Good day, and welcome to another wonderful Wednesday. As Chuck mentioned yesterday, the call to the bullpen has been made, so Chris and I will split shifts over the next couple of days. When I got home last night, I sat on my back porch to collect some thoughts and not only noticed all of the yardwork that needed to be done, but also how the grass and plants really greened up after a day of rain on Monday. I guess a day of reprieve from droughtlike conditions is what you would call it.
The markets had a day of reprieve yesterday, as the focus had shifted away from Europe, at least for now, and reverted back across the pond to the U.S. As we get closer to the weekend and the Greek election, I wouldn’t be surprised to see the ball hit back into Europe’s court, but thoughts of more stimulus measures from the Fed was the soup du jour. The risk-on investors took control of the markets as the day progressed, so both equities and currencies had a solid day when it was all said and done.
Most of the currencies yesterday did begin in positive territory, and when Chuck last wrote, the euro (EUR) was trading just below 1.25. Although it did finish the day with a positive return, it was touch-and-go for a while, as Fitch cut the long-term issuer default ratings on quite a few Spanish banks. The ratings agency went on to say Spain will significantly miss its budget deficit targets, so as you can guess, Spanish bond yields rose to the highest level since the euro was introduced. After that bit of news, the euro did take it on the chin and fell as low as 1.2443.
As the euro was wallowing around, there were several things that I wanted to point out. First and foremost, both gold and silver shot up quite a bit. In fact, gold rose about $20 from where it began the morning, and silver added over $0.30. Chuck mentioned the price action in metals yesterday, so these types of moves shouldn’t be a surprise, but more importantly, they did rise on fundamental reasons, namely that of fiscal safety. In other words, gold isn’t a fiat currency, so its move upward after the Spanish bailout/downgrades should be considered a normal reaction.
Another thing I wanted to point out was the fact that most currencies were able to avoid getting caught up in a broad sell-off, so that was another feather in the cap for fundamental trading. As we moved into midmorning, an interview with the Chicago Fed president set the markets in motion for the rest of the day. During his interview, he expressed support for additional stimulus. Even though he doesn’t get a vote in the FOMC (Federal Open Market Committee), investors ran with it, and before long, rumors of additional measures from the Fed were rampant in the markets.
A few sound bites from his interview included extending Operation Twist after it expires this month, buying additional mortgage-backed securities and suggesting more asset purchases. Keep in mind that he’s one of the biggest supporters of additional easing, but those comments sound like that of desperation and disregard to the balance sheet. While the stock market found those views intriguing, holders of the U.S. dollar didn’t find the same solace. I mention fundamentals again because the dollar weakened for the rest of the day, as it should when that stuff is being discussed.
I’ll dig deeper into currencies later, but I wanted to touch on the economic reports before I forget. It was a fairly quiet day (datawise) around the world, but we did have a couple here in the U.S. A gauge of small-business confidence did fall slightly, but remained near a 14-month high in May. If we compare that sentiment with the May employment numbers, it doesn’t look like too many were confident enough to hire new employees. While this wouldn’t be considered one of the major reports, it still had weaker overtones for future sales and business conditions.
We also saw the May report of import prices fall by the most in almost two years, as oil and other commodities fell throughout the month. This report is the first in a string of three inflation reports that are due this week — we’ll see producer prices today and then consumer prices tomorrow, and both are expected to show the same price moderation.
While prices at the gas pump have decreased, I really haven’t noticed the prices of other everyday items fall that would suggest those expectations. I agree with Chuck in that you should take those reports for what you will. The lower prices from yesterday just fed the fire for additional stimulus, since it theoretically gives the Fed more room to act, if it wanted.
The other report from yesterday included the May budget deficit, which nobody seems to care about except for us. I was hard-pressed to find many headlines on the major news networks, but the deficit did balloon as expected, to just under $125 billion. It’s a sad state of affairs when people who should know better just shrug off this type of report as just numbers on a piece of paper. Other than that, a secondary measure of economic optimism fell more than expected, so just another disappointing result.
There isn’t much in the data cupboard today, except for the wholesale side of inflation, which I mentioned earlier, and retail sales. Given the drop in employment, I don’t see where the improvement in retail sales during the first quarter would have legs, and if we go back to May, stocks took a hit, so that wouldn’t bode well, either. With that said, the overall number is expected to fall for the first time this year. Regardless of the result, jobs are still hard to come by and job security remains shaky, so it’s still a lot to ask from the general consumer to keep spending.
As far as data reports, I’ll finish it off by saying that we’ll see a bunch of individual reports tomorrow, but they can be broken down into a few categories. We’ll get the last piece of inflation through CPI, the first-quarter revision of the current account deficit, and finally the weekly jobs numbers. With not much in the way of substantial reports, look for continued European concerns or more talk of Fed stimulus to take the markets in one direction or the other.
Hopping back on the currency train, the dollar did fall against most currencies after more QE — or whatever you want to call it — was being passed around like a hot potato. When I took a look at the currency screens before I left the office last night, the higher yielders dominated the top of the charts.
Both Australian (AUD) and New Zealand dollars (NZD) were sitting on 1% gains, while the peso (MXN), rand (ZAR) and Swedish krona (SEK) rounded out the top five with around 0.80% gains. Chuck talked about the Aussie and kiwi gains yesterday, so I’ll leave them alone for now, but we didn’t have much driving the individual currencies except for the word of the day, which was stimulus.
One of the few reports we did see came from Norway, as the May underlying inflation report rose more than expected, to 1.4%, from the previous reading of 0.70%. The krone (NOK) did finish the day up over 0.50% and was able to free itself from the claws of the euro; however, the events in Europe will most likely keep it on a short leash for now. The higher inflation report put thoughts of any rate cuts on the back burner, so the currency was at least able to stretch its legs.
The other currency often thrown into the same bucket as the euro, which is the Swedish krona, did even better, as one of their policymakers tried to put some distance between them and the European debt problems. They went on to say Sweden would be the least-impacted country in Europe if Greece did exit the euro, since direct exposure is negligible.
Obviously, indirect exposure is another story, but investors seemed to eat it up, as the currency put in a solid showing. The central bank said back in April that it planned to keep interest rates on hold for the next year as inflation, including the May report, remains well below the 2% target.
The rise in the peso and rand can be directly tied to the risk on mentality in the markets yesterday, so nothing out of the ordinary here. Both currencies are volatile to begin with, but look for the bumpy rides to continue. While I’m on the more-volatile currencies, the Brazilian real (BRL) was left in the dust, as it merely broke even on the day. You would generally expect the real to be near the top when risk aversion subsides, but government talk of more rate cuts kept it under wraps.
The last currency that I’ll mention today is the Canadian dollar (CAD), which finished in the middle of the pack and was trading over its high of the day as I left last night. The loonie hasn’t seen as much volatility that many of the other currencies experienced over the past several months, and can be attributed in large part to the central bank not totally ruling out a rate hike by year-end. Many analysts have all but discounted that thought, but it’s one of the few central banks that still have a hawkish tone.
We’re going to see Canadian retail sales, CPI numbers and April GDP pretty soon, so that may provide more insight, but I still think the government will continue sitting on their hands, especially with jobs and other reports in the U.S. showing moderation. Government officials are still calling for an elimination of the budget deficit by 2015, so the list of nations that haven’t mortgaged the future and still maintain a AAA rating is getting hard to find.
With all of the stimulus talk from yesterday, I would be remiss to not mention gold and silver again, which finished up 1% and 1.5%, respectively. The metals gained on two fronts: that of safe-haven buying spurred by the events in Spain, which I spoke of earlier and then as a hedge against further weakness in the U.S. dollar. If we sprinkle in some buying below $1,600, then we get what we saw yesterday, but it’s a new day, so who knows what we’ll have in store.
As I came in this morning, the dollar weakness from yesterday has carried over as both the euro and Swiss franc (CHF) are in the lead so far. It looks as though an article in the Financial Times Deutschland reported that European leaders might consider relaxing the Greek austerity program, so the market has a positive attitude to start the day, even though euro area industrial production fell for a second month in April. Other than that, it looks as if investors are holding their breath for the May retail sales numbers.
Then there was this… Fund managers are fleeing risk and seeking safety in cash to an extent not seen since the worst days of the financial crisis. June’s Bank of America Merrill Lynch Fund Manager Survey found that cash accounts for 5.3% of fund portfolios, the biggest percentage since January 2009.
To recap, the markets shift focus from the European woes to that of additional stimulus from the Fed midday, so many of the currencies had a decent day. It was a quiet day around the world for economic data, but small-business confidence didn’t waiver much and imported inflation in May fell the most in two years. The May budget deficit ballooned from April, but it seems as if many have again turned their head. We get to see wholesale inflation and retail sales today. The Aussie and kiwi were the best-performing currencies, while the NOK and SEK ventured away from the grips of the euro. Gold and silver rose as a result of safe-haven buying and a hedge from more U.S. stimulus.
Chuck Butlerfor The Daily Reckoning
Chuck Butler is President of EverBank
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