ICAP AM REPORT

The fall in US jobless claims to 451k from 478k was met with a solid global bid for stocks, while bonds sold off. The expectation was that claims would be higher at 470K. They’re still elevated for sure, but the recent decline in new claims is a good sign that the deterioration in late July/August was an anomaly. Whatever the case, it highlights the danger in being too fixated on volatile high frequency data in forming a medium term view.

Also giving the market a boost were the trade figures. Now these have habit of being revised, sometimes substantially, but the numbers for July (and noting it is still early days) are telling us that the net export detraction may be significantly lower in Q3 (exports rose 1.8% and imports fell 2.1%). Remember that imports alone took off 4.5%pts from GDP in Q2, net exports making the largest detraction since the 1940’s. What that means is that there is ample scope for GDP to be reasonably decent in Q3 and that talk of a double dip was exaggerated – the probability far below 40%.

As a consequence of this we’ve seen another fairly sizeable move on the US treasury curve and on decent volume (16% above average). Steepeners in vogue, the yield on the 2yr rose 6bp (0.56%) while the 10yr rose 12bp to 2.75% which is the highest close in about a month. Now admittedly ‘only’ average demand at a 30yr bond auction wouldn’t have helped bullish sentiment, but overall the auction wasn’t too bad and I doubt this was a key factor at play. Cover was at 2.73 compared to 2.75 in the 6 prior reopening. Aussie futures were off about 9 ticks on a 10 tick range with 3s at 95.32 and 10s at 95.01.

As for stocks they got a fairly decent bid, especially in Europe where the major indexes closed up between 0.9% and 1.2% higher. US equities didn’t do badly but they underperformed Europe with the S&P up 0.5% (1104), the Dow up 28pts to 10415, while the Nasdaq rose 0.3% (2236). Outperforming sectors included telecommunications, healthcare and financials. Otherwise the SPI rose 0.5% (4603).

Elsewhere we didn’t see a lot of action. On the FX front AUD and EUR were up smalls to 0.9234 and 1.2708. Conversely GBP sold off about 30pips to 1.5437 while JPY pushed a little higher to 83.82 from 83.66. Yen strength has clearly been worrying the Japanese government, and now the latest is that the Japan wants to buy Chinese bonds. China has been very active in buying short-term Japanese debt and the Japanese finance minister wants to even things out.

About the only place where risk wasn’t put on was in the commodity space. Crude was down 0.8% ($74.06) after the Energy Department said that crude stocks increased last week, while copper was down 2% in NY.

Bits and pieces otherwise. UK trade data showed the deficit unexpectedly expanding in July with exports falling 0.9% (after very strong growth) and imports rising 3%. The BoE held rates steady and made no changes to its asset purchase program. Finally, while many investors have been steering clear, one of the world largest (Norway's Sovereign wealth fund, as been snapping it up and apparently accelerated that process in Q2. The funds view is that Greece will not default especially over he next couple of years - the period they have got a guarantee. Makes sense.

Today we get Chinese trade data at some point and the final estimate of Japanese Q2 GDP (0950). Data tonight includes UK PPI and Canadian employment numbers.

Have a good day…