Afternoon Run … November 24, 2009

Key News

 

* Bank Made £60 Billion Emergency Loans to RBS, HBOS  (NY Times)

* Ifo’s Nerb: Recovery Still Too Weak For ECB Rate Hike (WSJ)

* Chinese stocks hit by capital concerns (FT)

*BOE King: Sterling Depreciation To Help Boost Economic Demand (WSJ)

 

The Event Agenda

Afternoon Run-Down

 

Overall the dollar is mixed and key markets continue to trade near the top of recent ranges.  Some major psychological levels continue to prove difficult to sustain:  the 1100 area in the S&P 500, the $1.50 area in the euro and $80 in crude oil.  These levels are potential inflection points for the future path of global risk appetite.  A break would portend a reflation trade is underway … a reversal from these levels would likely mean risk aversion is back, as the market focus turns back toward the uncertainty surround the potential outcomes of the unprecedented scale of the global recession and the consequences of the unprecedented responses.

 

The latter scenario seems increasingly more likely.  Where there is smoke, there is usually fire.  Safe haven demand has ticked up in the U.S. Treasury market.  Short term U.S. Treasury Bill yields fell back to the zero yield line last Thursday for the first time since the credit freeze of last year.  Today’s 5-year note auction drew the strongest demand in two years, and yesterday’s 2-year notes sold for the lowest yield ever. 

 

The notable movers today are commodities (weaker) and commodity currencies (weaker) as traders carrying pro-risk trades lighten up going into thin holiday trading conditions over the next few days. 

 

The risk environment elevated overnight as Chinese stocks fell 3.5% on rumor that China’s top banks would need to raise $43 billion to meet more stringent capital adequacy requirements and consequently easy money conditions may be tightening up. 

 

News that a German bank WestLB was going to fail put more pressure on riskier currencies.  The German government and WestLB ownership later in the day reached an agreement for a rescue.  

 

Here’s a look at the charts going into the middle of this holiday trading week…

Key Charts

 

The S&P 500 continues to trade on the two-year descending trendline.  A breach of the 1113 prior highs would be needed to suggest a further run in stocks.  U.S. stocks are closed Thursday and trade a half day on Friday.  Lower volumes could result in a break away from this trendline (either lower or higher).

 

USD/JPY continues to fall back toward the crisis-driven lows of 87.13 (which was driven by the massive carry trade unwind).  The chart below shows the tight relationship of USD/JPY and the Japanese stock market… strong yen bad for stocks, weak yen good for stocks.  While most major developed market stock markets are flat or up in the last month, the Nikkei is down 9%– since just late October.

Crude oil has been recoverying 1) on the prospects for a recovery in global demand and 2) on the reflation theme … i.e. easy money, lower dollar, higher nominal asset prices.  But the $80 level has proven a tough level to sustain and the technical wedge that has been building looks like it may be get tested – to the downside.

Here’s a look at the dive in short term t-bill yields back to and below zero.