Morning Report: April 11, 2012

The European debt crisis once again dominated headlines as the Spanish Economy Minister Luis de Guindos declined to exclude the possibility of a rescue for his nation and the Governor of the Bank of Spain indicated that the nation's bank may need more capital if the economy continues to worsen. Spanish 10 year bond yields raced towards 6% for the first time this year while Italian yields surged almost 25 basis points.

At the same time, yields on two and five-year German notes fell to all time record lows at 0.091% and 0.617% respectively. The surprise announcement by Prime Minister Rajoy of a further EUR 10 billion in budget cuts in education and health, only two weeks after unveiling the latest budget, failed to impress investors. The EUR opens this morning at 1.3080.

The Chinese economy continues to show signs of weakness as import growth came in at below forecasts as the nation reported an unexpected trade surplus. There is once again speculation that the central government may take measures to boost the economy amid increasing signs of a slowdown.

The yen surged on the back of a rise in risk-aversion that has coincided with an 8-day rise in the VIX index of volatility. USD/JPY fell more than 1% to as low 80.64 in trade overnight with the yen gaining against all of its major trading counter-parts. Yen crosses were smashed and the Australian dollar opens the morning looking susceptible to further falls sitting just above 1.0250.

US share markets fell for the fifth consecutive day as European bond yields surged. The S&P 500 has now dropped almost 4.5% in five days with Friday's disappointing jobs report still weighing on the markets. All 10 industry groups in the index have fallen as the it closes down 1.71% at 1,359. Stock markets across Europe were slammed with blood on the bourses as the IBEX and CAC lost 3% and the DAX fell 2.5%. Italian banks such as UniCredit and Intesa Sanpaolo lost more than 6.5%. Markets in Australia will reopen today to significant falls after having been closed for the Easter holidays.

Commodity prices apart from precious metals have recorded significant falls overnight with the CRB index losing more than 1% to 300.45. WTI crude has dropped another 1.1% to $101.30 on speculation of rising supplies in the US. Precious metals have bucked the trend and risen as other asset classes recorded significant falls in a sign that gold's safe haven status is once again coming to the fore. Gold rose 1.02% to $1,661 while silver gained 0.7% to $31.70. Soft commodities were broadly lower with cocoa, corn and wheat all slumping more than 2%. Copper is down 1.7%

Gold price swung widely before opening this morning $20 higher at $1660, after recording a trading range between $1631 and $1662. Both weak bulls and bears were wiped out as gold struggles to find direction. As we have expected, asset prices could demonstrate higher volatility as market fear increases. We see increased negative market sentiment as China reported a sharply lower import growth number.

The Bank of Japan said it was not considering more monetary stimulus and bond yields rose again for Spain and Italy, after the disappointing US nonfarm payrolls figure last Friday. We also note that gold is seeing safehaven demand support for the first time in months, as it gains while equity markets fall heavily. We have shifted our view on the precious metal to neutral for the short and medium term, as we assess the sustainability of a seeming comeback
of safe-haven demand for gold. For bulls, be warned that the price level around $1665 appears to be the top of the still-valid downward channel.

Compass Direction
Short-Term Medium-Term
NEUTRAL NEUTRAL


AUD/USD rallied during the middle of the Asia session on the better-than-expected Chinese Trade Balance numbers and the earlier positive sentiment left over from the NAB Business conference numbers. Solid selling at 1.0355/60 was enough to stop the rise with speculative and corporate names hitting the bids hard. Fears over the European crisis and the future of the euro itself were enough to see risk sentiment decline with safe-haven gold rallying, but this time AUD did not benefit and moved lower to be closing the day sitting right above the previous low.

Looks like the AUD toes are standing on the edge of a cliff and it's only time before it slips over the edge. However, where the bottom will be is a little too hard to tell at this stage, as in the past, the bearish momentum has managed to be stalled by nothing more than hopes about the European crisis fixing itself. However, this won’t be the case this time with parity just around the corner.

Bears holding shorts from higher levels should look to add to shorts once the major support breaks and momentum builds. Australian Home Loan data at 11.30am Sydney could be the tipping point!

Compass Direction
Short-Term Medium-Term
BEARISH BEARISH