US data shifts the focus
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*European pessimism...
*US optimism... 
*A quick look back... 
*What does 2012 hold in store...

And, Now, Today's Pfennig For Your Thoughts!

US data shifts the focus

Good day.and welcome to the last day of the year, or should I say the last business day. I've probably said this a million times, but where does the time go. It's still hard to believe the end of 2011 is upon us, not only that, but we're 12 years removed from the infamous year 2000 turnover. I remember as a child telling my mother how I wish time would move faster so the summer break from school would arrive sooner. She then told me when I got older that I would actually wish time would instead move slower.And how right she was.

Well, the short term memory in the markets were at play once again as we moved from feelings of continued risk aversion to that of willingness to venture back into riskier investments and ultimately a weaker dollar when the dust settled. We saw a reversal of fortunes in market action as the relatively benign European sessions that we've seen over the past week carried the torch of risk aversion. The culprit, as I touched on yesterday, was the continued bond auctions for longer term Italian debt. While there were low expectations to begin with, the fact that yields didn't climb out of control was at least a positive.

The not so good news was the euro fell to a 15 month low in European trading as Italy actually sold less than its maximum auction target, which just brought to light once again that we're not out of the woods by any means. This wasn't a failed auction but concern again increased that the ECB will need to pump more cash, adding to their already bloated balance sheet, into the financial system. The Italian treasury was able to raise about 7 billion euros in the four auctions, which was less than the allotted maximum of 8.5 billion euros. I saw an article where Italy plans to raise almost 450 billion euros from debt sales next year, which would be enough to cover 202 billion euros of maturing bonds and a 23.6 billion euro deficit.

Still, investors will continue to push the envelope with Italy until they either get bailed out or they demonstrate beyond a reasonable doubt that tangible steps are being taken to manage the debt. We also saw eurozone M3, which the ECB uses as a gauge for future inflation, fall to 2% in November from 2.6% in October. Investors interpreted this report to mean the ECB will have more room to cut interest rates even further, so traders may have been pricing that likelihood into the mix before US trading sessions began. In fact, the euro was the worst performing currency when I arrived to the office bright and early yesterday morning. Gold was down another 1.5% and silver was trading with nearly a 2% loss at that point.

We started the day with the weekly jobs numbers along with another regional manufacturing report and a consumer comfort index, but the housing numbers are what really fueled the fire later in the morning. The initial jobless claims report did actually show a rise in unemployment claims, but the focus was squarely on the fact that the four week moving average fell to the lowest level since June 2008. The number of first time filings for unemployment last week did rise to 381k, higher than the expected 375k, but also rose quite a bit from the previous reading of 366k.

Its certainly a step in the right direction since they have remained below 400k for a while, but you would have thought the unemployment problems were all but over with some of the headlines floating around. Continuing claims did rise by about 34k to 3.6 million and those who are receiving emergency or extended benefits remained right around 3.5 million. I guess it depends if you're a glass half full or empty type of person as to how you look at this data. Looking at the consumer confidence numbers earlier in the week, it appears many would be in the half full camp.

I like feel good stories and we need those in life, but I'm also a realist and can't help to notice there is a long road ahead of us before we can declare victory. The Bloomberg consumer comfort index did fall last week from a 5 month high of -45 to -47.5. Just to put that in scale, the average so far this year is -46.8 and the average for 2010 was -45.7. The worst annual average reading on record was -47.9, back in 2009, so we're still hovering in the low end of this report.

We had some time between the jobs figures and the housing report in which the markets stabilized and inched higher as anticipation mounted. The euro rose back above 1.29 and silver quietly gained about 20 cents. Then we saw it. The index of pending homes sales showed an increase of 7.3% in November, which was way better than the original forecast of a 1.5% gain. This report shows the number of contracts to buy previously owned homes and is more forward looking as it tracks contract signings as opposed to home sales, which are counted when the contract closes.

Prices that have continued to fall and low interest rates have definitely helped, but until we see home prices actually begin to rise, pressure still looms as some buyers stay on the sidelines until they officially see the bottom. A report released by the NAR explained that housing affordability conditions are at a record high and there is pent up demand as a result, but contract failures have been running unusually high. It went on to say some of the increase in pending sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage.

Housing has, nonetheless, shown signs of stabilization but it almost sounds like the old chicken and the egg story. If we do have more demand in the market, how many buyers will actually qualify for a loan. Regardless, the foreign exchange market and the stock market liked what they saw and started to re-enter the pool. By the time lunch arrived, we saw most of the currencies in positive territory and silver, which had gotten beat up pretty good, was trading at breakeven. As the day wore on, we continued to see most of the financial markets climb and actually turn in a respectable day.

The only currency that ended in the loss column was the pound sterling. With risk tolerances running at higher levels, the South African rand topped the list and most of the other currencies fell in with 0.25% to 0.50% gains. The euro was trading at the high of the day, 1.2965, as I left the office last night and silver was back knocking at the door of $28. Gold just couldn't muster enough momentum to push it back positive, so it lost about 0.75% and was trading around $1545. In fact, silver was the big winner and turned in about a 2.5% return.

The past month has been pretty choppy for the currencies as concern about Europe jumped up here and there. Surprisingly enough, the commodity currencies fared the best with gains over the past month, which wouldn't necessarily be expected with risk aversion on the table. Since we're at year end, let's take a brief look at the returns of 2011. Unfortunately its not the best looking picture, but we have definitely seen worse. Of the assets that we religiously cover, only three have positive returns.

In the currency department, we had both the Chinese renminbi and Japanese yen hang 4.5% gains against the dollar and gold ended the year up over 10%. There were only a handful of currencies that were considered a lost cause by year end, which when you see them, shouldn't come as a surprise. The South African rand was, by far, in the deepest hole as it lost nearly 19% on the year. The runner up, and not too far behind, was the Indian rupee as it lost just under 16%.

The Mexican peso and Brazilian real both suffered a hit of around 11% and silver ended with a loss of 9%. Other than that, the euro finished with just over a 3% slide and all of the other currencies fell anywhere between 3% and 0.50%. Those currencies that had larger losses were pretty much self inflicted wounds as both Brazil and India took steps to weaken their currencies and then Mexico and South Africa weren't exactly stable to begin with. If it wasn't for those currencies, you wouldn't have thought 2011 was filled with such uncertainty and unsettling moments.

Before I wrap this up, I wanted to take a moment and discuss the Norwegian krone since I had a few people ask why the currency has dropped even though the country is not bogged down with large amounts of debt. Well, the simple answer is the euro. The euro sets the direction of all the other peripheral European currencies since the eurozone combined economy far outweighs the individual economies, for example Norway. The supporting cast members to the eurozone rely heavily upon that collective economy for a majority of export and commerce. In other words, if there are problems with the euro or that collective economy, the smaller currencies get swept into the same bucket.

Since Norway does have decent underlying fundamentals, such as low unemployment, a large pile of cash reserves, and strong exposure oil and gas, you would think this currency would be able to wiggle its way out of the leash. Unfortunately, the euro's grip is just too tight and the market perceives this as a situation of what's bad for the euro is bad for Norway. While its an unfortunate situation, I do see the logic as over 60% of Norwegian exports go to the EU. If Norway's largest trading market isn't buying up Norwegian product, then the domestic economy will bear the effects.

Other than just an overall flight into the USD in the foreign exchange market, the krone saw selling pressures from the unexpected rate cut of 0.50% to 1.75% a couple of weeks ago. The market had already priced in and was expecting a 0.25% cut, so this came as a bit of a surprise. It looks as though the central bank was trying to be pre-emptive in response to the euro debt crisis since inflation is pretty much a non-event in Norway. The underlying annual inflation rate slowed to 1% in November and remains well below the 2.5% target that would cause alarm.

The Norwegian central bank doesn't like to stray too far away from the global interest rate environment, especially the ECB, as their smaller economy is more sensitive to the relative strength or weakness of the krone exchange rate and was just another incentive for the rate cut. In other words, a higher internal interest rate would have made the krone more attractive to investors and would apply unwanted upward pressure on the krone. While Norway is dealing with the fallout of the European debt crisis and trying to navigate a bumpy road, the future for the currency at this point continues to look positive. Whenever fundamentals do return to the market and when the dollar does continue to weaken, the krone is well poised to benefit.   

When I came in this morning, there was a slight sell bias for the dollar as most currencies are where I left them last night. The euro is holding firm in the mid 1.29 range and a majority of the currencies are sitting on fractional gains so far. The big moves overnight were pretty much confined to metals as gold is currently up about $24 to $1573 and silver has risen about 1.5% to $28.20. With nothing to speak of in the data department, it should be a fairly quiet news day. I think we'll see tug of war type action in the markets as the ongoing European problems and the improving US outlook try to one up each other.

Once trading desks are back to full staff after the holidays, I think we'll get a true sense of where things stand. There hasn't been much to cheer about with the European problems and the bandwagon for the US economy is starting to pick up more passengers. While Europe has an enormous task at hand, there is still a lot to deal with here at home as 2012 will bring us a presidential election, continued political standoffs surrounding the budget, attempting to lasso the runaway deficit, and a host of other issues. With all of these question marks and fragile situations, 2012 could just be as volatile as this year.
Recap.Most of the currencies started the day in the dog house as concern over the Italian bond auction and thoughts of another rate cut at some point pushed the euro down and risk aversion upward. The jobs numbers and pending home sales report turned the focus away from Europe and over to signs of an improving US economy. The risk sentiment turned on a dime and most currencies ended the day in positive territory, except for gold. If you looked at year to date returns, with the exception of a handful of currencies, you wouldn't have known this was an extremely volatile year. We still have big question marks heading into 2012.

Currencies today 12/30/11. American Style: A$ 1.0165, kiwi .7735, C$ .9801, euro 1.2944, sterling 1.5444, Swiss $1.0645. European Style: rand 8.0952, krone 6.0083, SEK 6.8968, forint 240.55, zloty 3.4361, koruna 19.9158, RUB 32.2635, yen 77.36, sing 1.2963, HKD 7.77687, INR 53.0650, China 6.2949, pesos 13.9728, BRL 1.8668, Dollar Index 80.38, Oil $99.95, 10-year 1.89, Silver $28.20, and Gold. $1573.

That's it for today.I would first like to wish everyone a safe and happy New Year and thanks for hanging with me this week. Chuck will be back in the saddle on Tuesday so I'm sure he'll have a lot to talk about when he returns. This weekend also brings the close of the NFL season, which couldn't get here fast enough for the Rams, but it won't be too long before pitchers and catchers start showing up for spring training. That's it for me today, so until next time.Have a Great Day!!

Should auld acquaintance be forgot,
And never brought to mind?
Should auld acquaintance be forgot,
And auld lang syne!

For auld lang syne, my dear,
For auld lang syne.
We'll take a cup o' kindness yet,
For auld lang syne.

Mike Meyer
Assistant Vice President
EverBank World Markets

Posted 12-30-2011 8:07 AM by Chuck Butler
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