Notes From Underground

The unfortunate news from the weekend was the disasterous earthquake that shook Chile. We await more news on the devastation and the human misery that accompanies all such events and hope that it is minimal. The markets reacted to the copper as it is the market’s job to do. The short copper positions ran for cover as they were correctly afraid of a short squeeze because copper could have short-term supply problems, even though the Chileans said that the mines were going to run as usual and the ports seemed to be running for exports. The copper markets will be on edge as the news will continue to trickle out about the overall damage.

Traders should be cognizant of other global producers to meet short -term demand. It is well known that China is sitting on massive stockpiles of copper and should be able to weather any disruption. Production from Australia will be ramped up if need be. Speaking of Australia, we want to remind readers that there is a central bank announcement tonight at 9:30 CST. The market is leaning toward a tightening of 25 basis points as the RBA chose not to move at the last meeting. The Aussie is one of the only central banks that is currently ahead of the curve and this has made it a favorite of the currency carry crowd. If the RBA holds at 3.75% on its overnight rates, we expect to see a selloff in the Aussie but you should be prepared with support levels.

The biggest financial story over the weekend was that AIG is planning to sell its Asian insurance unit to Prudential of the U.K.for $35 billion. This has led to weakness in the British pound as the market is anticipating the buying of dollars to do the deal. This transaction bothers us for several reasons. First, the U.K. insurer is using a weak currency to do the transaction. Where are the potential buyers who could use a strong currency and therefore pick up better value?

Secondly, why did the Chinese not try to make this deal as they have a long history of involvement with AIG? The insurance conglomerate has had a long presence in China–AIG was established in Shanghai in 1923. By buying AIG’s Asian operation, China could have put their massive DOLLAR stockpile too good use. Lastly, when a company is selling off its best businesses to finance its mere existence, we begin to wonder what their strategy is going forward. The huge wealth held in sovereign wealth funds makes us question why the SWFs are hoarding rather than spending.

Something that also caught our eye was the Italian bond futures. As traders we look for the disconnects in the market that take us from what ought to be happening to what is happening. When the Greek debt problems and the Dubai debt news arrived on everyone’s radar screens simultaneously Thanksgiving weekend, we noted that the only way we had to play in the European debt arena was through the newly listed Italian bond futures. The fact that the Italian bonds became the proxy for all the PIIGS made us pay close attention. We find it interesting that with all the talk about contagion in the European debt markets that the Italian bond futures are now trading above when the severity of the Greek problems made the headlines. As usual we will point out divergence when it occurs. This is why we always believe that 2+2=5!

Tags: Aussie, Dollar, PIIGS, SWF

This entry was posted on March 1, 2010 at 12:02 pm and is filed under Currency. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.