Questioning China... Again!
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In This Issue..

* Risk Aversion takes over...
* Gold fails to reach all-time high...
* Debasing is good?
* Treasury yields plummet!

And Now... Today's Pfennig!

Questioning China... Again!

Good day... And a Terrific Tuesday to you! Well, it looks like the hurricane in the Gulf will veer left, and avoid the "spill area"... So, those guys working in the Gulf finally catch a break! The bias to sell dollars didn't last too long yesterday, about as long as it takes for an Albert Pujols home run to leave the park! This back and forth stuff is really beginning to give me a rash, folks...

Yesterday, the selling of the currencies and metals began with Gold... The shiny metal  had climbed to just above $1,260, but could not go further, and apparently, traders threw in the towel because Gold couldn't go past its all-time high of $1,266... Gold began to sell off and in the blink of an eye, it went from being up $8, to being down $14! OUCH!

Then the currencies followed Gold's lead... With the high yielders taking it on the chin the most. Swiss francs however, added to their gains, and has set, yet another, all-time high VS the euro this morning. The franc has slipped modestly VS the dollar, but with the euro falling from the 1.23 handle to the 1.21 handle, the franc's gains VS the euro are huge!

The single unit, euro, isn't getting any love this morning from traders either, due to reports that the Greeks have staged nationwide strikes to protest the austerity measures the Greek Gov't has announced. Let them protest! I just don't get it... Don't these people see that their country is circling the bowl right now? Amazing to me that changes like this get protested... Oh well, like I said, Let them protest! It's not going to change anything. Greece has to go down this austerity measures road, no two ways about it!

So... Global growth questions are back on the table this morning... Here's the skinny...

We have 2 global growth engines the markets depend on... The U.S. and China... I don't know why people keep questioning China's economy, for the Chinese continue to show economic resiliency. The U.S. now that's where the questions should be directed... I've shown you the softness of the economic data that has printed recently, and this week should be no different. On Friday, we'll have a Jobs Jamboree, which will really tick off those traders wanting to get out of Dodge early for the Holiday weekend... But anyway, like we care! HA! Anyway... Recall, that last month's Jobs report was soft... Well this month's is expected to be very disappointing, that is before the BLS gets their hands on the report!

I just don't know what traders expect from China... They continue to keep the economic ship out to sea, and get no credit whatsoever for doing so! But... That's what we're dealing with this morning... The markets questioning Chinese economic growth...

Even in the face of report from the China Daily that: China is expected to receive fiscal revenue totaling $1.18 Trillion by the end of this year, state broadcaster CCTV reported. The amount would make China the world's second-largest economy ranked by fiscal revenue, after the U.S.

The Big Winner overnight for the currencies has been the Japanese yen... Japanese yen has gone below the 89 handle to trade with an 88! WOW! See how fickle these traders are? On one hand they penalize a country for low growth, and on the other hand they reward yen, which hasn't seen economic growth in 20 years!

But, that's the game they are playing... Buy, dollars, yen and now Swiss francs too, when risk aversion casts its net over the markets.

One other thing weighing on the risk assets as we close out the month and quarter, is portfolio re-balancing...

Well... Since it's all about "economic growth" these days... The high yielders get sand kicked in their collective faces. Yes, what fundamentally should be a green light to buy the higher yielding currencies, is thrown to the roadside, and this "economic growth" mantra is here for us to deal with...

I've seen this once before... It was earlier this decade, probably in 2001 or so... It was right after the tech bubble blow-up and global recessions began... What we saw then was very similar to today, in that, the markets rewarded currencies from countries that debased their currency! Rate cuts would get more attention and love than not debasing your currency!

Thanks goodness that only lasted about a year! We've got to hope that this time it doesn't last as long as a year, for I will be climbing the walls, raising the white flag, and throwing in the towel, should that happen!

This scenario right now, is causing Treasuries to rally Big Time! And that's 180 degrees from what I saw for Treasuries this year. A quick look at the Treasury yield curve, and you see things that haven't been seen in a long time... The 10-year Treasury that we track in the currency round-up each day, now sports a yield of 2.96%! The Two year Treasury yield is at an all time low of .96%...

Now, you have to ask yourself this question... What do I have to gain from buying a Treasury that's at all-time highs? (remember bonds have an inverse relationship between price and yield. So if the yield goes down, the price goes up.)

Think about that for a minute... If you buy a 2-year Treasury, the broker takes his pound of flesh for commission, and you're left with about .50 or 1/2% yield... There's no where to go but up from here, folks... Sure it could go do down more, but by more than the yield you own the 2-year at? Hardly! So, it's a losing trade from the get-go!

Oh, I've got to move on to something else, this is getting me all worked up!

Stock futures are down this morning, which indicates the risk assets will have a tough row to hoe today.

Want to see some real economic growth? You'll have to head south to Brazil... Not only are they on the path to winning the World Cup... Brazil is also on the path to see GDP grow to 7.13% this year! That's according to economists that were surveyed an increased their forecast for Brazil's economy.

I heard that a presidential candidate in Brazil was calling for lower interest rates, which is a good ploy in an attempt to get you elected... But... With over 7% growth, interest rates in Brazil are probably going to go even higher before they head down...

The Brazilian currency, the real, is under attack once again from the Gov't, as the real had risen stealth like recently... In the past the Gov't has attempted several measures to weaken the currency, only to see it rise again after the initial sell off. So, it will be interesting to see what the Gov't has up its sleeve this time...

The worst performer overnight was the Aussie dollar (A$)... And this plays along with the scenario I told you about above, where the higher yielding currencies get no love for being fundamentally sound, and countries that have to cut rates or keeping rates at ultra-lows, thus debasing their currency, get all the love... UGH!

Then there was this... The Wall Street Journal is reporting today that, "Kevin Warsh, a member of the Federal Reserve Board, voiced concern about the central bank's willingness to bolster the U.S. economy by buying more government bonds or mortgage debt. The idea has been considered as fear continues that the economic recovery will falter. "Any judgment to expand the balance sheet further should be subject to strict scrutiny," Warsh said. "I would want to be convinced that the incremental macroeconomic benefits outweighed the costs."

Chuck here... Yes, Kevin, I would like to be convinced too!

Currencies today 6/29/10: American Style: A$ .8565, kiwi .6960, C$ .9535, euro 1.2190, sterling 1.5050, Swiss .92, ... European Style: rand 7.6345, krone 6.4850, SEK 7.8150, forint 235.25, zloty 3.4140, koruna 21.0965, RUB 31.25, yen 88.80, sing 1.40, HKD 7.7845, INR 46.47, China 6.7975, pesos 12.86, BRL 1.78, dollar index 86.14, Oil $76.67, 10-year 2.97%, Silver $18.62, and Gold... $1,238.30

That's it for today... Little Delaney Grace came by to see me yesterday afternoon. She is so darn cute! The scorching heat wave is over, and more normal weather has returned, thank goodness! A quick trip to the dentist yesterday... I only have a few more to go! I finally got to watch "The Hangover" this past weekend... Very Funny! I'm always way behind on those movies. At least when Alex was younger, I got to see kid movies at the theater! Speaking of Alex, he leaves for Camp today. Just one week this year, football, swimming, and water polo got in his way! I'll be "batching" it again for a few days, which means I need to find the phone number of the pizza delivery place! HA! Tomorrow is the end of the quarter / 1/2 year... WOW! Where did the first 1/2 go? Well... Let's go out an have a Terrific Tuesday and not worry about where the first 1/2 go!

Chuck Butler
EverBank World Markets

Posted 06-29-2010 9:33 AM by Chuck Butler