Daily Market Commentary
November 14, 2007
The economic calendar heats up a bit this morning from a slow starting week. Bonds are modestly lower after trading down on yesterday's huge equity rally.
It's tough making sense of these markets. Volatility is high, and the battle between bulls and bears is intensifying such that each day brings a renewed sense of where we stand. It's best to stand far back and take an objective view of the markets:
- Two year Canadas - volatility has actually been mostly to the upside (lower yields) and are now hovering at just below 4%.
- Ten year Canada - still holding at 4.25%, their lowest in 6 months. I'm no expert in technicals, but this seems to be an important level (see chart in Daily FI Snapshot)
- TED spread - measuring big banks' willingness to lend to each other, is still elevated at 1.42
- Corporate spreads - in general, have not improved materially recently, especially in financials. As an example, 5 year HSBC Canada trading 150 bps over Canadas, 10 year BMO trading 115 bps over Canadas... these are both near their highs for the year (in fact for several years)
Putting all this together makes yesterday's equity rally smell suspiciously like a violent short covering rally. Whether or not that is the end of the credit concerns remains to be seen, but the bond market has not eased yet.
US PPI came in slightly lighter than expected. We would continue to expect all measures of inflation to ease as there is still not a lot of pricing power in the markets, and consumers are still retrenching. These aren't the times when inflation perks up.
Canada's leading indicators came out weaker than expected. This is the first weak economic data out of Canada we can remember in the recent past. The bond market has foretold it already, but the Bank of Canada will be cutting soon, possibly as early as December.
The CAD$ remains well bid despite the crummy print on our leading indicators. As a trading position, being long US$ while the equity markets are jittery is usually a good idea. The CAD$ responds to risk... like it or not, we're a risky currency (opposite of US$ and Yen), and we should continue to grind lower as long as risk aversion is the main theme in the markets.
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