The Overnight Report: Dollar Trouble

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By Rudi Filapek-Vandyck

Tuesday (US time) was one of rather exceptional sessions across the globe as a strengthening US dollar was largely ignored by traders and speculators in commodity and equity markets. Last night was different. Last night the US dollar surged, and surged. And this time the world did pay attention.

US equities endured their heaviest losses since November 27. Dow closed at 10,603.15, down 122.28 (1.14%). The S&P500 lost 1.05% and closed at 1138.19. The Nasdaq lost 1.26%.

Earlier in the day, the DJ Euro Stoxx 50 fell 2.4% to 2915, the German DAX lost 2.1% to 5852 and the FTSE was 1.7% lower at 5421.

Base metals prices tanked, crude oil prices sank below US$78/bbl.

The SPI futures are indicating… you don’t really need me to finish this sentence, do you?

A combination of further tightening measures in China, ongoing concerns about Greece’s finances (and Italy’s, and Spain’s, and…) plus, say some commentators, the prospects of Obama’s healthcare reform potentially being blocked (costs: US$1 trillion) all conspired yesterday to push the US dollar from strength to strength.

The US dollar rose to its highest level against the euro in five months, pushing EUR/USD temporarily below 1.4082. The cross opens marginally higher at 1.4102 this morning. The USD index (five currencies) jumped more than 1%, currently at 78.34.

The surge in the USD caused for some serious reshuffling across financial assets. The price of gold tumbled US$30, bringing US$1100/oz back in focus. Copper and other base metals retreated between 1.5-2.5%, with the exception of lead which lost more than 5%. Crude oil futures for delivery in February (expiration today) fell more than 2% to close just above US$77/bbl.

Despite all traders’ hopes focused on China, the world’s emerging leader is not being very cooperative these early weeks of the new year. Yesterday, new reports emerged Chinese authorities have instructed some major banks to stop lending for the rest of January. Less liquidity usually translates into less growth, and thus less demand. Hence why the news was not taken kindly by traders in metals and energy markets.

In case you wondered: shares of BHP Billiton ((BHP)) and Rio Tinto ((RIO)) suffered losses in the order of 3.5-4.5% in New York overnight.

AUD/USD declined steadily overnight and opens today’s Asian session weaker at 0.9079 (not a typo). AUD/EUR opens marginally lower at 0.6437, relatively unchanged from Wednesday close. AUD/JPY declined in choppy trade overnight and opens lower at 82.83 and the  AUD/NZD opens marginally lower at 1.2623 after a whippy session.

The Shanghai Composite Index tumbled 2.9% to its lowest level of the year yesterday and mid-day during yesterday’s session on Wall Street it seemed US shares were on their way to retreat by some 2% as well. Towards the end of the session, markets pared some of the losses. Regardless, the overnight session instantly marks the worst day of the year (so far?), recording the biggest retreat since late November last year. Market bulls will tell you the market is still up for the year.

From a technical perspective, the S&P500 was immediately from the opening of trade firmly rejected at the 1150-level and never even looked like it might have another go at breaking through technical resistance.

In economic news, US December producer prices rose 0.2% against an expected 0.1% increase, while housing starts for the same month came in at 0.56 million units compared with a projected 0.58 million. As far as corporate news goes, IBM’s quarterly report plus strong outlook were okay, but concerns have emerged about the valuation of its shares. Bank of America, Wells Fargo and Morgan Stanley continued the trend of mixed and disappointing reports by financials.

However, investors chose to focus on the fact that underlying credit trends seem on the up, and that was taken as promising news. eBay’s results, released after the market close, appear better than expectations, but the shares trade lower in after-market trade.

In a case of bad timing, analysts at Credit Suisse issued an update on base metals, having raised all price forecasts, except for nickel this year. Overall, say the analysts, 2010 should become a strong year for commodities, despite the shaky start we’re enduring right now.

CS is keen on platinum group metals and the more cyclical markets, such as base metals or oil, as these have a larger exposure to industrial production (expected to surge this year).

A widening of the SHFE-LME (Shanghai-London) arbitrage should keep prices supported in Q1, predict the analysts. Price forecasts for copper have been upwardly revised with the metal expected to trade in a range of US$7,800-US$8,000 per tonne this quarter. Aluminium is expected to range between US$2,200 and US$2,300 per tonne.

Zinc and lead are both seen trading between US$2,500 and US$2,600 per tonne in Q1, while tin’s forecast has been upgraded to US$18,000-US$19,000 per tonne.

Credit Suisse downgraded its forecasts for nickel citing “poor demand prospects”, to US$19,000-US$20,000 per tonne from US$20,000-US$21,000 previously.

All this does not take away that base metals, and crude oil, continue batlling with rising inventories. Yesterday, study groups concurred, with the International Lead and Zinc Study Group (ILZSG) reporting both zinc and lead were in surplus in the first 11 months of 2009. The World Bureau of Metals Statistics (WBMS) had surpluses in all markets, bar lead and nickel, during that time.

US bond yields were lower overnight as disappointing US corporate earnings and China’s move to limit bank lending increased the safe-haven appeal of the US Treasuries. The yield on 2-year notes lost 2bps to 0.870%, whilst the 10-year yield fell 4bps to 3.653%.

Greg Peel will be back after Australia Day.

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