two children, and to pursue a career in a field that was just taking off: telemarketing. I remember his fine suits and cufflinks, his waking up early to catch the train in the dark morning hours. He would come home late with stacks of printouts, and work after dinner at our dining room table, beside a propped-open briefcase. He would talk about clients and new responsibilities he had just undertaken. It all seemed to me as incomprehensible as a magician’s craft, which really is how a father’s job should seem to an awestruck young child.

What impressed me most then and still does was his fairness. In my years growing up, I never once heard him make a racist remark. Never once. Not in passing. Not in anger. Not in jest. He was never angrier than when at age 9, I came home repeating a joke that used the “N” word that I had heard from a friend. Frankly, I didn’t even know what the word meant. I was stunned that he would telephone my friend’s parents, as he never called them before. As he explained the meaning of the word to me, I could tell it hurt him to discuss it, and hurt him more to think that I might one day use it again.

His fairness also played into his business. Throughout the 1970s, he pioneered the telemarketing divisions of several companies, quickly rising up the ranks. At a time when laws were needed to break up the discriminatory employment practices of many corporations, my dad saw the opportunity in hiring talented people of all backgrounds — precisely those who were discriminated against in other places of business.

To a bigoted eye, they may have appeared a jumble of colors and genders. But in reality, they were ambitious professionals thankful for a chance and ready to work hard to prove it. When he founded his own company, in 1984, he hired minorities even to the highest executive levels.

By employing talented people overlooked by the old boy’s club, my dad’s core belief in fairness gave him the edge over competition.

There was no March on Washington in my dad’s life. There was no Selma or Edmund Pettus Bridge. There were no church bombings. There was no James Earl Ray, no Lorraine Motel.

But he was a refugee who worked hard to be a successful American. Life threw obstacles at him, but he overcame. He entered the country a native Spanish speaker and was thus threatened (as schools did in those days) with being held back, but he learned English — more perfectly, in fact, than almost anyone I know. Who else could tell his son, then a college English teacher, the difference between “continually” and “continuously” without missing a beat?

He got involved in a nasty series of lawsuits with former business partners in the late 1980s. Then a divorce in the early 1990s. Lawsuits kept coming in those days.

Then, in late 2004, the U.S. government implemented the National Do Not Call Registry for telemarketers. I heard the news over the wires while I was working for The Associated Press in Washington. Businesses were panicking. I called my father that night, expecting despair.

But he had an impish tone in his voice. After listening to me for a few minutes, he broke in: “Do I sound worried? This is going to drive the weaker companies out of business and leave the good ones with more work. This will be good for us.”

Today, he is remarried and lives in a peaceful suburb of Chicago, thousands of miles from Guatemala. His company has employed 100,000 people in more than 20 locations across the globe. At his headquarters, rising-star executives in his employ listen to him with fierce admiration. My dad’s in his early 60s, and after visiting China a few years ago to check into business opportunities and to lecture at business schools, he thinks he may one day retire there and resume a childhood love of painting.

Years ago when I learned that I had passed my exams and would thus be completing graduate school, my first call was to him.

I could tell that he was weeping over the phone line. He very rarely cried.

“Oh, Erik,” he said, “I’m crying because I’m happy. Finishing graduate school is something that I was never able to do.”

“Everything that we see is a shadow cast by that which we do not see.”

— Martin Luther King Jr.

Regards,
Erik Kestler

Erik Kestler is Agora Financial’s copy editor and also teaches at the Baltimore City Women's Detention Center.

Under the Sun of That Dream is featured at Whiskey & Gunpowder.

Commodity weekly: Focus shifts to commodity driven inflation fears

Inflation worries are beginning to attract attention, after a week where stocks and commodities rose while euro zone debt fears receded on successful bond auctions from some of the zones most economically fragile members.

The four percent surge of the Euro versus the dollar, which up until Thursday mostly looked like a short covering rally, gathered additional speed following ECB presidentJean Claude Trichet's tough inflation remarks. They seem to have increased the chance of a rate rise much earlier than the market may have been anticipating. European inflation rose to 2.2 percent in December, the fastest pace since 2008 and is now above the ECB's ceiling of 2 percent.

The leading Chinese stock market index erased the gains for the year after an announcement from the People’s Bank of China of another bank reserve rate hike. This will be one of the themes that could dampen the expectations for higher commodity prices in 2011. China's consumer prices rose to 5.1 percent in November, the highest since 2008, on surging food costs.

Commodities, of which many had seen retracements during the first week of January, got back in gear with the Reuters Jeffries CRB index racing ahead and almost reaching a fifty percent retracement of the 2008 to 2009 sell off. Strong rallies among agricultural and energy products left the index 2.3 percent higher at the time of writing this report.

 Energy prices recovered from the bout of selling during the first week of January on the back of various supply disruptions. A report on the Gulf of Mexico leak last year could herald a new and more expensive era for offshore drilling with some projects being delayed as a consequence, thereby reducing supplies to the US market.

European Brent crude looks set to be the first to test the 100 dollar level as it continues to trade at a steep premium over WTI crude. This week it touched 98.85 per barrel with the premium over March WTI rising to six dollars. Supply disruptions and cold weather in Europe combined with high inventory levels at Cushing, the delivery hub for WTI crude, has caused this dramatic widening.

 Discussions are ongoing about whether the price of Brent crude is a better reflection of the current global demand situation with WTI crude's status as the global benchmark being increasingly threatened. What seems to be clear is that global demand rose strongly during the last quarter of 2010 and projections for growth in 2011 still point towards a global increase in demand. With excess capacity OPEC is in no hurry to turn up the tap and holds the key on how the price will behave over the coming months.
The ninety dollar level continues to be the pivot for WTI crude with the recent highs at 92.60 providing resistance while support can be found at the December and January lows at 87.10.

Silver and gold have struggled to gain some traction during the last couple of weeks. Reduced sovereign debt concerns, stock market gains and a shifting focus toward cyclical commodities, such as energy and base metals, have removed some of the strong support seen during the previous six months. The speculative long position in both metals has seen a continued reduction over the past three months while investments through ETFs have also seen a reduction, albeit a small one.

Silver has underperformed gold by three percent recently and is currently stuck in a 28 to 30 dollar range while gold is trading in a range between 1,350 and 1,400. A break below those two lows increases the risk for additional position squaring.

 The world agricultural supply and demand report from the USDA on Wednesday triggered another round of price rises for corn, soybeans and cotton as global stock levels continue to dwindle. Stocks to use ratios fell to a fifteen year low for corn and a thirty year low for soybeans. Strong demand for ethanol now take up nearly 40 percent of the US corn production and it is estimated that this demand will only begin to suffer should corn prices move above USD 8 per bushel, some 25% higher than current levels. Strong expected demand for soybean oil will leave soybean stocks at the lowest levels for thirty years and rationing or higher prices to curb demand could be the result.

 From a food security point of view the report did have some positive news. Rice and wheat are two of the most important cereals with rice being the stable diet for billions of people in Asia. The USDA increased its harvest forecast for rice and cut the demand outlook while the wheat market is amply supplied. Wheat as consequence has underperformed corn by more than five percent since year end, a trend that could continue over the coming months.

FX Weekly Chart Wrap

Today's close in the major currencies offers an interesting setup for next week, with the Euro rocketing higher on tough talk from Trichet and the JPY wilting on widening interest rate spreads. What should we look for next week?

Last week, by all appearances, we saw a major move in the USD that appeared to set up the potential for follow through this week. But that follow-through was halting at best and instead we got a huge reaction to Trichet's surprisingly hawkish words on inflation and other encouragement in Euro crosses because of short term relief on the PIGS sovereign debt issue. So the focus shifted dramatically from USD strength to Euro strength. Below we highlight some of the more interesting charts on the close of this week.

Chart: EURUSD
Last week's weak close near the lows is followed up by this week's strong close. The key resistance at the 11-week (55-day) moving average is still in place, though one can also say that the attempt to break below the 200-day (40-week) moving average failed this week. Needless to say, this chart appears very much in limbo. Bulls can argue that we are in for a test of the 0.618 Fibo up above 1.3700 after the show of support this week. The flatline area around 1.3435 has been critical on a number of occasion recently and now happens to coincide with that 55-day moving average.

 Chart: EURJPY
EURJPY saw enormous gains this week as Trichet broke out the hawkish rhetoric and on "successful debt auctions" from Spain and Portugal. Note that the pair has now paused right at the bottom of the daily Ichimoku cloud, which also happens to be close to the 55-day moving average. The action has been awfully steep, but so then too has the acceleration in interest rate spreads.

 Chart: USDJPY
On the USDJPY side as well, the pair saw a new low for the week today rejected. Also interesting is that we are trading near the Ichimoku cloud levels and the 55-day moving average and that today's candle suggests a bullish reversal, though on relatively low volatility. This is a reverse image of bonds, which rallied, but then failed to hold the gains - bullish for USDJPY if we see follow through in the bond selling next week.

 Chart: AUDUSD
A curious market, as we have copper closing the week strongly while silver and gold are closing near their lowest levels in come time and below key moving averages. Meanwhile, risk appetite has gone virtually ballistic in the US stock exchanges. Technically, the pair looks relatively bearish, though we need to see a close to a new low for some confirmation of whether the pair really wants to take out that 55-day moving average.

Looking ahead
Next week the focus will be on whether the gains in European interest rates can hold and whether EURUSD and EURGBP can take out the next key resistance levels. While it seems crazy to think that Trichet could pull the lever on rates in this environment, he did raise rates as the world was sliding into oblivion in July 2008, so maybe we shouldn't underestimate his willingness to throw himself under a bus again. 12-month forward expectations, by some miraculous logic we have no access to, are looking for 67 basis points of tightening from the ECB.

Wake-up Call - Macro Kickoff: will Portugal be mentioned by the ECB today?

Wake-up Call - Macro Kickoff: will Portugal be mentioned by the ECB today?

Focus will be on the Bank of England and the ECB today and the markets will look for any hints from the latter about the situation concerning Portugal.

Focus will be on the Bank of England and the ECB today and the markets will look for any hints from the latter about the situation concerning Portugal. The calendar features U.K. industrial production and U.S. producer prices, both of which are expected to increase. Trade data for the U.S. is also released and should show a slight widening of the deficit.

BoE, ECB rate announcements
Portugal’s successful auction yesterday saw risk rally and while we maintain our stance that Portugal will sooner or later apply for a bailout package perhaps we can concentrate on other events today than the constantly reappearing European sovereign debt concerns.
Both the ECB and the Bank of England will announcement rates today, but neither is expected to provide much action, we believe. The central banks will keep rates at 1% and 0.5%, respectively, and in the case of the latter the asset purchase target amount will remain at £200 billion.
The BoE should not change its monetary policy stance until a clearer picture of the economy is available given all the changes this year including a VAT increase to 20%. The ECB’s Trichet is also not expected to say much we don’t already know which includes potential questions about a Portuguese auction where the President of the ECB will maintain that any prospective bailout applicants have to make the first move.

U.K. manufacturing sector to improve
The PMI Manufacturing survey last week confirmed similar surveys from the U.S. and Eurozone, namely that the manufacturing sector of these economies continues to perform well. The overall index in the survey rose to 58.3, the highest in a decade, and has provided the markets with the ammunition needed to forecast that today’s report on industrial production while show that production rose 0.5% month-on-month in December.

 U.S. producer prices expected to rise, trade deficit to widen
Turning to the U.S. producer prices are set to rise yet again helped by the surge in energy in December, a month which saw Crude rise 8%. Following November’s 0.8% month-on-month change in prices, we expect prices are the producer level to show another gain of 0.7% (consensus: 0.8%) while core prices should also improve by 0.2%.

 The disappointing wholesale inventories report earlier this week suggests that the contribution from inventories in the fourth quarter may be smaller than previously expected (tomorrow’s business inventories report should help clarify that), but on the other hand trade data has been kind to the U.S. in recent months and even though we look for a slightly increase in the deficit to $40 billion, net exports looks on track to boost GDP in the fourth quarter.

Equity Kickoff: Higher on Intel expectations

European cash indices will open higher Thursday lead by a general strong expectation for the upcoming earnings season and today’s release from Intel is expected to boost that sentiment.

In terms of planned data events look for BoE and ECB interest rate announcements at respectively and especially Trichet’s wording in the follow up conference. Trichet is widely expected to comment on the Portuguese situation.

Equity markets will focus on Intel earnings and the conference call afterwards. There is no release time, but earnings are expected to show an increase from 0.440 USD per share in Q3 to 0.530 USD per share in Q4. This is to a large extent driven by sales growth as sales growth is expected to increase from 10.72 bln. USD to 11.36 bln. USD. Intel’s own guidance for Q4 sales is 11.40 bln. USD. The really interesting issue with Intels sales growth is where it is located; in Q3 sales growth was all coming from emerging markets, but this time around we do expect to see some of it origin from the U.S. If this is the case this will strengthen our belief that the U.S. is in for a strong recovery this year where we expect a GDP growth of 2.7%.

Lately there has been talk of a bailout of Portugal from EU/IMF. In our view there is a great likelihood that this will be the outcome of the current situation for Portugal. Trichet is not expected to move interest rates in either direction for a long time, neither is the BoE for that matter. But llisten carefully to the ECB press conference where we expect Trichet to indirectly comment on the situation in Portugal, pointing toward whether it will receive a bailout. If that should be the case, then expect markets to start testing Spain. As we have said several times now, Spain is a whole different story; it is a BIG economy. So big that if the bond investors really put pressure on the Spanish government bonds you should expect EURUSD to drop and equity markets, at least in Europe, to drop too – whether we are in an earnings season or not.

In today’s trading we are bullish on tech companies as we expect solid earnings from Intel – so look for STMicroelectronics. JPMorgan is out with earnings tomorrow and here we expect a surprise to the upside, so we are still positive on JPMorgan, Goldman Sachs and UBS. It is widely expected that due to QEII the fixed income trading divisions will drive earnings higher like they did the last time around when QEI was hitting the street. Commodity producers continue to rise in Asia, so look for Rio Tinto and BHP Billiton.

FX Update: Reversal to set up more USD strength?

The USD was pushed to the mat overnight, but found strong support in the critical EURUSD cross just ahead of “final” short term resistance. With this reversal, the line in the sand is drawn for the USD this week and today’s close gives us a status on near term direction.

Portuguese bond auction
Portugal managed to go through the motions on a debt auction today, with yields falling slightly relative to recent highs, but the involvement of the ECB is a certainty and the real market price is impossible to determine, so we can’t really take much away from today’s debt sale. The country’s leadership is trying to put on a brave face and claim that no bailout will be necessary and touting its reduction of the deficit last year, but all signs point to the inevitability of a bailout and the latest noise from unnamed sources is that talks are continuing, with some combination of debt buybacks/low-interest rate rescue loans and guarantees in the works. It’s mostly a question of timing and one wonders whether the actual announcement of a bailout might be a Euro positive for a short time in some of the crosses at least. In the meantime, EURUSD pressed its case toward the 200-day moving average (around 1.3070), but fell short and reversed sharply, emphasizing that area as a critical short term resistance.

Japan was out announcing that it planned to buy more than a fifth of the bonds to be sold later this month aimed at funding the Irish bailout. Further down the road, this kind of news only matters if Ireland doesn’t elect a government that decides to restructure debt and if the EU/ECB and Spain are able to get ahead of the curve on its public debt demons. It’s these “ifs” that are dogging the Euro more than the drip-feed of positive-for-spreads news on the smaller PIGS. Spain is the one to watch.

Australia floods
The flooding situation in Australia is rapidly worsening as flood waters are peaking in Brisbane today and tomorrow, and the RBA’s McKibbin estimated that the floods could cost a full percentage point of GDP this year. This knocked the Aussie sharply lower overnight, but the currency rebounded against most of its peers in a sign that the negative potential of this terrible natural disaster has peaked. Still, if we have a look at interest rate spreads versus the USD, for example, there appears to be little for the Aussie to build on here (though the strong equity rally in the US suggests otherwise). A natural resistance level comes in at parity for the AUDUSD.  Many will argue that natural disasters can actually turn out as a GDP-positive in the longer term as they increase activity levels due to the need to rebuild.

Chart: AUDUSD
An attempt at a comeback today, though we have the 55-day moving average at 0.9925 and the psychological parity level to deal with. Watch for the Australian employment report out tonight. Against the rest of the G-10 as a basket, the Australian dollar is seeing its most significant sell-off since the early summer, just before the equity market bottomed and launched its furious rally into this year.

Odds and ends
UK Trade Balance: yet another terrible monthly figure from the UK as the trade deficit came in at a record high level. The news received little attention, but this is a profoundly disturbing trend in the bigger picture and distinct disappointment that the weak sterling of the last couple of years has failed to see an improvement in terms of trade. Let’s see if this trend is reversed this year as austerity measures take hold.

Strong home loans data from Australia helped boost the AUD overnight as it suggests the Australian housing market would prefer to die another day. Home loans for owner occupied housing have been increasing steadily since last summer, but the rate is still far below the 2009 peak.

Canada housing prices edged higher in November, according to official data, but we underline that housing affordability is a tremendous problem in Canada, that gains in the Canadian housing bubble have exceeded those in the US during its bubble, and that the Canadian consumer is more overleveraged than any other consumer in the world. So let’s enjoy the USDCAD sell-off as long as oil rallies above 90, but tuck in the back of our mind that Canada will one day also face a post-housing/consumer credit bubble of its own. Tick-tock. Good thing that the Canadian government has a low public debt level as its starts down the road already traveled by the US and some of the European countries during the last cycle.

Looking ahead
The next focus today is on the US 10-year treasury auction. USDJPY is still rather buoyant as yesterday’s auction was greeted as neither here nor there and US treasuries have not followed up on their rally from last week – in fact, they are threatening to reverse the rally and German bunds have already collapsed again. We wonder aloud (again again) at what yield the market decides that the interest rates and higher commodity prices threaten global growth. The “everything up” trade (commodities, interest rates, equities) is not a long term proposition.

Watch for the US Fed’s Beige Book later, though we expect no real surprises. It is abundantly clear that the FOMC intends to carry out the rest of its QE2 program. The Dallas Fed’s Fisher is out speaking today – he is perhaps the leading light on the hawkish side of the FOMC and we would like to see whether he will choose to pick up where the now non-voting Hoenig left off with loud dissent on Fed policy.

Aussie traders need to watch for the December employment report out tonight in Australia. The data has been incredibly strong in recent months, so the market is looking for some mean reversion in this data series.

Tomorrow we have the BoE and ECB on tap (anything interesting from Trichet for once?), UK production figures, US Dec. PPI and weekly jobless claims, and Canada and US trade figures for November.

Economic Data Highlights

• US Weekly ABC Consumer Confidence out at -40 vs. -45 last week
• Japan Nov. Adjusted Current Account Total out at ¥1145.1B vs. ¥1150B expected and ¥1463B in Oct.
• UK Dec. BRC Shop Price Index rose +2.1% YoY and ex Food rose +1.1% YoY  vs. 2.0%/0.9% in Nov., respectively
• US Jan. IBD/TIPP Economic Optimism Poll out at 51.9 vs. 47.0 expected and 45.8 in Dec.
• Australia Nov. Home Loans rose 2.5% MoM vs. -1.0% expected
• Australia Nov. Investment Lending fell -2.3% MoM
• UK Nov. Visible Trade Balance out at £8736M vs. £8350M expected and £8591M in Oct.
• EuroZone Nov. Industrial Production out at +1.2% MoM and +7.4% YoY vs. +0.5%/+5.9% expected, respectively and vs. +7.1% YoY in Oct.
• Canada Nov. New Housing Price Index rose +0.3% MoM vs. +0.1% expected
• US Dec. Import Price Index rose +1.1% MoM and +4.8% YoY vs. +1.2%/+4.7% expected, respectively and vs. +3.9% YoY in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly DOE Crude Oil and Product Inventories (1530)
• US Fed’s Fisher to Speak on Monetary Policy (1800)
• US Fed’s Beige Book (1900)
• New Zealand Dec. NZ Credit Card Spending (2145)
• New Zealand Dec. QV House Prices (2300)
• Japan Nov. Machine Orders (2350)
• Australia Dec. Employment Change/Unemployment Rate (0030)
• China Nov. Conference Board Leading Economic Index (0200)
• Japan Dec. Machine Tool Orders (0600)