It has been just over a year since Spain saw Standard & Poors reduce its credit rating from AAA to AA+. S&P also trimmed Portugal’s credit worthiness rating from AA+ to AA-. Despite these moves, it appears that Greece remains the weakest link in an already flimsy chain as S&P downgraded Greece’s rating to BBB+ this past December. This is the lowest of the “Investment Grade” ratings, but the reality is that, for a sovereign nation, this is really the equivalent of “junk” status. Worse still, S&P has warned that given the downside risks of dealing with Greece, further cuts are not out of the question.

“If public support for the government’s stability program decreases from its current level, compromising its execution, we could also lower the rating,” noted S&P analyst Marko Mrsnik in a statement released February 24th.

Seeing that – even as I write this – Greece is in a state of lock-down, I would guess that “public support” is a bit on the light side. Schools are shuttered, the airports are offline, and public transit is shut tight as protestors take to the streets in the thousands. All this in reaction to the government’s first attempts at reigning-in spending, which so far, have consisted of a lot of talk, but little action. Imagine the outcry when the austerity program actually kicks in.

In addition to dramatic spending cuts, Greece must raise in the order of $54 billion this year to cover its budget shortfall. At its bond sale last week, Greece was forced to increase the yield on its 10-year bonds to attract sufficient buyers to ensure a successful sale. The yield spread, when compared to Germany’s equivalent bond, jumped 11 points over the previous sale to 297 basis points. Demand was strong, but it is clear that investors see this as an opportunity to buy high-yielding bonds, ultimately, backed by the collective strength of the entire EU. Buyers are clearly betting on a rescue package should Greece be forced to default.

Some of the finer points to be debated include whether to develop a “formal” bailout approach to serve as the official protocol for a future budget crisis, or whether each incident should be handled independently. There is also a question as to what point should the EU intervene on the behalf of a member-country.

Source: Bloomberg

Overall, the IEA predicted that total global demand will increase 1.8 percent this year to 86.6 million barrels a day. The IEA also noted that half of the world demand would come from Asia.

Source: BBC News

“There is slow re-engagement from consumers,” Ethan Harris, head of North America economics at Bank of America- Merrill Lynch Global Research in New York, said before the report. “As the economy slowly improves and the labor market stabilizes, people get a little less conservative in their spending.”

Source: Bloomberg

Source: The Canadian Press

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘subdued’ trading range.

In the US yesterday, both the nominal and real trade balances improved. The improvement in the price-controlled is what flows through to GDP and it should reverse the deteriorating trend that had been in place over the previous two-months. That being said, the nominal trade balance improved more than anticipated (+$37.3b vs. $-41b.). One notices that the dollar value of imports fell faster than the decline in exports. The drop in nominal exports was focused on the transportation sector. This sub-sector is highly volatile, as large monthly gains create ‘unsustainable base effects for the next month’. Surprisingly, other export categories produced considerable strength (telecom equipment climbed +6.4%, consumer goods were up +1.3% etc). It’s the decline in imports that concerns analysts the most. It was broadly based. Notably, only apparel (+1.6%), food and beverage (+1.7%) and services (+0.4%) were up. All other major categories of imports fell.

The claims and employment reports should be heading towards solid footing after the ‘blizzard induced spikes’ we witnessed last month. So it’s expected that US jobless claims will be able to report further improvement going forward. Yesterday’s US initial claims number revealed another weekly improvement (+462k) from the spike induced print of last month (+498k). By the end of Mar. we should be back to pre-blizzard reporting. This should provide a solid footing for the next NFP report. Again, distorted by weather conditions, we witnessed continuing claims push a tad higher (+4.558m vs. +4.521m). It’s important to note that the weekly print lags initial claims by one week. So, optimistically, we should see an improved print going forward. Finally, both extended (+163k vs. +178k) and emergency (+5.68m vs. +5.52m) fell last week. Analysts remain confident that they expect to see further improvements in these programs over the coming months.

The USD$ is weaker against the EUR +0.30%, GBP +0.36%, CHF +0.38% and JPY +0.03%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.17%. Yesterday we saw evidence in Canada that potentially will put ‘upward’ pressure on core-inflation. Firstly, there was a rise in new house prices (+0.4%), and secondly, a faster than expected pace of industrial capacity’ (70.9% vs. +70%) in the Canadian economy. This is strong proof that Canada is moving away from an emergency rate setting (+0.25%). Trader’s opinions vary on the timing of a hike, consensus is probably July. However, both June and Sept. cannot be ignored. The BOC will certainly have its work cut out. All along they have been vocal on a stronger loonie effect on sustainable growth. Surely, with the currency flirting with parity, its value is doing a hiking job? The Canadian monthly rise in new house prices met expectations for the third-straight month or almost +5% annualized. It’s worth noting that the level of new house prices is only +1.3% away from the all-time record of two-years ago. The fourth Q capacity utilization climbed a percentage point higher than expected to +70.9%. That’s on top of a +1.3% upward revision to the previous quarter’s rate. The rate has climbed a whopping +3.2% points in six-months. Despite being below pre-crises levels, it continues to provide support for robust growth and an end to emergency interest rate policies. Canada’s trade picture continued to improve in Jan. (+$0.8b vs. +$0.2b). Exports rose while imports dipped for the first time in two-months. Digging deeper into the report, trade was weaker than the headline number implies, as all of the growth in exports was due to prices, with both export and import volumes down on the month. Despite remaining the darling of growth currencies and even with commodities prices ‘to and fro’ there is an appetite to own the currency as speculators gamble on these ‘growth’ prospects. For now, ahead of this morning employment report, the currency continues to congest vs. its southern partner. The trend remains your friend. Expect better buying of the domestic currency on USD rallies in the medium term. Record IMM long growth currency positions may put a spoke in the wheel.

In the O/N session the AUD traded near its seven-week high from Jan. vs. the dollar as traders bet ‘accelerating growth’ will prompt its RBA to increase interest rates. The weaker than expected Australian employment report (+0.4k vs. +15.2k) earlier this week only provided an opportunity for speculators to add to their positions. In Feb., the economy added the fewest jobs in six-months. Some have suggested that the RBA ‘has room to slow the pace of future interest-rate increases (+4%)’. The pause in the employment boom ‘may prompt some consumers to trim spending in coming months’. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. Expect Chinese policy tightening to eventually cool the demand for the AUD as a ‘first play’ growth currency, but until then, the trend remains your friend. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9178).

Crude is higher in the O/N session ($82.38 up +27c). Crude was little changed yesterday despite the initial sell off on speculation that China might have to implement various exit strategies after recording the highest inflation rates in 16-month. Their CPI print of +2.7% in Feb. increases pressure on the Government to somehow suppress inflation and probably growth. This week’s EIA reports are supporting the ‘bull’ technicals. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. An OPEC report this week stated that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. OPEC meet next week to decide production quotas. Already member representatives say that ‘no new decision’ about production levels is expected at the meeting as ‘projected demand levels are still much less than OPEC’s current production’. This scenario will increase stockpiles. With momentum and an investor attitude that the economic situation will not get much worse should support commodities on pull-backs.

For a fourth-consecutive trading session this week the ‘yellow metal’ has struggled. It managed to print new weekly lows yesterday morning as the dollar tries to maintain its buoyancy vs. the EUR, thus reducing the demand for the metal as an alternative asset. Thus far this morning the dollar has struggled. Speculation of tightening monetary policies in China could add additional pressure to the commodity. Comments earlier this week, also from China, have managed to weigh on the commodity. Authorities indicated that ‘bullion probably will not be the country’s main reserve investment’. Technically that means they will ‘have to hold dollars’. It’s all about the performance of the dollar. Currently, any signs of weakness and we will have buyers happily entering the market. Until then, the bulls are the unlucky investors. Close to current levels, EU sovereign debt concerns have had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at these lower levels ($1,111)?

The Nikkei closed at 10,751 up +86. The DAX index in Europe was at 5,945 up +16; the FTSE (UK) currently is 5,621 up +5. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.74%) and is little changed in the O/N session. The US yield curve, especially the long-end, has felt the pressure of supply, finally. The short end of the curve has been better bid despite the plethora of product this week. The appetite is been aided by Fed rhetoric stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’. The 2’s/bonds spread managed to widen out to new-records ahead of the last auction of the week, the long bond ($13b). Yesterday’s 30-year auction was again well received. The bid-to-cover ratio was 2.89 compared with 2.36 in Feb. and 2.68 in Jan. The average has been 2.44 from the past 4-auctions. Indirect-bids (proxy for Cbanks) were +24%, compared with +28.5% in Feb. and +40.7% in Jan. The average was +38.4% for the last 4-auctions.

Source: Reuters

At the current rate, if projected over the entire year, America’s annual trade deficit would be $447.5 billion for 2010. This would be an increase of 68.9 billion, or 18.1 percent.

The growing trade deficit has become a considerable headache for the Obama administration which continues to level charges of currency manipulation against China. The yuan has been prevented from appreciating against the dollar for the past 18 months in a move intended to maintain China’s competitiveness on the global markets. Yesterday, China reported that its February exports rose by 45.7 percent compared to February 2009.

Source: Associated Press

With respect to employment, the report pointed to rising commodity prices as a net benefit to the country as well as a return to stability in the manufacturing sector, in particular, the auto industry.

Source: The Canadian Press

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘subdued’ trading range.

Finally there was some data to chew on yesterday. The US whole sale inventory, on the face of it, disappointed as a new all-time low on the wholesale inventory-to-sales ratio was achieved. Inventories unexpectedly fell (-0.2% vs. +0.2%). With the drop across all the sub-categories in nominal terms has analysts believing that it was due to a price-adjusted drop, which will end up being a drag on the US GDP for the 1st Q. On the other hand, sales continue to grow (+1.3%, m/m), broadly based, so probably not a ‘price distortion’. Both durable and non-durable goods accounted for the increase. As analysts note, recent reports suggest the ‘replenishment of depleted stockpiles will lift production in coming months’. These on-going efforts helped the US economy expand at +5.9% last quarter (the fastest pace in six-years).

Reports have shown that US mortgage foreclosure filings dropped for a second straight month in Feb., and produced the smallest increase in four years as housing-rescue efforts contained activity. The US housing market remains ‘vulnerable’ to set backs and continues to rely heavily on government intervention. This is an important indicator, if foreclosures keep dropping it will send a strong signal that ‘the market is on the path to recovery’.

The USD$ is weaker against the EUR +0.04%, GBP +0.14%, CHF +0.03% and JPY +0.03%. The commodity currencies are stronger this morning, CAD +0.16% and AUD +0.16%. Despite remaining the darling of growth currencies and even with commodities prices ‘to and fro’ there is an appetite to own the currency as speculators gamble on these ‘growth’ prospects. The currency continues to congest vs. its southern partner and certainly outperform on the crosses. Traders are waiting for today’s trade numbers and tomorrow’s all important Canadian employment report. Technically, the currency is on course to test the USD support levels close to 1.0200. Depending on this week’s data, the domestic currency may have the momentum to provide another parity onslaught where it should run into strong opposition. Last week, the BOC did what was expected of them, by keeping rates on hold. It seems that they are potentially ‘behind the curve’. Their communiqué was hawkish in nature, leading to somewhat predictable rate increases for the second-half of this year. The BOC must be concerned about the loonies’ strength of late. However, it has occurred in an orderly fashion and rapid appreciation for speculative reasons would have sent alarm bells ringing. The trend remains your friend. Expect better buying of the domestic currency on USD rallies in the medium term. Record IMM long growth currency positions may put a spoke in the wheel.

The AUD managed, at one point, in the O/N session to print a seven-week high, but backed off slightly on the back of the Australian employment report (+0.4k vs. +15.2k). In Feb., the economy added the fewest jobs in six-months, which suggests that the RBA ‘has room to slow the pace of future interest-rate increases (+4%)’. The pause in the employment boom ‘may prompt some consumers to trim spending in coming months’. Of late, robust Chinese export numbers have had investors demanding higher yielding growth currencies. Expect Chinese policy tightening to eventually cool the demand for the AUD as a ‘first play’ growth currency. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. Analysts believe that the ‘the biggest jobs boom in more than 3-years and a surge in business confidence suggest Australia’s economy is already growing at or close to trend, after escaping recession during the global crisis’. Reading between the lines, we should expect the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9161).

Crude is lower in the O/N session ($82.02 down -7c). Crude bulls are wearing ‘diamonds’ this morning as the commodity maintains its upward momentum, setting its sights on old resistance targets. Yesterday’s weekly EIA reports are supporting the technicals. Mind you, a softer ‘buck’ is also aiding the black-stuff. The weekly report showed a decline in supplies of gas and distillate fuels. Gas stocks dropped -2.96m barrels to +229m vs. an expected ‘little change’ scenario. Distillate supplies (heating oil and diesel) decreased -2.22m barrels to +149.6m. It was expected that stockpiles were to fall by only -1m barrels. On the flip side, crude inventories rose +1.43m barrels to +343m vs. an expected climb of +2m barrels. An OPEC report yesterday stated that member states will need to produce more oil than previously estimated. It’s expected that the members need to be pumping +28.94m barrels a day to satisfy this years global demand. That’s an increase of +190k barrels a day over last year’s projections. OPEC meet next week to decide production quotas. Already member representatives say that ‘no new decision’ about production levels is expected at the meeting as ‘projected demand levels are still much less than OPEC’s current production’. This scenario will increase stockpiles. With momentum and an investor attitude that the economic situation will not get much worse will support commodities on pull-backs.

For a fourth-consecutive trading session this week the ‘yellow metal’ has struggled. It managed to print new weekly lows this morning as the dollar maintains its buoyancy vs. the EUR, thus reducing the demand for the metal as an alternative asset. Comments earlier this week from China have also managed to weigh on the commodity. Authorities indicated that ‘bullion probably will not be the country’s main reserve investment’. Technically that means they will ‘have to hold dollars’. As we wait for US Trade and claims data investors have been happily cashing in profits that were booked using other G7 currencies. Forgetting Greece, it’s all about the performance of the dollar. Currently, any signs of weakness and we will have buyers happily enter the market. Until then, the bulls are the unlucky investors. Last month the commodity managed to print its first monthly gain since Nov. European sovereign debt issues and a ballooning UK deficit with the potential of ‘hung’ parliament after the next general election had investors seeking some sort of portfolio surety back in Feb. Will we see the same interest at lower levels ($1,106)?

The Nikkei closed at 10,664 up +101. The DAX index in Europe was at 5,940 up +4; the FTSE (UK) currently is 5,635 down -5. The early call for the open of key US indices is lower. The US 10-year backed up 3bp yesterday (3.73%) and is little changed in the O/N session. The FI asset class felt the pressure from a somewhat buoyant equity market and US supply issues this week. The short end of the curve has been better bid despite the plethora of product. The appetite has been aided by Fed rhetoric stating that ‘low interest rates are likely to be needed for some time, as high unemployment lingers and inflation stays below target’. Yesterday’s 10-year auction ($21b) was well received. The bid-to-cover ratio was 3.45 compared with 2.67 in Feb. and 3.00 in Jan. The average has been 2.83 from the past 8-auctions. Indirect-bids (proxy for Cbanks) were +35%, compared with +33.2% in Feb. and +29% in Jan. The average was +42.3% for the last 8-auctions. Today we get to bring down the last of this week auctions, the long-bond ($13b).