Subprime Bubble Cracking

Daily Analysis - 04/03/2015

Subprime Lending Problems Resurface in Auto Loans

With the lessons of the last crisis seemingly forgotten, the comeback in subprime lending is setting up for another bubble to burst in the auto-lending space. As lending standards become more rigorous, auto sales have cratered as earlier loans face rising delinquencies.

Auto Sales Dive

The blockbuster sales figures from American automakers are coming to a halt as the Government cracks down on lending standards that have created a bubble similar to that of subprime home lending that led to the last financial crisis. Automakers are facing the worst start to a year since 2010 with Ford seeing auto sales contract 2.00% versus expected expansion of 5.80%. The resurgence in this form of lending to risky borrowers threatens to pop as the Government investigates loan underwriting while meanwhile loan defaults are on the rise. Coupled with student lending, these bubbles exceed $1 trillion in loans with any crack likely to impact other parts of the economy. The recent acquisition of Citigroup’s subprime lending unit by AIG also highlights that resurgent popularity of the lending mechanism despite the contagion risks.

GDP Beats Expectations

GDP figures released from Switzerland and Canada beat analyst estimates of slowing expansion with each economy expanding at 0.60% pace quarter over quarter. On an annualized basis, Canadian GDP is growing at 2.40% according to the latest data while Switzerland prints at 1.90%, in-line with the prior figure. This is surprising considering the efforts of both nations to keep rates exceptionally low to deal with risks of an overvalued currency in the case of Switzerland and falling commodity prices which impact the Canadian export economy. Both countries will maintain their present dovish monetary policies in an effort to keep currencies weak to support economic growth as the global economy continues to experience contraction. While Switzerland will be forced to intervene directly in the currency markets by purchasing Euros, Canada still has room to drop interest rates further to sustain the economy.

Oil Production Swells

With US inventories pushing highs not seen in over 80 years and production steadily increasing, the downward pressure on oil prices is likely to resume despite a lower build in inventories. Libya which has been plagued with violence since the fall of Ghaddafi, has seen production expand despite low prices, no supplying 400,000 barrels per day versus 325,000 in January. This reflects the improving security situation, but nevertheless emphasizes the efforts of national governments dependent on oil revenues to support regional economies and social programming. Oversupply will continue to be a factor even as US producers deal new well projects in anticipation of higher oil prices in the future. Yesterday’s API crude stock data expanded a smaller than forecast 2.9 million barrels with traders preparing for today’s EIA crude oil inventories figure due later this afternoon. Oil prices are trending back above $50 per barrel, but any larger than expected inventory gains in the EIA data could send prices back lower.

AUDUSD Head & Shoulders Technical Setup

The rebound in the AUDUSD pair looks to be over following comments from Reserve Bank of Australia Governor Stevens highlighting his willingness to cut interest rates further in an effort to keep the economy growing. Although the RBA refrained from cutting rates in the last meeting, speculation is high that subsequent meetings will see the key rate dropped from 2.25% to 2.00%. With US rates forecast to increase during the next 6-12 months depending on the data, AUDUSD is likely to retest multi-year lows. The head and shoulders technical pattern setting up in the pair has a bearish bias as the right shoulder nears completion. The first target on the downside is 0.7760 with support at 0.7723 as the subsequent level to watch. A move above 0.7844 will reflect a breakdown in the pattern and possible upside reversal.