Traders are Flicking the On/Off Switch for Risk Appetite
The wind up of October’s month-end position squaring and corporate flows
has left the market lacking direction to start the month of November
this morning. Contributing to the day’s rather uninspired trading was
the fact that two competing stories are battling for precedence in the
minds and position books of traders whose decisions continue to be made
in the starkest of terms, either outright risk avoidance, where the
dollar is well bid, or outright risk acceptance, where the major
currencies most leveraged for growth perform well.
Though the news that CIT Group, the small
business financier, filed for bankruptcy protection this morning, did
not come as a tremendous shock, it did manage to put a risk averse bid
tone into the USD, as one might expect, albeit briefly. Though the firm
is expected to emerge from chapter 11 proceedings and its operating
entities are not under the bankruptcy filing, it has been estimated by
some analysts that up to one million small and medium-sized enterprises
could be forced to search out an alternative lender – a process that
will likely yield more than a few frustrated entrepreneurs in this tight
credit environment. Those expected to come under the most pressure are
those who employ CIT’s factoring services, where the firm purchases the
accounts receivable of a business, as CIT is a significant player in the
sector.
On the positive side of the ledger this
morning in terms of risk appetite is the fact that Ford Motor Company
reported a near billion dollar profit in the third quarter, generating
positive cash flow, cutting costs and growing market share in both North
America as well as key international markets – an improvement of nearly
$1.2B USD from a year ago. Shares of the automaker soared 5.7% in
premarket trading. After burning through $4.7B USD in cash in the first
half of 2009, Ford generated a whopping $1.3B USD in positive cash flow
in the quarter while managing to record a profit on its North American
operations for the first time since the first quarter of 2005. Though
revenues were depressed by $800M to $30.9B USD in the three month
period, the fact that Ford was “solidly profitable” on the quarter in
addition to raising its outlook for 2011 from break even to profitable
is being viewed as a significantly positive story for the sector.
Further, some analysts this morning are affixing a buy rating to the
automaker under the belief that it will see a return to full year
profitability as early as 2010.
Market Reaction
The end result this morning is that the USD Index hasn’t had any real
direction, though it is trading at the high side of its recent range.
Shares traded lower in Asia overnight with the Nikkei hitting a
three-week low with a 2.31% decline on weak consumer data and a strong
yen that continues to weigh on export markets. European bourses were
largely flat, though commodities provided some support to miners and oil
producers on London’s FTSE, which posted a 0.6% gain. The Dow is higher
on the morning, buoyed by Ford’s results, which are being taken as a
barometer for the manufacturing sector, while the TSX in Toronto is
giving up ground on retreating commodity prices as we head into the
heart of the North American session.
Central Banks Rule the Week Ahead
Central Banks will continue to be a focal point for currency markets in
the week ahead with the Federal Reserve, the Bank of England, the
European Central Bank, and the Reserve Bank of Australia all expected to
announce their latest policy decisions. For the Fed, the discussion
centres upon its wording with respect to keeping rates “exceptionally
low for an extended period,” with many market participants believing
that the institution will soon have to move away from such specific
wording with long-term inflation expectations beginning to build. That
said, the data of late has been disappointing on balance, and may in
fact provide Bernanke and company the rationale to hold firm. The Bank
of England’s key policy decision will focus on whether or not to expand
its programme of quantitative easing, whereby the bank monetizes the
national debt through the purchase of UK Government Gilt bonds. A
further expansion of the program would be seen as pound-negative,
essentially devaluing the currency. The ECB’s accompanying statement
will be monitored for any signal that the institution is moving away
from the “unconventional policy measures” – read: below market interest
rates – any time soon. Finally, the RBA, as the only bank with a real
risk of taking interest rates higher, will be under a great deal of
pressure to balance the need for growth against the long-term inflation
expectations that are developing down under. Though another hike is a
given early in 2010, some market participants are of the opinion that
the RBA will once again employ its famous two speed monetary policy,
whereby it takes a pause in its broader campaign of removing monetary
stimulus.
Have a great day.
By Mark Frey, Regional Director for Corporate Canada
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