Markets seem to be waiting for some type of catalyst to determine the direction of the next leg. It was an inside day in Crude oil as prices hover around $82/barrel. For new entries we still like the idea of $5 put spreads, but we would start looking at the June as opposed to May contract. If currently in the May, we would try to buy back the bottom leg; we have suggested for clients to buy back their $70 puts and that would leave them long the $75 puts. It was a disappointing day for longs in natural gas as yesterday could prove to be just a head fake. Clients remain long via April futures and June call spreads as prices were off 2.4% today.

As of this post, indices are at the high of the day; we think we are close to an inflection point but we’ve been wrong for the past two weeks. If the S&P closes above 1148, exit short futures at a loss. It's been a fourth consecutive down day in sugar but we are assuming yesterday’s low at 18.82 in May will serve as support. May cotton has lost 3.8% in the last 5 session and closed below the 20 day moving average for the first time since February 8th. We are expecting another 2-4 cents and will then be advising clients to lift shorts.

If the bull story about the loonie was in book form, it would be on the best seller list.

But despite all the sponsorship and accolades from the pundits, this pair has been unable to challenge the season's best for the C$ versus the USD of 1.0204 established on October 15, 2009. The pair did trade at 1.0214 on Wednesday, good enough for the red ribbon, but then retreated back above the 1.03 handle. What is interesting about yesterday's trade is that the open interest in the futures market went up almost 12,000 contracts, over 7% of the total open interest.

Is Forex in 2010 like Equities in 2003?

The first half of 2003, around the time the second Gulf War was about to begin, was probably one of the worst times for short-term trading (I heard 1994 was terrible too, but I didn’t start trading until 1998). The S&P 500 had traded to post 9/11 lows of around 800 during October 2002, and then rebounded to 930. However, the rally was short lived as an Iraqi Invasion was looming and stocks slumped back toward to their October 2002 lows.

Ahead of another heavy U.S. Treasury auction, with today the turn of the 30-year maturity, dealers have sold bonds ahead of time bowing to slightly more favorable economic data. Strong industrial production, retail sales and bank lending data emerging overnight from the Chinese economy coupled to a report indicating a rise in its inflationary pressures, also helped pressure global bond prices lower in turn lifting yields. The distant stench of a possible Greek sovereign debt default also prompted some investors to ditch the safety of German bunds at midday in Frankfurt causing a lurch lower in prices.

Harvard Professor Martin Feldstein, who is a member of the NBER committee that is the official arbiter of US recessions, was on Bloomberg TV today suggesting that the the euro's decline this year refelunjustified panic over Greece.

While of course the concerns about Greece and the lack of sufficient institutional capacity was a important drag on the euro, there seems to be something else at work. Greek bonds have been steady to higher for the better part of the past two weeks and the euro remains stuck in relatively narrow trading range that has prevailed since at least the middle of February.

Up until a few months ago, many analysts were predicting the demise of the US dollar to be replaced by the euro as the new global reserve currency. Well, one huge Greek debt crisis later, and many are questioning the long term viability of the euro. My personal opinion continues to be that by the year 2020 we will not recognize the euro in its current form.

The Devil Is in the Details

There’s a nice mix of arguments this morning to give rise to conflicting views on today’s currency movements. A slew of healthy data out of China confirmed up to be a rambunctious pup desperate to play in the yard. Moreover the strength of the data raises the stakes in terms of monetary tightening, which helped boost the Japanese yen rise against regional currencies on a risk reversion theme. Yet the yen showed its true colors against both the dollar and euro where rising confidence in a recovery and where growing conviction that the dangers stemming from the Greek episode have passed increased the confidence in both currencies. U.S. and European stock markets are heading lower today after healthy recent performances meaning that the overall risk aversion theme has also been put out in to the back yard along with stray pups.

Some late hour buying pulled the Indian markets high into the positive territory from what was otherwise looking like a lacklustre close to the day. Strength was seen in stocks from the IT and banking sectors. However, auto and FMCG stocks continued to trade weak. On the broader BSE, there were two losers for every stock that closed in the positive today.

The BSE Sensex and NSE Nifty closed with marginal gains of around 70 points (0.4%) and 30 points (0.6%) respectively. Mid and small cap stocks however closed in the red. The BSE Midcap and BSE Smallcap indices closed down by 0.2% and 0.5% respectively. At the time of writing this, the rupee was trading at 45.57 to the US dollar.

I love this guy. In the clip below, he dishes out his patently-straightforward analysis of the Greek debt problem. He demands accountability from the Greeks (and anybody else asking for a bailout), and dismisses concerns that sovereign CDS traders are the problem – “Were they the ones who increased deficits to 12% of GDP?”

Other talking points:

Over the last two days we have reviewed the Chinese yuan exchange rate, its anticipated rise and how that presents an opportunity for owning Chinese stocks. Funds seem to be the best route, and here are criteria for selecting a promising one.

Get local management

I must admit that I have a hard time maintaining an open mind on the yen. I see so many issues impacting the currency relative to the other G-7 that when good news does happen, I tend to discount it (my own Confirmatory Bias peeking through). So let’s start with my predilection that the Yen is due for a fall, and then try to discredit it.

The fundamentals certainly do give one pause. The central bank rate has been 0.1% for years, and of course gave rise to the Carry Trade. With the recent increases moving short term US interest rates above Japanese rates, a resurgence of the Carry Trade will drive the Yen lower. Other measures of the economy are woeful too. The GDP took the worst fall of all the G-7 last year (-12.7% annualized in March 2009), and monthly change in GDP remains negative, although improved from a year ago. Amongst the G-7, the budget deficit is third worst (behind the US and UK) at -7.8%.

We have a number of shorts on commodities, thinking a setback is due. A failed rally... say it is not so! Crude looks to close higher on the day but below $82 and $1 off its high. We remain convinced a 5-7% correction is right around the corner. Forget the fundamentals and technicals; throw it all out the window and just recognize that even in a bull market, it is healthy to get corrections. In the last 5 weeks Crude has moved almost 19% higher without any significant correction; it is time.

Buying is starting to emerge in natural gas. We have been early to this trade but have held our guns thinking a short squeeze could lift April futures back over $5 in a hurry. Clients are long April futures and June $5/5.50 call spreads.

The last rally the dollar had versus the yen was sponsored by the Non-Farm Payroll report, showing fewer job loses than anticipated, and indications that the Finance Minister was urging the Bank of Japan to increase the money supply. This move has stalled short of the 91 level.

As the evidence continues to grow that the global recession has ended, the yen, because of its perceived safety, becomes less attractive. Yesterday's report that Chinese exports has surged in February to 46% above last year's levels confirms their recovery is progressing. Today we get a number of Chinese reports, including Industrial production, forecasted to be up 19.5% and retail sales up an amazing 18.3% from year ago numbers. As one of China's biggest trading partners, Japan will benefit from the increased activity, but their recovery seems to be lagging.

It was all looking like an orthodox drift higher in equity markets last night until the SPX rolled over in a late-session swoon, perhaps on rumors that the government would flog out its considerable holding in Citigroup (C)? Regardless, Macro Man's Bloomberg inbox lit up with comments on the heavy futures selling, driving the 7 point reversal ... perhaps this is a sign of the top?

Uh ... ok. We'll disregard the fact that in the context of the past couple of years, a 70 bp move in the index, within half an hour, constitutes more of a "baby's hiccup" than a reversal. No, what made Macro Man laugh was the commentary on the "heavy futures selling." Perhaps there was a large order or two that went through ... but even so, aggregate end-of-session volume was utterly unremarkable by the standards of the past couple of weeks- which themselves haven't exactly been a hotbed of activity. If you've found yourself musing that equity markets haven't been particularly interesting recently, perhaps this is an example of why.
(Click to enlarge)

Canadian gold miner NovaGold Resources (NG) raised around $100 million on Tuesday, March 9th after selling 18.2 million shares of common stock at $5.50 each. Despite the dilution from this sale and another scheduled sale of 13.6 million shares for $5.51 on March 11th, the stock rallied 9%, closing at $6.88. Together the two sales will increase the outstanding shares of NovaGold by 17%.

The purchasers of Tuesday's stock offering were funds managed by Paulson & Co. Thursday's sales will be to George Soros' Quantum Fund. Both are renowned investors, bullish on gold and bearish on the euro. The average investor would have trouble realizing that Soros is bullish on gold because of mainstream media reports misrepresenting his outlook. The press reported that Soros stated the gold was in the ultimate bubble, instead of would be in the ultimate bubble because of governments engaging in excess spending and money printing globally. Bubbles are where investors make the most money, as long as they can control their greed and sell around the top. Successful investors understand this. Unsuccessful investors like to blame the market, instead of how they interact with the market.

There has been much talk about the decline of the dollar as the world’s favorite currency, but not among hedge fund managers. The greenback remains their favored currency by a wide margin, according to a new survey.

Fifty-seven percent of those responding to the TrimTabs Investment Research/BarclayHedge Currency Survey are bullish on the dollar over the next three months. The Brazilian real was a distant second, favored by 11.5%, followed by the yen and “other” currencies, among them the Australian dollar, with 8.2%.

Former Italian Prime Minister and no stranger to yawning fiscal deficits, Romano Prodi said earlier today that the Greek crisis is over. Having weathered the storm and with less time pressing their own fiscal agenda, the former President of the European Commission said that other lesser indebted Eurozone nations will be spared the Greek-style drama. Signor Prodi sees no reason for other Eurozone members to falter from this point.

Last week, the BoE decided to leave rates unchanged at 0.5% and to forestall expanding on its GBP 200bn asset-purchase program, which was widely anticipated by the whole of economists in the Bloomberg consensus. It was hard to see any reason for the BoE to change the outlook for monetary policy in the short term, having decided to pause the program in February.

The latest economic data confirmed that the wait-and-see stance recently adopted by the BoE is appropriate. Over the last week, GDP growth in Q4 was revised upwards from 0.1% q/q to 0.3% q/q; the CIPS Manufacturing Index remained well above 50 in February (56.6, unchanged from January); and the CIPS Services Index rose from 54.5 in January to 58.4 in February. However, these data confirmed that the UK economy is likely to grow at a moderate pace in the next few quarters and will not recover the pre-crisis growth trend for many years, as BoE’s Governor Mervyn King stressed in the press conference for the presentation of February’s Inflation report.

In a long engagement, Turkey and the IMF have been negotiating a stand-by package for well over a year. Today Turkey announced that there would be no marriage after all--no deal. The impasse appeared to be over municipal expenditures. PM Erdogan's government had previously negotiated two programs with the IMF since coming to power in 2002.

There is disappointment in some quarters of the end of the protracted talks as some suggest the talks themselves had lent support to the lira and the bond market. As noted yesterday, the poor inflation news at the end of last week, coupled with the heightened political anxiety and withholding tax uncertainty have weighed on Turkish bonds. Yields yesterday rose to their highest for the year amid a lukewarm reception to the bond auction and there is follow through selling today.

Bundesbank President Weber has been the most candid to date about what the ECB could do in case Greece is downgraded again, especially by Moody's.

Recall the problem: Prior to the crisis, the ECB would take as collateral only paper rated A- or better. During the crisis they have extended it to BBB-. It is due to revert back at the end of the year. Fitch and S&P rates Greece below A-, leaving only Moody's above the normal threshold.