Sterling under more pressure

Tuesday,  March 9, 2010

Ongoing speculation that profits earned overseas by Japanese companies is finding its way home before the fiscal year-end is lifting the yen on Tuesday. At the same time Asian stocks are commemorating the one-year anniversary of the lowest closing point of the bear market for stocks with a down day, also providing a knee-jerk bid to the Japanese yen. Other Pacific region data suggests, however, that risk appetite is likely to remain on the agenda and may provide the Australians with another reason to lift rates. But the main story today surrounds the British pound where the bad news just keeps piling up.

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British pound – Comments from two ratings agencies helped keep the pressure on the pound today while warmer words from one of the MPC members helped stem some of the pessimism. Kate Barker addressing an NIESR audience said that recent data provided grounds for optimism that the British recovery was “broadly on track” and pointed to the gradual disappearance of several of the negative factors holding back the recovery. While admitting that the economy still looks fragile Ms. Barker noted that the downside risks to growth had diminished leaving a still bumpy road ahead.

Speaking on a day when data proved a further weakening of the U.K. trade deficit for January on account of lower chemical and commodity sales, Ms. Barker said that the British economy was failing to feel the potential impetus from weaker sterling. She noted that the British economy was faring no better than either German or French manufacturers presented with the onset of recovery. Her fear is for significant ongoing weakness in Britain’s trading partners that would prevent any benefit from a cheaper pound.

Meanwhile the pound fell against the dollar to $1.4971 and above last week’s 10-month low after Fitch Ratings agency advised that the government needs to accelerate its plans to reduce the budget deficit. Reflecting momentarily on that prospect, investors quickly connected the dots to see that a rudderless government is the most likely outcome in the forthcoming election, further hampering sterling.

Moody’s Investor Services separately cautioned that as the tide of government support for the U.K. banking system slowly ebbs out, it will leave exposed those financial services companies that have failed to improve their funding position. The reports together were taken negatively by sterling today which also fell to 90.61 pence against the euro.

Euro – Having risen to $1.3700 on Monday the euro is back on the defensive today and retreated to an intraday low at $1.3550. Most recently the single European currency traded at $1.3558. It also shed ¥1.3 to stand at ¥121.73. Friday’s low against the dollar was at $1.3530 and only if the euro can hold above here will it start to look constructive.

U.S. Dollar – A Manpower Inc. survey suggests that the recovery in employment is expanding into the second quarter, while jobs growth across emerging markets is also likely to continue its expansion. The world’s second-largest temporary employment agency said that of 18,000 surveyed companies, 76% leave hiring intentions unchanged between April and June while 16% said they’d expand the number of workers. The most optimistic response came from companies located in the North East. Within emerging markets it’s no surprise to learn that hiring intentions were strongest within nations such as Brazil and India, while they were the weakest in Italy, Spain and Ireland. Some analysts claim that without the adverse impact of winter snowstorms, the February reading of U.S. employment would have shown jobs added. Previous data during disrupted winters have shown sharp rebounds in job additions during March. The ongoing U.S. economic recovery is bolstering the dollar under current conditions.

Japanese yen – We’ll just have to wait and see how far the yen rises in response to the seasonal impact of repatriation. With global equity markets around 60% higher than this day a year ago, the world is in far fitter shape and the recovery remains encouraging. And so the premise that the yen is rising on a risk aversion theme has to go down as a somewhat bogus claim today. We await any word from the Bank of Japan, which is supposedly mulling ideas on how to breathe life into the Japanese economy. The impact of further quantitative easing via additional government bond pressures should serve to weaken the yen, which currently stands at ¥89.75 against the dollar.

Aussie dollar – A buoyant ANZ job survey for February made the previous month’s downturn appear to be little more than an aberration. The measure of newspaper advertisements and Internet job listings increased 19.1% – the largest jump in the reading since it was first compiled in 1999. The data comes days ahead of the February employment report, which might prove so strong that it will prevent the RBA from taking a breather after its February interest rate hike to 4.00%. The Aussie unit jumped in the immediate aftermath of the data and reached 91.17 U.S. cents. However, a reversal in attitude towards risk later saw the dollar and yen both rally sending the Aussie back to a low at 90.56 cents. The Aussie is currently trading at 90.76 cents, while it’s lower on the day at ¥81.50 against the Japanese unit.

Canadian dollar –The Canadian dollar remains just a fraction of a penny above 97.00 U.S. cents this morning and has lost some impetus on account of a gentle decline in key crude oil and gold prices. Gold has slipped by $11 per ounce while crude at $80.25 per barrel remains north of psychological support at $80.00.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Andrew Wilkinson

Director of Media Communications

Interactive Brokers Group LLC

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Global optimism spurs weaker bond prices

Monday, March 8, 2010

Bond traders are in no mood to be the last one out of the exit today. Friday’s U.S. employment report provided enough reason to start lightening the safe-haven payload of government debt, while the support from French President Sarkozy for the government of Greece was enough to spark a risk revival in equities, commodities and riskier currencies. Such a move argues against the recent bid to bonds and as such 10-year yields are higher across the board, except for those of Greece and Spain.

Eurodollar futures –Former Fed Chairman Paul Volcker speaking in Germany at the weekend argued that now is not the time to dispense with either fiscal or monetary efforts to spur demand. Nevertheless, a revisit to breakeven for U.S. equities for the year based upon building confidence that there is sufficient momentum to deliver a sustainable economic recovery is helping drag bond yields higher. The 10-year yield rose three basis points to start the week and is sitting at 3.71% as the June note future slipped seven ticks to 116-26. Losses for Eurodollar futures are larger at farther maturities with three tick declines evident from June 2011 outwards.

Canada’s 90-day BA’s – The spread between U.S. and Canadian 10-year bonds is once again widening as yield increases are more evident in American government debt. The Canadian dollar has held firm against its U.S. counterpart as investors warm towards the more fiscally sound properties of the Canadian government’s measures. Nevertheless, bill prices are down harder than Eurodollar futures today possibly because rising commodity prices are a sign that a recovering economy may well deliver harsher monetary measures sooner rather than later. The spread between June and December bills continues to stretch wider as a result with the spread of 84 basis points indicating three quarter point rate increases during the second half of 2010.

European short futures – Euribor futures are a little brighter this morning and it is the back end of the curve where the relief pressures are being felt. With money traders concluding that the fallout over Greece will ensure a slower pace of growth, no one is expecting the ECB to raise rates anytime soon. But June bund prices slid earlier as yields rose to 3.18%. Losses have subsequently been curtailed with the June contract having rebounded from an intraday low of 122.26 to stand at 122.46.

British interest rate futures – All is well in the U.K. today. Stocks are up, the pound is perkier and sterling rate futures indicate that the Bank of England can take a nap for the foreseeable future. Gilt prices fell sharply earlier and the June contract slipped to a low of 113.83 at its worst point of the day. The 10-year yield stands at 4.10% and higher by four basis points on the day. Two weekend polls indicated a widening of the opposition Conservative party’s lead over the government heading in to the summer election.

Australian rate futures –Rising regional equity prices and a jump in commodity prices helped depress interest rate futures. The 10-year Australian government bond yield jumped to reflect losses it missed out on after the U.S. employment report. Yields rose 10 basis points to stand at 5.55%. Meanwhile, ahead of its own labor report later this week, 90-day bills slumped up to 10 basis points.

Japan – Government bond yields rose one basis point taking a cue from declining bond prices around the world. Last week’s Nikkei newspaper reported that the Bank of Japan would this week mull any additional measures it could possibly take to help rescue the ailing economy. March JGBs declined just two ticks to close at 140.17.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Bonds slide after jobs data

Friday, March 5, 2010

Japanese and Greek bond prices proved exceptions to a wholesale slump in global bond prices following a stronger than expected U.S. jobs report. The Japanese central bank is apparently set to mull measures that would in some way further ease already wafer thin interest rates while a restoration of confidence after an austere Greek budget created thrice as many willing lenders to bid for a €5 billion 10-year bond auction on Thursday.

Eurodollar futures –About half as many lob losses as feared in February helped deliver a bearish signal for bond traders on Friday as 36,000 jobs were lost, while an upward revision to manufacturing labor data saw that sector eek out a third monthly employment gain. A separate household survey showed that the unemployment rate did not rise as expected, rather it remained unchanged at 9.7% for the month. Evidence of a weather-related job loss was scant as a reading of average hours worked fell by a minimum. Economists will surely be looking for a weather-related jobs rebound next month.

The yield curve stretching from two-to-10 years rose in parallel by around six basis points. At this stage the bullish data is being treated with caution. Let’s not forget that a net number of jobs were still lost in February in addition to 6.8 million lost since December 2007. Indeed speeches presented by two Fed speakers yesterday confirm that they’d not be in rush to change the current accommodative stance on the evidence of a single piece of data.

Chicago Fed President Evans wants to see “highly sustainable growth” before he’d support any move away from low interest rates, while St. Louis Fed President Bullard noted that the early stages of recovery will still warrant further accommodative positioning for some time. These remarks today appear to counter the inevitable drop in Eurodollar futures prices, where nearby expirations have seen implied yields add two basis points while far-dated maturities are approaching yield increases of 10 basis points. The one year June calendar spread widened out to 125 basis points while the same September spread widened to 138 basis points in light of today’s events.

Canada’s 90-day BA’s – The Canadian jobs report typically coincides with the release of the U.S. jobs data. Today, however is one of those sessions when the data is deferred for another week. Still, the robust nature of recent growth and the fact that Canada is more dexterous as it’s a smaller nation has ensured that today’s decline in Eurodollar futures is mirrored in Canadian bill futures. The yield on the 1-0year government bond rose by just three basis points to 3.43% as June futures slipped 25 ticks to 118.51. Meanwhile bill prices for December and latter maturities fell by five basis points and more on Friday.

European short futures – Despite a Thursday announcement from the ECB that it will maintain highly liquid conditions for approximately another six months, the short-term trend is towards marginally higher yields according to the euribor strip. What’s important to consider now that the Greek budget has been approved and has received wide respect, is that much of the recent surge in German bund prices is likely to unwind. In line with weaker U.S. fixed income prices today, March bund prices are 30 ticks lower at 123.99 to yield 3.16% having rejected panic lows last week in yield terms at 3.08%. Euribor contracts are lower by just a couple of basis points.

British interest rate futures – The story is pretty much the same for British fixed income prices with no domestic data to drive affairs. Short sterling futures are weaker in line with euribor prices and the curve is marginally steeper. June gilts slipped 35 ticks in late trade with the yield rising three basis points to close the week at 4.03%.

Australian rate futures –Favorable price action for Asian stock markets boosted by the promise of accommodative monetary policy from its largest trading partner, China, helped maintain a weaker bias to fixed income prices. Bills eased by a couple of basis points with bill yields rising six basis points across the strip. Meanwhile government bond prices fell to send the 10-year yield higher by one pip to 5.45%.

Japan – Despite that boost to regional equity prices, Japanese government bonds rose sending yields towards the lower end of the recent range at 1.29%. According to sources the Bank of Japan will next week mull how it might further relax already extremely accommodative monetary policy conditions in order to satiate government calls for help in staving off further deflationary waves.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Bonds respond to rally in dollar

Thursday, March 4, 2010

Bond prices are staging a late afternoon rally in Europe and an out-of-the-blue surge in the value of the dollar is creating a sense of rising risk aversion. The Greek budget appears to have found the support of various factions across Europe and a sense of calm had returned to markets today.

Eurodollar futures –A decline of 29,000 in the weekly initial claims data on Thursday allowed pressure to build on Eurodollar futures as bond yields continued a gentle climb. The fall to 469,000 initial claims through Saturday helped somewhat soothe investors’ fears that the nascent recovery in the labor market had stalled prematurely. Better news was evident in a reading of continuing claims, which declined by 100,000 to 4.5 million. Dealers now await the official data on Friday, which is expected to show a decline of 59,000 jobs. We await better weather in order to iron out the quirky nature of current data.

With equity markets continue to improve and the ongoing Eurozone mess creating a roadblock to both growth and a removal of liquidity measures, interest markets are fast concluding that the world can only get better based upon the current direction of growth. Investors eyeing a 2.5-3.5% GDP range for the United States this year are starting to sense that such a scenario will inevitably lead to a removal of low interest rates at some point. The bias towards higher rates appears to be drawing more investors’ thought process with deeper ongoing losses for deferred futures contracts than at the short end. Today June and September expirations are two-to-three basis points lower in price while further maturities are lower by five-and-a-half pips forcing the curve to steepen. June treasury note futures are rallying off earlier weakness and stand at 117-12 to imply a yield of 3.62%.

Canada’s 90-day BA’s – The last time September Canadian bill futures traded with a yield above 1% was January 20. During the last five sessions yields have risen by almost one-quarter of a percent as dealers respond to a variety of driving news. The Bank of Canada is upbeat and its view is underscored by strong growth and a faster than anticipated return to the target rate for inflation. The market today predicts that within one year the three month cash rate will have risen from 0.5% to 1.85%.

European short futures – The ECB left rates unchanged and after the Greek budget there is a bit of an easier tone. It would seem that the danger of a Greek collapse has now passed and by making the Greek government hold its hands over the fire, the EU has helped forge a sense of reality delivered by the austere budget. The Greeks responded today by announcing the issuance of €5 billion of euro-denominated bonds at 300 basis points over German debt. The end game here is to create the conditions that allow the government to finance its debt needs. Some of that must come from budget measures and some must now come from the market. There is no sense in brandishing those investors who tried to ditch the euro currency in hopes that things would blow apart. And it appears that business may be getting back to normal.

British interest rate futures – the Halifax reported weakening home prices for February, while the Bank of England revealed no changes to either monetary or its quantitative policy today. Gilt prices continue to rally in late afternoon trading with the June contract 21 ticks higher at 114.67. Short sterling futures meanwhile are around three basis points lower in price.

Australian rate futures –Bills prices dipped by a basis point while government bond prices advanced to shave two pips off the 10-year yield, which fell to 5.47%. Shanghai stocks slumped 2.4% as a major bank announced that 2010 new lending would be half of the 2009 rate. Meanwhile a narrowing in the trade deficit showed iron ore exports were especially strong in January.

Japan – Barely a budge in the JGB yield down to 1.315% as stocks eased 1% in the Far East. Capital spending data showed a – 17.3% decline for the final quarter of the year – not as bearish as the 18.4% forecast.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com



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The Canadian economy grew at a rate of 5% in the fourth quarter, Statistics Canada said yesterday, outpacing the bank’s prediction of 3.3% growth. Inflation has also picked up, accelerating at close to the central bank’s 2% target, which has analysts projecting the bank will raise interest rates earlier than previously thought.

“The relative fundamentals of Canada are still there,” said Brian Kim, a currency strategist at UBS AG (NYSE: UBS) in Stamford, Connecticut, before the announcement.

The Canadian dollar rose 1.8% last month against the U.S. dollar, posting its biggest monthly gain since November as exports of crude oil, the country’s largest export, continued to soar. The loonie appreciated as much as 1% yesterday, the currency’s largest daily upswing since Feb. 11.

After policymakers held their last meeting on Jan. 19, BOC officials repeated that the currency’s “persistent strength” could hurt the nation’s economic rebound.

Rates on the Rise in the Land Down Under

For its part, Australia resumed its tightening policy after it paused in February. The RBA insisted that the latest rate increase is just another response to economic conditions that are returning to normal.

“The board judges that with growth likely to be close to trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process,” RBA Governor Glenn Stevens said in a statement.

The rate increase indicates that Australia will continue to lead the Group of 20 (G20) countries — most of which still have rates set close to zero and continue to face weak conditions — in removing stimulus from the economy.

After the country avoided recession in 2009, the RBA was the first central bank in the G20 to start raising interest rates, beginning in October, and then again in November and December. Stevens last week said rates are still 50 to 100 basis points, or hundredths of a percentage point, below normal.

Economists said further rate rises are on the way but expect the RBA to pause every so often. Most expect the bank to boost rates back into levels appropriate for a steadily growing economy, widely viewed to be between 4.25% and 4.75%.

“They are not indicating any urgency,” Bill Evans, chief economist at Westpac (NYSE ADR: WBK) told The Wall Street Journal.” We think they will go again in a couple of months. It could be three months, it could be two…that may depend on how the inflation numbers look.”

Australia’s economy is in the midst of a rally, with already-low unemployment causing worry about wage pressures, as demand heats up in areas of the economy like mining and energy. Unemployment fell to 5.3% in January, already above levels economists considered full employment.

Treasurer Wayne Swan noted that while some areas of the economy are weak, mining companies are experiencing a boom.

“If you are in resources, the outlook is quite bright, there’s no doubt the economy is strengthening, but if you saw some of the data that came out last week, parts of the economy are still soft,” he told The Journal.

Tuesday, March 2, 2010

The money market response to an upbeat policy statement out of the mouth of the Bank of Canada was pretty bearish with bills of acceptance slumping by one-eight of a percentage point. Dealers took the view that the Bank is indeed likely at some point in 2010 to start raising interest rates. The Canadian currency jumped in response to a perceived growing yield cushion against the dollar with local exporters far more likely to benefit from what the Bank of Canada referred to as strong domestic demand in many emerging market economies.

Canada’s 90-day BA’s – December bills dropped 11 basis points to 98.69 to imply a year end three-month cash yield of 1.31%. The benchmark short cash rate was left untouched at 0.25% but the upbeat statement from the BoC left dealers in the frame of mind that tightening will happen as the recovery continues. Bond yields actually dipped one basis point to 3.39% possibly on account of the note from the Bank that a rising dollar has the persistent impact of constraining inflationary pressures. The bottom line is that prevailing stronger economic activity and prospects are tipping the market towards an expectation of tighter monetary policy.

Eurodollar futures – June bonds became the lead month today as we approach delivery of March notes. The contract is trading either side of unchanged as investors see a relatively muted inflationary profile with a need to keep an ongoing watch on the situation in Europe. Eurodollar futures are not paying much attention to the overnight comments from Philadelphia Fed President Charles Plosser who said he’d rather the fOMC ditch its “extended period” terminology. The words gave a caffeine boost to the dollar earlier but as a non-voting member at the Fed, we know his hawkish words are not shared by more important voting members on the basis of recent speeches.

European short futures – Euribor futures are unchanged across the strip. On Thursday the ECB gets to air its latest views on whatever subject it chooses to. Factors important today are the state of play in EU negotiations with Greece over budgetary controls as well as the roadblocks the furor raises as the ECB attempts to step back from its emergency exit strategy.

March bunds are 10 ticks lower at 124.23 where the yield is 3.12%.Greek Prime Minister George Papandreou is scheduled to meet the German Chancellor Angela Merkel on Friday. It’s still unclear whether we will ever hear of an emergency fund or plan to support Greece even in the event that it takes each and every measure suggested by the EU Monetary Commissioner Ollie Rehn who flew to Athens at the weekend.

British interest rate futures – A good auction of gilts has the bond bulls out in force buying government debt today. The June gilt future rallied sharply after the auction to yield 4.03% with the future adding 52 ticks on the day to 114.55. Short sterling has precious little to react to and is unchanged across the curve.

Australian rate futures –The RBA indeed raised its short rate to 4% and said that average borrowing costs still remained historically low. Inflation is now likely to be consistent with its official target, although that doesn’t mean that risks are balanced, that would be a signal that rates are on hold. Given that the market is still looking for a further 1% as the economy simmers, 90-day bill futures continued to fall by about three basis points. The March 2011 maturity settled unchanged at 94.77 to imply a yield of 5.23% before the time the RBA has finished tightening. The 10-year government bond shed five basis points to 5.28% as the yield curve flattened. In a sign of robust demand for its resource exports the Australian Bureau of Agricultural and Resource Economics today forecast demand would grow by 15%to A$187 billion in the 12 months ending June 2011. The record of A$197 billion was set in the 2008/9 period also ending in June.

Japan – Yields fell one basis point at the 10-year where they stand at 1.28% and on the threshold of the lowest in many weeks. With Asian stocks remaining firm for two days in a row, it’s strange to see bonds and stocks rise together.

Andrew Wilkinson

Senior Market Analyst

ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.