MAJOR HEADLINES – PREVIOUS SESSION
- Australia Q2 Import Price Index fell -6.4% QoQ vs. -6.0% expected
- China Jun. Wholesale Prices fell -8.0% YoY vs. -7.6% in May
- Norway Q2 Existing Home Prices rose 5.3% YoY vs. 4.1% in Q1
- EuroZone May Trade Balance out at 1.9B vs. 0.0B expected and 2.7B in Apr.
- EuroZone May Construction Output fell -2.0% MoM vs. +0.4% in Apr.
- Canada Jun. CPI out at +0.3% Mom and -0.3% YoY as expected. Core CPI was 0.0% MoM as expected.
- Canada Jun. Leading Indicators out at -0.1% vs. 0.1% expected
- US Jun. Housing Starts out at 582k vs. 530k expected and 532k in May
- US Jun. Building Permits out at 563k vs. 524k expected and 518k in May
THEMES TO WATCH – UPCOMING SESSION
- New Zealand Jun. Performance of Services Index (Sun 2230)
- UK Jul. Rightmove House Prices (Sun 2301)
- Australia Q2 Producer Price Index (Mon 0130)
Market Comments:
Ahead of the US opening, we seem to be seeing yet another confirmation that the market wants to stay in the ranges for now, as the Dollar Index stepped back from the abyss yesterday (when it broke to a new low since early June for a few minutes) before pushing back strongly in the European session. Still, a further move back, for example, below 1.4000 in EURUSD is needed to fully wipe away the recent USD sell-off, but the latest moves are very consistent with the summer doldrums behavior of the market over the last six or eight weeks of range trading. Trend followers continue to find frustration in this market and need to see the 1.4170/1.4210 levels give way to get up hopes for an extension of the USD sell-off.
The markets saw a number of inputs overnight and this morning, first with a terrorist event in Jakarta and then with the Bank of America and Citigroup earnings this morning, which were generally positive but failed to generate much attention. This was after the hysterical rally that was supposedly sparked by the Goldman Sachs earnings recently, a rally further fueled, if to a lesser degree, by JP Morgan Chase's results. Now we have the threat of a CIT bankruptcy offering some background dissonance. The markets are fickle with their attention if nothing else.
Other good news could be found in the housing starts/building permits data, which were far stronger than expected and sparked a very sharp sell-off in long bonds. While the house building numbers do clearly appear to have stabilized since the beginning of the year, we have to wonder whether the rate of housing starts has even reached anywhere near a sustainable replacement rate. There are well over 100 million households in the US, so a rate of 500-600k probably is far below the necessary rate. At this instant in time, though, the market clearly prefers to focus on stabilization.
A more troubling issue that may garner more focus in coming weeks and months is the potential second round of defaults from so-called Alt A loans, many of which are up for refinancing in this period. These tended to be larger loans than subprime loans. Combine this with the threat of a commercial mortgage debacle and we have good cause to question any further rally impulse from the financial sector. This could do the GBP some harm - and it is interesting to note that despite the huge reversal lower in EURGBP, for example, after the Goldman Sachs earnings report, we are seeing a strong rally in the pair back well above the 0.8600 level.
As we are about to go to press, the bottom continues to completely fall out of the bond market -suggesting that the risk appetite rally is attempting a comeback (or possibly the devaluation concerns). If this move is sustained, it will threaten to push the JPY crosses sharply higher into the close today (Japan has three-day weekend with Monday holiday). It is also interesting to note the CHF selling off - possibly also on the tremors in the bond market.
