Action Economics morning alert

7:34 November 25, 2009, EDT.
(Canadian Press)

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(Action Economics) - 06:04 EST Oil Action: Oil prices are higher as a weaker USD is boosting the appeal of oil as a hedge against inflation and as stock markets benefit from renewed growth confidence. A Bloomberg survey predicts crude-oil inventories grew by 1.5 m barrels last week. Yesterday, the American Petroleum Institute reported that distillate fuels, such as heating oil and diesel fell by 2.36m barrels last week. As of 10:52GMT the January Nymex future was up 21 cents per barrel at USD 76.23, after trading in a range between USD 75.78 to USD 76.60.

05:22 EST Germany sells EUR 4.105 bln of 5-year 2014 Bobls with a coupon of 2.5% at an average price of 110.680, bringing the average yield to 2.350%. The lowest price was 100.670 and total bids amounted to EUR 7.171 bln, bringing the bid-to-cover ratio to 1.7, slightly less than the 1.8 in the last 5-year auction. The Bundesbank held back EUR 0.895 bln for market smoothing purposes, bringing the total top up amount to EUR 5 bln and the overall volume of the issue to EUR 17 bln.

05:14 EST Gold Action: Gold rallied to new record highs of $1180.00 after a broadly softer dollar tone encouraged fresh momentum fund demand. Price action was choppy in Europe after early attempts to break $1180.00 were rebuffed by scrap selling and good fund profit take orders ahead of $1180.00. However, the backdrop of broad based dollar selling following the FOMC minutes encouraged ongoing demand on dips, along with reports reports that India is open to buying more gold from the IMF. The backdrop of bullish fundamentals and a supportive technical picture raises the risk of a test of $1200 level, which is reportedly where more outstanding option positions are noted.

04:39 EST U.K. Q3 GDP was revised up to -0.3% quarter over quarter and -5.1% year over year as expected, from -0.4% and -5.2% in the preliminary release. The main reason for the upward revision to the headline reading was an upward revision of services sector output, to -0.1% quarter over quarter from -0.2%, though the contraction of the sector continues to stand in contrast to survey data which suggested that output grew last quarters. (In particular, the distribution, hotels and catering sector saw a large upward revision, now estimated to have expanded by 0.3% quarter over quarter in Q3, versus -1.0% in the first Q3 release.) Total industrial production fell 0.8% quarter over quarter, revised down from -0.7% and in line with September IP data. Meanwhile, the demand side of the economy saw consumer spending flat quarter over quarter after declining 0.6% quarter over quarter in Q2. Exports grew by 0.5% quarter over quarter but imports rose by a far stronger 1.3% quarter over quarter, with net exports not contributing to growth in Q3 either. Gross fixed capital formation declined by 0.3% quarter over quarter, while government spending rose by 0.2% quarter over quarter. Gilt futures have climbed on the release, and the 10-year December contract is now up 19 ticks at 118.89, versus 118.68 just prior to the release.

04:06 EST Italian September retail sales dropped 0.1% month opver month, and 1.6% year over year, after rising 0.1% month opver month in the previous month. September data meant sales dropped 0.5% quarter over quarter in Q3, which points to a negative contribution from private consumption to overall GDP growth in Q3. As in Germany, rising unemployment is weighing on confidence and consumption trends and while overall consumer confidence improved in November, to 112.8 from 111.7, the personal economic climate index dropped, which highlights remaining downside risks.

02:37 EST ECB's Trichet said central bank has been able to prevent deflation. Trichet told Dutch newspaper Het Financieele Dagblad, that the ECB was "able to prevent the risk of deflation from becoming reality thanks to a solid anchoring of inflation expectatoins". He added that at the same time the ECB has not affected its "ability to maintain price stability in the medium term". Trichet stressed that the global financial system need to be improved as it turned out to be "far too fragile."

02:10 EST German December GfK consumer confidence declined to 3.7 from 4.0 in November. This was weaker than the Bloomberg median of 4.0 and the GfK said that the decline was "primarily a result of growing public fears of rising unemployment". The labour market has been surprisingly resilient so far, but a marked rise is expected for the coming months. Q3 GDP data already saw consumption falling again and with confidence coming down, subdued consumption trends will continue to weigh on overall growth. The breakdown, which is only available until November, showed the reading for price expectations rising sharply, while the overall economic climate index as well as personal income expectations declined. The reading for the willingness to buy still nudged higher in November, but the details for December are likely to show a different picture.

02:03 EST Equity Action: Asian shares rallied, extending the recovery that was seen in the latter part of the Wall Street session (which was seen after the Fed upgraded revised upwards its 2010 growth expectation and the FOMC minutes showed that officials were increasingly confident about the durability of economic recovery). The MSCI Asia Pacific index was up 0.8%, making a one-week high. Helping fuel the move were remarks from RBA Battelino, who described Australia's commodity linked economy as having entered a "new upswing" and that it was reasonable to expect growth to extend for a "few more years yet." There was also IPO news, with China Pacific Insurance getting the go-ahead to raise $3.4 bln in Hong Kong while CapitaMalls Asia shares surged over 8% on their Singapore debut (Reuters).

01:33 EST Japan's corporate services price index fell 2.2% in October from a year earlier, the Bank of Japan said on Wednesdsay, but the pace of falls narrowed for the second straight month. The index, which tracks business-to-business services, rose 0.1% from September and was the first rise in four months. The data is encouraging, but the basic picture in Japan is still one of price softness and shows that Japan is still struggling to expect from deflation, which has been a bone-of-contention for policy makers. These number reinforce expectations that the BoJ will stay on hold indefinitely and may also up the political pressure as Japan looks to end its unconventional policy steps at the end of the fiscal year in March 2010.

01:24 EST Japan's trade surplus came in at Y807.1 bln, which was much higher than expectations for Y452.2 bln. The break down showed a 23.2% fall in October exports and imports fell 35.6%. The fall in exports was at its slowest pace in a year and helped to boost its surplus, which will reinforce expectations that the economy is recovering, although economic stimulus packages around the world have been a strong influence. Exports are likely to slow in 2010 as the impact of stimulus fades and this will be a worry for Japanese policy makers as it looks to navigate its way out of recession.

00:46 EST Oil Action: NYMEX crude traded close to $76 bbl after it fell 2% on Tuesday after a sharp downward revision in U.S. GDP data. API data was also a big disappointment and came in much stronger than expected, with crude stocks building 3.3 million in the week to November 20, which was compared to forecasts for 1.2 million. The market is on tenterhooks ahead of the EIA data due later today and likely to maintain a bearish tone intra-day.

00:38 EST Gold Action: Gold rallied to new record highs of $1177.90. The move higher was boosted by fund names and good interest from Tocom buyers after the market responded to reports that India is open to buying more gold from the IMF. The RBI may buy the IMF's remaining hoard of 201.3 tonnes on acceptable terms, which are now under negotiation. The next level of resistance is at $1180 and may be protected by scrap selling and light profit take orders ahead of Thursday's Thanksgiving holiday. However, the backdrop of bullish fundamentals and a supportive technical picture raises the risk of a test of $1200 level, which is reportedly where more outstanding option positions are noted. Elsewhere, the Vietnam central bank granted quotas to import 10 tonnes of gold after the 6.8 tonnes it imported in recent weeks.

18:53 EST RBA Deputy Governor Battellino said Australian home prices relative to income are high historically and versus other countries due to the fall in inflation over the last 20 years, speaking on Housing and the Economy from Melbourne.

The fall in inflation has allowed lower interest rates, prompting households to take out bigger home loans that are then reflected in rising prices. He said that "most people agree" that the ratio of house prices to incomes in Australia is higher than in the U.S. But he concludes that the "experience of the last few years suggests that the Australian household sector as a whole appears to have the financial capacity to sustain a relatively high ratio of housing prices to income." This would seem to point to a lack of worry at the RBA over the risk of a housing bubble forming. On the economy, he was consistent with recent RBA-speak, observing that the global economy is growing again and that outperformance by Asian economies is positive for Australia.

FX Overnight

The dollar came under heavy selling pressure in Europe as intra-day accounts and momentum funds forced the index down to new trend lows of 74.633. The market was encouraged by broad based gains across equity markets, but also took its lead after the Fed said the dollar decline was orderly in Tuesday's FOMC minutes. USD-JPY stole the headlines after it broke 88.00, which saw Japanese hedgers force a follow through move on 87.57 before any significant support emerged. Elsewhere, Cable consolidated around 1.6700 after the U.K. GDP was revised up to -0.3% quarter over quarter. Market interest for the pound peaked early after speculation of a big upward revision and the official release fueled light position squaring, which was generally absorbed by Asian sovereigns. The commodity bloc currencies benefited from a new record high for gold around $1180.00, which boosted AUD-USD to 0.9292, forced USD-CAD below 1.0500 and lifted NZD-USD above 0.7300.

USD-JPY extended overnight losses to trade at 87.57 lows. JPY rallied sharply after large USD-JPY barriers gave way at 88.00. Heavy interest was noted from Japanese exporters and real money names, which forced a move down to 87.57 lows. There was temporary support around 87.70, but exporters panicked after their deep in-the-money JPY calls were knocked out at 88.00. Larger size positions are noted at 87.50 and 87.10 and yen buying interest will accelerate if these levels give way. There was market speculation that a quasi-official bid held the downside, along with real money demand for EUR-JPY at its lows. Howver, the JPY crosses are well offered, with EUR-JPY consolidating just under 132.00 after breaking support at 131.70-80 to hit 131.53 lows, while AUD-JPY to reverted to session lows around 81.25. GBP-JPY traded in to 146.00, but rebounded to 146.80 on persistent sterling support via Cable and EUR-GBP. Note, there was ongoing speculation in Asia that equity related flows would benefit JPY ahead of the month end and this should hamper any recovery across the JPY components.

EUR-USD made an early push on 1.5020-25 offers and extended to session highs of 1.5045 as the broad uptick in risk fueled momentum account demand. There was talk that an Asian account and a supranational name layered offers between 1.5020 and 1.5050 due to heavy strike congestion. Plain vanilla interest is due to roll off at 1.4950, 1.4980, 1.5000, 1.5020, and 1.5050-60, which may fuel aggressive shorts to sell in to 1.5050, with a tight stop due to previous failures to sustain 1.5000. However, the Fed's comment that the dollar decline is orderly should leave impetus with the topside as intra-day accounts absorb gamma related selling. There is speculation that the Double-No-Touch positions between 1.4800 and 1.5100 have been rolled over to November 30 and could see protective sellers higher up. Given the heavy two way flows range bound trade looks likely, but with the market biased to higher levels. Large stop losses have been established above 1.5070 and 1.5110.

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Elsewhere, the market overlooked eurozone data releases, which were generally few and far between, with only German Gfk on the agenda and it slipped to 3.7 in December from 4.0 previously.

GBP longs pared back positions after U.K. Q3 GDP met expectations after an upward revision to -0.3% quarter over quarter. Early on in the session a U.S. name was a good buyer and touted speculation of a much larger than expected revision to -0.1% quarter over quarter. However, this looked like a bid to force a rally and Cable successfully overcame 1.6700 offers and traded at 1.6727 highs, but further gains were limited for the remainder of the session. A softer dollar backdrop combined with Asia and Middle Eastern sterling demand was a supportive influence and raised talk of equity flows related to the Lloyds rights issue. However, market insiders claim that these flows are likely to be neutral given that U.K. investors are the main participants. Cable is changing hands around 1.6700 and EUR-GBP briefly moved back above 0.9000 before succumbing to good European account offers. The broad equity market bid is likely to support sterling in the near-term, with the improving risk profile expected to temper any adjustment in positions. Sovereign-backed bids in Cable at 1.6770 and 1.6750 provided support and EUR-GBP has struggled since two Swiss names capped its rise at 0.9057 on Tuesday amid corporate related orders.

CHF firmed up after the dollar reverted to the downside after the Fed looked as if it gave the greenlight for more dollar selling as the FOMC minutes described the decline as orderly. USD-CHF moved under 1.0100 on Tuesday and extended to 1.0026 lows as momentum accounts moved in following an upbeat Asian equity market performance and gains across Europe. EUR-CHF was pressurised as a result and tested 1.5080-90 bids. Tuesday's comments from SNB's Roth also provided some impetus for swissy longs after he said the SNB did not have a specific forex target, although he also maintained that the Bank is weighing up the right moment for a policy change. The combination of SNB/Fed remarks could see the SNB's resolve tested today, with USD-CHF eyeing 1.0025-30 bids and EUR-CHF closing in on the 1.5080 support. Large stops are building in the cross at 1.5050, 1.5020, 1.4980 and 1.4950, with a close below 1.0030 opening up the downside to parity.

CAD gains were boosted by the strong bid in gold, which traded at new record highs of $1180.00. USD-CAD pulled back from 1.0586 highs and triggered stops under 1.0500. The Russian central bank said that it was preparing to invest reserves in Canadian dollars, which added to the bid tone and a low of 1.0479 was noted.

Fixed Income Overnight

European Morning Session

European debt futures are higher, having reversed earlier losses. Gilts rose on the U.K. GDP release pulling Bunds with them, but Gilts are still outperforming significantly. The second GDP release saw an upward revision to -0.3% quarter over quarter from -0.4% reported initially, though market rumours ahead of the release of an upward revision to -0.1% sparked the Gilts relief rally. Meanwhile, stock markets are higher on the day.

As of 10:56GMT the December 10-year Bund future is up 6 ticks at 122.78, while the corresponding Gilt future is up 35 ticks at 119.05. In the cash market the 10-year Bund yield is flat at 3.25% and the 10-year Gilt future is down 3 bp at 3.62%. By comparison the DAX is up 0.55% and the FTSE 100 is up 0.60% as of 10:42GMT.

Today's calendar has revised U.K. Q3 GDP, which is expected to be revised up to -0.3% quarter over quarter and -5.1% year over year(medians same), from-0.4% quarter over quarter and -5.2% year over year reported previously. In the eurozone, German December GfK consumer confidence, slipped to 3.7 (median 4.0) from 4.0. Italy released retail sales and consumer confidence. Still to come, ECBspeak from Mersch.