The Week Ahead: Safe Haven Trades Explode

Investor sentiment failed to improve over the long weekend, sending U.S. Treasury bond prices to unprecedented heights.

European markets took a beating on Monday with Germany's DAX falling more than 5% and London's FTSE 100 falling 3.6%. Markets recovered somewhat Tuesday - the ongoing session has the DAX up 1.1% and the FTSE up 1.3% - but sentiment remains weak.

"Risk aversion continues even after European equity markets recouped a modest amount of yesterday's steep losses," said BMO Capital Markets.

The big news from Europe today comes from Switzerland, where the central bank imposed a ceiling on the franc's exchange rate to combat record rates against the euro and greenback. The move prompted an immediate 8.7% fall in exchange rates, according to Bloomberg News.

"Fears of a new global recession have prompted investors to pile into currencies such as the franc and the Japanese yen which are seen as havens in a time of crisis," the news agency said. "That's forced policy makers into action to protect their exporters."

Meantime, BMO said concerns are growing that Greece and Italy "are losing their appetite for fiscal austerity, and that Germany is losing its appetite for further bailouts."

"Without aid, Greece would likely default, causing further strain on Europe's banking system," BMO added. "With Greece's one-year borrowing rates at 82%, the market is clearly pricing in a high risk of default."

The 10-year Treasury yield tumbled to as low as 1.908% overnight - its lowest in at least six decades. Two hours before the opening bell, its yield is now only slightly firmer at 1.987%, the 30-year yield is one basis point lower at 3.295%, and the tw0-year yield is a basis point higher at 0.208%.

The 10-year yield broke the 2% barrier for the first time in 60 years in mid-August.

U.S. equities look to open more than 1% lower after dropping in excess of 2% on Friday. S&P 500 futures are 17.1 points lower at 1,152.20 and Dow futures are 138 points down at 11,070.

Light crude oil is 1.91% lower at $84.80 per barrel, while gold prices are $1,896.20l

Key Events This Week:

Tuesday:

10:00 - The ISM Non-Manufacturing Index has been in growth mode for 20 straight months but its pace has fallen in four of the past five months, including the last two. In January, it read 59.4; by July it had fallen to 52.7, and forecasts for August assume a rate of 51 - a single point above break-even. 

"The economy does not appear to have fallen into retreat, but it shows almost no positive momentum and weak readings for non-manufacturing orders and business activity will reflect that malaise," said IHS Global Insight.

This index tracks the services, financial, and construction industries. Unlike its manufacturing cousin, it's not considered much of a leading indicator, however, especially in months when the payrolls figure has already been released.

1:10 - Narayana Kocherlakota, president of the Minneapolis Fed, speaks to the Carlson School of Management in Minneapolis.

• Treasury Auctions:
• 11:30 - 3-Month Bills
• 11:30 - 6-Month Bills

Wednesday:

2:00 - With little new data this week, a lot of focus could turn to the Fed's Beige Book for a comprehensive update on where the economy stands near the end of the third-quarter. The book offers an anecdotal look at the economy, as published by the 12 regional Federal Reserve branches. It's being compiled for the Sept. 20-21 monetary policy meeting.

"The pessimistic regional Fed surveys in August reflect the debt ceiling debacle, the ratings downgrade and coinciding stock market volatility," said Nomura Global Economics. "We expect a similarly negative portrait of the economy to be painted in the Beige Book. We expect anecdotes of firms exhibiting restraint - in both hiring and capital investment - to also crop up in a labor market whose outlook has dimmed."

4:00 - John Williams, president of the San Francisco Fed, speaks to the Seattle Rotary Club on Fed policy and the economic outlook.

• Treasury Auctions:
• 11:30 - 4-Week Bills

Thursday:

8:30 - The Trade Balance is expected to produce a $51 billion deficit for the month of July, versus a $53.1 billion gap in June and a $50.8 billion hole in May. Exports are thought to have rebounded after a weak showing in June, while imports are thought to have been steady.

IHS Global Insight forecasts an exports rebound "with gains across most major subcategories."

By contrast, Citibank said the rebound in exports could be lopsided and soft.

"We think that exports will reverse only a small fraction of the huge June decline because it was centered in chemicals and non- electrical machinery," Citi wrote. "That decline coincided with weakening manufacturing PMI figures from around the globe. Just three out of thirty available PMI diffusion indexes signaled noticeably faster growth in July, while twenty-one showed signs of weaker growth."

Taking a step back, IHS Global notes that trade contributed just 0.1 percentage points to second-quarter growth. They said it should provide "a larger boost in the third quarter as exports rebound and imports moderate."

8:30 - Initial Jobless Claims fell 12k in the final week of August to 409k, while the four-week average bumped up to 410,250 - just up from the July average. Claims are anticipated to remain steady this week, though forecasts range from 400k to 435k.

"There is considerable risk associated with this figure due to Hurricane/Tropical Storm Irene," Citigroup notes. "Heavily ravaged states probably experienced fewer claims, while regions that recovered quickly and reopened offices likely reported greater than usual volume. The storm affected coastal and inland areas along the eastern seaboard from North Carolina to Maine. Damage estimates have ranged from $8 billion to $16 billion."

1:oo - Federal Reserve chairman Ben Bernanke speaks to the Minnesota Economic Club in Minneapolis.

3:00 - Consumer Credit is anticipated to rise $6 billion in July, a figure broadly in line with the $4 billion average seen from December to May. June's figure, a major outlier, was $15.5 billion. 

As with every month, the details are key: installment credit - loans with fixed payments, such as mortgages or auto and student loans - have been responsible for the bulk of recent increases; revolving credit - like credit cards - are in a deleveraging cycle (June's $5.2 billion increase was attributed to fewer payments rather than new pools of demand).

"Consumer credit will be driven in July by the jump in purchases of motor vehicles," said Nomura Global Economics. "For this reason, we expect non-revolving credit to account for nearly all of the increase."

7:00 - President Barack Obama addresses a joint session of Congress on his proposals to create more jobs and help the economy recover.

Friday:

10:00 - Wholesale Trade is anticipated to pick up 0.8% in July following a 0.6% gain in June and a 1.7% increase in May. One reason is firming energy prices lending upward pressure, according to Nomura Global Economics.

"Wholesale inventories have surpassed historical highs and are expected to continue expanding in July," added BBVA. "Durable goods inventories are on the rise, mostly due to transportation equipment, while growth of nondurable goods inventories appears to be decelerating. Consumer confidence has declined during the summer months, and with no clear signs of recovering demand, it is unlikely that a rebound in sales will reduce high inventories. Thus, we expect wholesale inventories to continue growing in July."