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Equity Investment Capital

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Monday, June 21, 2010

Stock indexes early pointed to a strong opening; for a 10th day, sending the MSCI World Index to its longest rally in 11 months, oil and copper soared and Treasuries plunged after China signaled it will relax the yuan’s fixed rate to the dollar. The People’s Bank of China said it will end a two-year currency peg adopted during the global financial crisis to protect exporters, a sign policy makers expect the world economy to strengthen. The move to let the yuan float a little is what the US has been pushing for and implies China is increasing its optimism for the global economy and less concern for a trade war between the US and China.

Treasuries and mortgages are being hit this morning on the better global equity markets, the news out of China, this week's Treasury borrowing and The FOMC policy meeting. At 8:30 the 10 yr note was off 12/32, at 9:00 down 21/32 at 3.30% +7 BP, mortgage prices at 9:00 -9/32 (.28 bp) on the 4.0 FNMA coupon and -7/32 (.22 bp) on the 4.5 coupon. At 9:00 the DJIA index traded +130. At 9:30 the DJIA opened +120, 10 yr note -21/32 3.30% +7 BP, mortgage prices -9/32 (.28 bp)

Key economic data this week; May existing and new home sales. The FOMC meeting, always a market concern, this time there is some feeling the Fed may lower its outlook for economic growth for the second half of the year and into 2011. That view doesn't have much of a following but with consumers down, small businesses not hiring, unemployment high, 2.35 mil a month filing new unemployment claims, and the housing sector showing no signs yet of bottoming, what the Fed has to say on Wednesday afternoon will be closely monitored.

This Week's Economic Calendar:

Tuesday;

10:00 am May Existing Hm Sales (+7.0%)

Apr FHFA home price index (N/A)

1:00 pm $40B 2 yr note auction

Wednesday;

7:00 am Weekly MBA mortgage applications

10:00 am May New Home sales (-14.5%)

1:00 pm $38B 5 yr note auction

2:15 pm FOMC policy statement

Thursday;

8:30 weekly jobless claims (-12K to 460K; con't claims 4.58 mil frm 4.57 mil)

May durable goods orders (-1.3%; ex transportation orders +1.3%)

1:00 pm $30B 7 yr note auction

Friday;

8:30 final Q1 GDP (+3.0% unchanged frm prelim report)

9:55 am U. of Michigan consumer sentiment index (unch at 75.5)

Global bond markets are being hit this morning on the surprising news over the weekend that China will let its currency float against the dollar. China's decision is a signal China believes economic growth will continue sending German bunds lower in price along with US treasury prices. The decision from China also relieves concerns that there might have been a China/US trade war.

The bellwether 10 yr note is running into strong yield resistance at 3.18% with equally strong support at 3.32%, however the technical's are weakening. Technically the mortgage markets are coiling, unable to break resistance, making no new highs and higher lows as the 20 day moving average is closing in on prices. Still however, totally dependent on the economic outlook which is anything but a sure thing. One day its onward and upward in stock markets, the next its more conservative. Like the rate markets the key stock indexes are whipping in their respective recent trading ranged. There is no real consensus on what the economy will do, just a lot of opinions that keep large investors on the sidelines.

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