Risk Aversion Theme Persists

Risk Aversion Seen Again

North American equities are set for a lower opening again this morning, following European indexes to close out a bearish week.  As might be expected, the unwinding of risk sensitive carry trades is propelling the Yen and Swissy higher as the high yielding AUD and NZD continue to struggle.  Both concerns over U.S. growth prospects in the coming quarter and further revelations with respect to sub-prime related write-downs on the part of both Canadian and U.S. investment houses are causing further hand wringing among stock watchers.

The EUR has benefited somewhat from a flight to quality overnight and has rallied again, hitting a new all-time high.  Cable however has fallen 0.8% on the news of a record U.K. trade deficit, which came in at 5.1B Pounds Sterling, exceeding consensus estimates by a fulll yard (1 Billion Pounds).

In this environment, the soaring Loonie has lost a little of its luster.  In previous sessions, a move towards risk aversion had seen the CAD hold firm while its commodity-driven brethren in Australasia took the brunt of the price action lower.  However, the recent capitulation in the Canadian unit has brought a decreased appetite for risk to the Canadian currency market and CAD is trading heavy at the moment as a result.

Bernanke and Trichet both Send Mixed Signals

Both Bernanke and Trichet spoke at length during Thursday's session, and both cited near-term worries over U.S. and by extension global economic growth, while choosing to focus on the ongoing need to maintain vigilance in the fight against inflation.

Bernanke's intial comments with respect to the risks to economic growth fuelled a rather short-lived dive in the Big Dollar but markets soon interepretted his comments as opening the door even further to a Fed rate cut on December 11th.  The latter half of his prepared remarks however focused on the continuing inflation pressure in the U.S. economy, a sentiment that carries more weight given today's bullish trade price data evident 

Debt traders have taken both comments to heart in that they are pricing in a Fed cut to the tune of 90% in December but are looking for higher rates long-term, as the Fed reacts to mounting inflation pressures, which will at least partially be fuelled by recent monetary easing.

The ECB's Trichet delivered a similar speach, just hours earlier, citing specific concerns over U.S. growth while jawboning rather aggressively on inflation.  While the ECB wants to remain vigilant on price pressures, rate hikes and hawkish rhetoric will only serve to further propel the European unit, something E.U. exporters certainly don't want to see.

North American Data

U.S. trade prices came in well above the consensus estimates this morning while the Michigan Consumer Sentiment Index delivered yet another blow to equities.  The index hit a two-year low with a reading of 75.0 vs. a consensus estimate of 80.0, demonstrating a quickly deteriorating view of consumer confidence in the U.S.  Today's releases will in no doubt cause more consternation amongst equity players with lagging consumer spending and the prospect of less accomodative monetary policy in the future due to inflation pressures.

The only piece of Canadian data of significance today was the release of the September trade balance, which highlighted a sharp rise in imports and decline in exports to a one year low.  It is now clear that he soaring Loonie is beginning to have an impact on real trade flows, something the BOC has cited as being a key concern.