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In This Issue..
* Housing starts suffer...
* Stressful times in Europe...
* Aussie dollar moves higher...
* Canada to raise rates...
And Now... Today's Pfennig!
US housing starts suffer.
The news which drove the markets yesterday was no big surprise for the desk. Homebuilder confidence here in the US dropped to the lowest level since April 2009 as the homebuyer credits expired. Today we will get additional data on the housing market which is expected to show US housing starts continue to fall while foreclosures climb. While prices steadied over the past couple of months there is still a backlog of homes facing foreclosure which will equate to a very slow recovery for the housing markets. And in the US, as the housing goes so does the economy; so the data is not a good sign for our nascent recovery.
Chuck had a long trip across the country yesterday, but went ahead and sent me a bit of information he wanted me to share with all of you Pfennig readers:
"Did you see that Moodys decided to downgrade Ireland's credit rating? Again... These guys a day late and dollar short! Wouldn't it have been nice to "know" that Ireland was "going to have problems" before they existed, so that if you had money invested there you could get it out?
When I arrived at the Hotel Vancouver for the conference, I immediately went to the bar, where my long time friend and bartender here, Kevin, greeted me, and I had the "carvery", which is what I have every year when I get here... It's great!
Any way... I was sitting at the bar with my glass of water and the "carvery", watching the TV behind the bar, when the news hit that the National Assoc of Home Builders confidence turned very pessimistic in July, even more than what was forecast... And guess what's causing all the bad vibes? The expiration of the government tax credit! I told you didn't I? I said that as soon as the tax credit expired home sales would circle the bowl... And next we'll begin to see home prices slide again...
Hey! I'm not wishing for this stuff folks! It's just how someone that doesn't believe the Govt's lies, or the Govt's "good intentions without realizing the unintended consequences of such good intentions"...
So... Fundamentally... News like that should send the dollar reeling... But no fundamentals were traded today folks... Look, a news story like this in the U.S. far outweighs the cut in Ireland's credit rating story...
Are we becoming "Comfortably Numb"? Hello, Is there anybody in there? Just nod if you can hear me. Is there anyone home... (one of Pink Floyd's all-time great songs!)
I mean, just last week, it was reported that Illinois had surpassed California with their debt level... Was that news here in the U.S.? Maybe on Chuck's radio station that he gets from the planet Mars!
Ok... Enough of all that... Here's Chris!"
European investors are selling the euro a bit this morning as we head into the NY open. The big story in Europe over the past few days has been the European bank stress-test results which are scheduled to be released on Friday. As with any big data release, predictions from traders have been all over the board. Yesterday the 'feel' of the markets was that the stress tests would show strength in the region's banking sector, and the euro moved higher. But today there have been rumors that a few major banks may actually fail the tests, and the euro has fallen back below $1.29 in a sharp move this morning.
But should anyone really be relying on these stress tests? After all, does anyone really think they are any more reliable than the stress tests which were performed on the US banks? This is simply a confidence game being played out by the banking regulators. After all, the banks are only as strong as their depositors confidence in them.
I believe the risk has moved against the euro, and the announcement of the stress tests could cause the euro to sell off. After all, if any of the 91 banks which were put through the stress tests fails, we would see confidence in the banking sector shaken. And if all of the banks pass the tests, investors won't believe the tests were tough enough. So the recent spike in the euro will probably be the short term high.
But in the longer term, the data indicates the euro should outperform the US$. A majority of the reports out of Europe have surprised on the upside, as the European economy has proven to be much more resilient than many economists thought. The sell-off in the euro has provided a good boost to exports in Germany and the Scandinavian countries. And with the recent auctions of government debt by both Spain and Greece are further proof investors have begun to put the European debt crisis behind them. According to one of the larger German banks, Commerzbank AG, the euro is likely to run up to $1.35 over the next three months. Currency technical analysts at Commerzbank are looking at what is called a 'double Fibonacci retracement' which would allow a rally to reach $1.3510 after pausing in the near term at $1.30.
The pound sterling fell a bit yesterday as Britian's June budget deficit narrowed less than estimated. Data released this morning by the Bank of England showed mortgage approvals fell in June as consumer confidence weakened. The soft economic data should keep the BOE from raising rates in the near term which will keep a lid on the value of the pound.
The Aussie dollar was down a bit in yesterday's trading, but rallied back strong overnight and has continued to move higher in European trading. The Australian dollar benefitted from better sentiment regarding the Chinese economy. China's stock market ticked up after the Chinese commerce ministry said domestic consumption will continue to rise.
This is the story both Chuck and I have been taking to the investment seminars which we are invited to speak at. While the Chinese economy has been built on exports, an expanding middle class is slowly pushing the world's fastest growing economy more toward consumption. A lot more needs to be done before trade is balanced in China, but the gradual building of wealth by the huge Chinese base of workers has begun to nudge China in the right direction. While naysayers have been calling for a dramatic fall in the Chinese economy, we believe they will continue to be the world's growth engine, posting near double digit growth over the next 3 - 5 years. And much of this growth will be due to their own internal demand, not just exports to Europe and the US.
So the positive news out of China has pushed the Aussie dollar higher. China is Australia's largest trading partner, and New Zealand's second biggest export market; so the positive news was well received by currency traders. Both the Aussie dollar and New Zealand's kiwi have been held down so far this year, so they may be overdue for a nice rally.
The Bank of Canada will be announcing a rate announcement later this morning, and an increase is what everyone is expecting. In fact, the markets have priced in another 2 more increases through the end of the year as the Canadian economy returns to growth. The risk here is that they decide to pause a bit if/when the US economy sputters later in the year. Governor Mark Carney may get worried about getting too far ahead of the US with regard to interest rates, and could look to slow down the pace on increases. There is typically a good press release following the rate announcement, so I will bring you more on this tomorrow.
I had a reader ask me to comment on the metals, so here you go. Both gold and silver were down a bit overnight, and are down 6% and 8.5% respectively over the past month. Volatility in the markets has calmed a bit, and both Gold and Silver seem to be treading water waiting for what I think will be another break out higher. The US economic data will probably disappoint, causing the global economic recovery to come back into question and forcing investors to take a harder look at the 'hard assets' of gold and silver.
To recap.. Housing continues to be a drag on the US economy, Europeans prepare for the release of the stress tests, the Aussie dollar rebounds on positive news regarding the Chinese economy, and the BOC is expected to raise rates this morning.
Currencies today 7/20/10: American Style: A$ .8759, kiwi .7123, C$ .9496, euro 1.2922, sterling 1.5179, Swiss .9485, ... European Style: rand 7.6271, krone 6.3027, SEK 7.3629, forint 224.92, zloty 3.200, koruna 19.637, RUB 30.5075, yen 86.80, sing 1.3749, HKD 7.7756, INR 47.3438, China 6.7783, pesos 12.909, BRL 1.7926, dollar index 82.602, Oil $76.70, 10-year 2.94%, Silver $17.54, and Gold... $1,178.05
That's it for today...Had some pretty massive thunderstorms roll through the area yesterday afternoon. Our new offices are on the 8th floor, and have solid glass walls giving us a tremendous view of the storms; very cool!! The Big Boss Frank Trotter got back from his trip over to England and Ireland and is back in the saddle. We are getting some visitors from the headquarters today, so better get this out the door and clean up my desk a bit. Hope everyone has a Tremendous Tuesday!!
Chris Gaffney, CFA
EverBank World Markets
07-20-2010 9:36 AM