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.

Greek austerity plan helps euro

Wednesday March 3, 2010

Stern spending cuts and further increases in tax levies announced today in the Greek budget provided somewhat of a reprieve to the euro in midweek trading. Improvements in British data also helped reduce the appeal of selling the unit short, while concerted regulatory efforts to track down profiteers engaging in the creation of an Armageddon-style ending for the Eurozone may also be helping reduce the value of outstanding bets against the euro.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

Euro – The euro is marginally higher against the dollar at $1.3624 with two clear catalysts this morning. The government of Greece announced in a budget plans to reduce by 5% the level of outstanding debt to GDP to 8.7% during 2010. The package amounts to 2% of GDP and involves €2.2 billion in spending cuts as part of a €4.8 billion package. The deal appears to have been received well in the markets and PM Papandreou must be hoping that the measures will help draw Athens closer to Berlin and Paris ahead of key discussions starting on Friday and lasting into the weekend.

On the revenue side the government raised taxes on sales of tobacco and alcohol while reducing spending on civil servants’ salaries. A 30% reduction in civil servants bonus payments received tri-annually is unlikely to be a treat for those losing the benefit, but will sit better with EU leaders who need such a sweetener in order to encourage them to sell the notion of a German-Franco aid package to help lower the cost of capital to Greece. For his part Mr. Papandreou warned of the growing catastrophe should the cost of Greek membership to the EU exclude his nation from the low borrowing costs provided to each other member.

U.S. Dollar – EU officials have recently accused investors of distorting the realities of the current crisis by clouding the market’s view on the perceived outcome. Betting against the euro and specifically through buying various instruments that magnify the perceived outcome of an event is being frowned upon by the authorities. Investors buying credit default swaps, for example, who pushed the price of insuring against debt default ever higher are being judged by EU officials as creators of a problem that could still lead to an undesirable outcome. The U.S. Department of Justice has also sent letters to some hedge fund attendees at a recent dinner in New York during which 23 trade types were discussed. I’m not suggesting that the sponsors conspired to “educate” the hedge funds on how to profit from the crisis, but am highlighting the extent to which the crisis attracted the construction of trade types that would benefit from a collapse of either Greece, the Eurozone or both.

The dollar remains stable on Wednesday and faces several key pieces of data over the next three sessions with employment data being the dominant theme. Recent evidence suggests an amelioration in the pace of labor market improvement with weekly initial claims last week rising uncomfortably towards the half million mark for the first time in three months. The Challenger Gray and Christmas mass layoff report is the first measure of health and it came in 77% lower than a year ago. We can’t read much into this and already know that the bulk of redundancies have already been made. The ADP employment reading showed private employers shed 20,000 jobs in February – in line with forecasts. Of course weekly initial claims are due tomorrow while the most important official non-farm payroll is due Friday. Reaction to all of these is likely to be tempered by developments in Europe. An improvement in dealings with Greece could conceivably overshadow negative U.S. numbers, which might otherwise provide a risk-aversion boost for the dollar.

British pound – The pound rose for the first time in seven sessions against the dollar and is stronger against the euro and yen. A Nationwide Building Society survey of consumer sentiment improved to a reading of 80 despite a forecast of 73, and while this is not a major calendar event, it does provide some respite from recent tepid data. Elsewhere the February service sector PMI reading at 58.4 compares to a reading of 54.5 in January and proves the fastest pace of growth within the sector for three years. The pound is trading at $1.5062 and up a cent on the dollar.

One overlooked factor that I did highlight at the time of the Prudential’s announced plan to takeover AIG’s Asian business is the likely sale of sterling that coincided with Monday’s official announcement. Today a spokesman for the company did confirm that a sterling hedge was made ahead of that announcement in relation to the $35.5 cash and stock deal. Since that time shares of the company have fallen by 20% and this fact is casting doubt on Prudential’s ability to pull off the deal.

Aussie dollar – Some vindication for Tuesday’s interest rate increase – if it is needed – came today in the shape of accelerating growth. The Australian Bureau of Statistics said that fourth quarter growth was three-times the pace of the third and registered an annualized 2.7% pace as demand from its Asian trading partners spurred exports. The Aussie unit is flat at 90.35 U.S. cents today while it appreciated to a decade high against its neighboring New Zealand where growth is returning at a slower pace.

Canadian dollar –Canadian Prime Minister Stephen Harper reveals his outline for the next year’s budget. Businesses are aware that record spending aimed at offsetting the headlong fall in to recession is ending and will be looking for additional measures to maintain the pace of growth. The Canadian dollar this morning is struggling to continue its recent move higher, but is equally showing no signs of relenting after the Bank of Canada’s upbeat economic assessment at Tuesday’s policy decision to keep interest rates unchanged. A single Canadian dollar buys 96.76 U.S. cents today and is creeping towards parity.

Japanese yen – Little movement in the yen overnight although it continues to make gains against the U.S. dollar at ¥88.63. The euro buys ¥120.88 while a pound buys ¥133.44.

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.

Housework

Tuesday March 2, 2010

Several nations have unfinished housework before investors can make further informed assumptions over future currency direction. That’s the message stemming from the world’s largest and most furiously traded market this morning. Hawkish comments from a Fed messenger boosted the dollar although are likely to cause conflicting rebuttals. The ongoing discussions to get the Greek house looking tidier as keeping euro sellers busy, while Britons are growing more alarmed at who is best cut out to do the nation’s dirty laundry after the summer election. It’s central bank meeting time for the commodity units with investors wondering whether the RBA’s raise in interest rates today concludes its housework, while Canadians are wondering whether the same process is soon to get underway in earnest.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

U.S. Dollar – I wonder whether the fact that Philadelphia Fed President Charles Plosser doesn’t get to vote on the FOMC throughout 2010 makes him more provocative than if he did vote. His comments to the Wall Street Journal carried today sound pretty hawkish and argue for a closer end to low interest rates. He says the Fed should back-off its “extended period” positioning and notes, “I don’t like that language. It ties our hands, or people believe that it ties our hands.”

The dollar surged in value against the euro to $1.3425, triggering plenty of stops at the recent $1.3450 low. However, this exercise has flushed the system of more weak longs and the euro has subsequently rebounded, unable to follow through to the downside. The euro subsequently rose to $1.3572 and now stands at $1.3554 -  more than a cent above its overnight low.

Euro – So much is already known about the woes of Athens that one has to expect at some point the market will overcome its bearish attitude along the way. Typically when markets turn, it occurs at the moment of maximum bearishness when there are no sellers left because everyone is already short. We keep witnessing the type of sharp rebound for the euro as empty pockets of resistance get burst as shorts scramble to exit.

For now the euro remains hampered by the remaining housework that has to be completed before it can recover. Over the weekend EU Monetary Commissioner Ollie Rehn laid the groundwork for further austerity measures that must be rapidly implemented “in the coming days.” Failure to do so will render meaningless Friday’s trip to Berlin where Greek Prime Minister George Papandreou will meet his German counterpart, Angela Merkel. A lack of progress with his domestic chores will dishearten Ms. Merkel who is struggling to justify a what is increasingly being seen as a handout to the people of Greece who have become permanently adjusted to living with an expensive safety net providing living standards far beyond their means.

Ms. Merkel’s discussions with Mr. Papandreou are hinged around rapid-fire progress on the domestic front. According to unnamed German lawmakers, a package of up to €25 billion awaits Greece via state-owned German lenders in the event it is needed to shore up debt issuance by Greece.

Greece faces a weakening economy and is hindered by the additional burden of rising interest rates to fund its debt. The domestic fracas is also creating stiff public opposition with another union calling for a national strike to coincide with the March 16 deadline for submitting further plans to the EU. At this point the government retains widespread public support for its austerity measures but aggressive pressure or an acceleration of demands from EU members could turn the plebiscite hostile.

The EU has spelled out to Athens that it could introduce fuel and alcohol levies as well as a sales tax and include a luxury tax on sales of expensive cars and yachts. Greece also has a so-called “14^th wage,” which provides two additional payments during the year giving workers an additional one month’s wage.

British pound – The pound has now weakened for six days straight against the dollar. Another opinion poll released on Monday showed the narrowest lead for the opposition Conservative party in two years as Britons are apparently shrinking from an austere Conservative mandate aimed at reducing public debt. The public is apparently thinking twice about who is best suited to tackle the mammoth debt burden. The pound has now rebounded from weakness to $1.4855 and so held Monday’s lowest point in 10 months at $1.4782 and currently stands at $1.4960.

Aussie dollar – The RBA officially raised its short term benchmark interest rate to 4% stating that inflation would be consistent with its target. That suggests that rates could now be on hold and as such dulled investor appetite for the currency. It initially fell in response to the news, but has later rebounded against a weaker U.S. dollar today and currently stands at 90.53 U.S. cents.

Governor Stevens also maintains that most borrowers still face lower than average lending costs at this point and also acknowledged that the economy has thus far benefitted from a firm domestic currency in the shape of weaker than otherwise inflationary pressures. Evidence that previous moves on rates is working comes today in the form of a 7% decline in building permits for January after applications to build or renovate new houses or apartments slowed.

Canadian dollar – The Bank of Canada left interest rates unchanged at 0.25% this morning as it announced its monetary policy decision. However, there is growing speculation that Governor Carney might begin to sound off about prospects for raising rates later during 2010. The core rate of inflation rose last month to the Bank’s 2% target, although the headline rate was a fraction more subdued at 1.9%. But fourth quarter annualized growth data revealed yesterday of 5% spanked the daylights out of an official 3.3% projection. The Canadian dollar surged after the BoC described recent growth as “vigorous” sending the dollar to 96.93 U.S. cents.

Japanese yen – Buoyant global stock markets continue to contain investor appetite for the yen, which is weaker at ¥89.14 against the dollar. The euro also strengthened back above ¥121.00.

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.

Originally Published Here

Toward the end of last year, many market followers were speculating on a Fed hike as early as the first half of 2010. Global stock markets had experienced explosive bounces, commodity prices had surged from the crisis lows, and risk spreads and market volatility had all subsided.

In short, markets were pricing in a very optimistic outlook for global economic recovery — a return to normalcy.

But just two short months into 2010, the exuberance about recovery has deflated. As I’ve explained in many of my Money and Markets columns, the world is still saddled with problems and vulnerable to lurking threats …

In the U.S., unemployment is sustaining high levels, the housing market continues to weigh on consumer balance sheets and confidence has again taken a dive.

There is more uncertainty, which is likely to impact the prospects for global growth. People are waking up to what’s likely a long road to recovery, given the damage from, what Alan Greenspan calls, “the worst financial crisis ever.”

And for now, the global financial markets are taking cues from three key themes …

Theme #1:
Sovereign Debt Problems

Fiscal problems in Greece are mushrooming into a global, sovereign debt crisis.

The saga surrounding Greece’s finances has created tremors in the European monetary union. And the speculative pressures on countries surrounding their fiscal challenges will likely find bigger targets in the coming months, namely the UK, Japan and the U.S.

The impact of this theme on global growth prospects: Negative.

Theme #2:
China Tightening Credit

The bubble alarm for Chinese authorities was the massive surge of new loans in the first half of January. New bank loans last month approached levels of last year, when liquidity pumping was in emergency mode. Now China is tightening up bank reserve ratios and curtailing easy money programs, fearing a bubble burst of its own.

The impact of this theme on global growth prospects: Negative.

Theme #3:
Fed’s Exit Strategy

The Fed’s move in the discount rate last week was the first active step it has taken toward reversing its emergency policies. Up to that point, the Fed had only guided (or allowed) the programs in place to either expire or mature — indeed, passive steps. And the timing was a surprise …

The Fed’s bumping up the discount rate was a growth positive sign.

The move came only eight days after the text of a Bernanke speech that said the discount rate would start moving higher “before long.”

To act so soon after making that comment will create loads of excitement and speculation whenever the Fed chooses to drop the magic words — “extended period” — from its guidance on keeping the benchmark Fed Funds rate at current levels.

The impact of this theme on global growth prospects: Positive.

Overall …

A Sentiment Shift
Has Taken Place

These three themes are keeping the dollar on solid footing and keeping pressure on European currencies and those currencies that are dependent upon sustained growth and demand from China (i.e. the Australian dollar, the New Zealand dollar, Brazilian real).

With all of that said, there is clearly a sentiment shift that has taken place when it comes to the recovery prospects for global economies.

Now the growing consensus is shifting away from the theories of a V-shaped economic recovery and toward the alternative scenarios … most visibly, a sovereign debt crisis.

But while a sovereign debt crisis is already underway and will likely continue to spread, I don’t think it’s the biggest threat to the global economy.

Rather, the biggest threat will likely come from growing trade tensions between China and the rest of the world.

That’s because …

China’s Currency Is
Enemy #1 to Global Recovery

Over the last 14 years, China’s economy has grown a whopping eight-fold, to $4.9 trillion, and has quickly ascended to become the world’s third-largest economy.

During the same period, the U.S. economy has only doubled in size.

As far as currencies are concerned, the dramatic outperformance of the Chinese economy relative to the U.S. economy would normally be reflected in a much stronger Chinese currency.

But, of course, China controls the value of its currency. They allowed it to strengthen only 18 percent during those 14 years — a mere drop in the bucket.

And that’s where tensions are threatening to boil over. It’s not just with its key export market, the United States, but equally as tumultuous with its Asian neighbors.

Just how out of line is China’s currency?

Let’s take a look …

In the table below, you can see on a purchasing-power parity basis, the Yuan (China’s currency) is 40 percent to 50 percent too cheap relative to the U.S. dollar.

Source: IMF

You can also see how China’s export-centric neighbors are feeling the pain of China’s artificially cheap currency, too. For example, based strictly on currency values, it would cost 37 percent more to import identical goods from South Korea than it would from China.

Threat of Protectionism

In my September 19 column, Protectionism an Enemy of Recovery, I wrote extensively about the threats that protectionism represents to the global economy.

And it’s widely believed that the world economy cannot find a path of sustainable growth until those key countries with lopsided trade become more balanced.

Consequently, the G-20 has made Chinese currency policy its number one agenda, under the code word “rebalancing.”

China’s unwillingness to let the Yuan strengthen could hinder global recovery.

As it becomes increasingly evident that China will not play ball on allowing its currency to appreciate to a fair value, expect the geopolitical tensions to rise and expect to see two forms of protectionism follow: Trade tariffs and currency devaluations against major currencies, to which the value of the Yuan is primarily linked.

And while a global economic recovery is already beginning to look like a longer road than many have expected, an outbreak of protectionism would likely derail recovery all together.

That’s why I continue to think that safety and capital preservation will re-emerge as the primary driver of capital flows around the world towards the U.S. dollar.

Regards,

Bryan