Overnight and weekly wrap up

Saturday, 9 April 2011 11:53


Overnight in the US treasuries and stocks dropped lower as inflation expectations surged and the markets continue to believe the Fed will lag behind other central banks in raising rates. As of this writing the US government has finally reached an agreement and agreed to cuts totally almost 38 billion dollars, the largest cuts in US history.

The dollar index plunged 0.8% to to the lowest level since Dec 2009, closing the week at 74.858. Commodities surged higher and the Thomson Reuters/Jefferies CRB Index of commodities climbed for a seventh straight day to reach the highest level since Sept 2008. The 10-year Treasury note yield increased 4bps to 3.59% as traders bet on higher inflation.

The effective federal funds rate dropped to as much as 0.16 percentage points below the rate the central bank pays banks on excess reserves, which is equal to the top of the Fed’s zero to 0.25% target range for overnight loans between banks. In US equity markets about 5 stocks retreated for every 2 that rose, markets were only lightly down the market was still relatively upbeat ahead of earnings season next week.

Portugal’s bid for emergency aid package, estimated at 80bn euros ($115bn), opens what European leaders say will be the final chapter in the debt crisis that erupted in Greece last year, spread to Ireland and triggered speculation that the 17-nation euro area might not survive in its current form. In Euroland German exports rose 2.7% in Feb from the previous month, when they dropped 1%; expectations had only be looking for 2% growth.

In the UK producer prices increased 0.9% in March from February, when they gained 0.5%, and higher than the 0.6% consensus was expecting. So yet more inflationary concerns, however unlike Germany the UK is experiencing a slowing in its recovery, especially manufacturing as recent factory order data showed. And unlike the ECB, the BoE is now behind the curve on the international rate front as is the US and this is an indicator to why economists are now talking up the growing likelihood of stagflation.

Ending a very quiet week on the economy front we only had one economic data point from the US last night with Feb Wholesale Inventories coming in as expected, climbing 1%, the same as Jan but for the first time since the recession officially ended sales decreased. Sales dropped 0.8%, the first fall since June 2009, after a 3.3% gain that was the biggest in 18 years.

S&P500 fell 0.4% to 1,328.17, the Dow dropped 0.2% to 12,380.05 and the Nasdaq retreated 0.6% to 2,780.42.

The ECB last made a policy error by raising rates prematurely in early July 2008. Interestingly, that marked the peak for the euro near the 1.60 level. A month later it was trading at 1.55 and a month after that it was sitting at 1.45. Higher policy rates and a firm currency may suit Germany just fine, but Germany is not the whole eurozone. The fact that the Spanish stock market is up 14% year-to-date for an economy that has no growth in either its economy, employment or credit, and a jobless rate of 21% is of concern.

The net speculative long position on the MERC in New York in the euro has risen to a four year high of 61,211 contracts. This is double the level prevailing when the ECB hiked in early July 2008, and those longs swung to a net short position of 8,411 contracts a month later.

Brent oil for May delivery climbed as much as 3.4% to $126.87 a barrel, the highest since Aug 2008, as skepticism that Libyan output will rebound when fighting ends also boosted prices. Tin jumped to an all-time high of $33,100 a metric ton in London and copper advanced 1.9% to $4.5015 a pound in New York. Heating oil, nickel, wheat and silver climbed more than 2.8% to lead gains in the CRB index.

In Asian markets you had the Chinese rate hike which was unexpected and shows that the Chinese governments is concerned with overheating. China moved to increase interest rates for the fourth time since October to calm inflation. This was unexpected yet had little impact on the markets. Most Asian exchanges were up on the week.

In Australia the ongoing coomdities boom and strong internal growth figures has pushed the Australian $ to recond highs against the US $ since the currency was first floated in 1983. The RBA did not make any moves on the benchmark rates yet the possibility of moves in the next months are high.