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Despite Friday’s euphoria, which was artificially controlled by global financial short selling rules, investors managed to manipulate asset class indexes to levels seen one week ago. Excluding the weekly noise, nothing was amiss for portfolio pricing. This week, the tandem team of Paulson and Bernanke will try and sell their packaged plan domestically and globally. Let’s see if the investor buys into it!

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

Like a blindsided collision, US regulators took the boldest move to date to try and appease consumer confidence levels once again in US financials. Last weekend, Treasury Secretary Paulson said financial markets remain ‘fragile’ and urged US Congress to pass his $700b proposal to use public funds to buy bad mortgage investments to avert a credit freeze (objective is to leak the ‘bad assets’ into the markets at a later date). Neither political party in an election year will want to be seen dragging their feet to aid the disenchanted voter. The objective is to stem the tide of US house foreclosures, which is tightly associated to most of the financial woes. Treasury will take the ‘toxic debt’ off financial balance sheets, resulting in a ‘kiss of life’ (we hope) and repackage them for a later date sale (this idea seem to have got us into this mess in the first place). End conclusion, there will be a larger national US debt, increased government issuance and a weaker greenback that should drive the one true bright spot in the US economy at the moment, ‘exports’. Where are the credit agencies in all of this? By default, this will create a weaker USD$ policy that no one will admit to. These new proposals, on the face of it, are giving too much power to too few people.

The US$ currently is lower against the EUR +0.60%, GBP +0.50%, CHF +0.70% and JPY +0.35%. The commodity currencies are mixed this morning, CAD +0.17% and AUD -0.01%. On Friday riskier assets were back in vogue. After the Paulson and Bernanke plan was tabled, despite all the details, capital markets embraced higher yielding assets. By default, the loonie remained better bid, more than analysts had anticipated. The buoyant commodity market continued to lend a helping hand as consumer confidence grew. But, it is interesting to note that futures traders are adding to their bets that the CAD$ will decline vs. the greenback. Prior to Cbanks ‘cash injection’ earlier in the week the loonie found no love amongst investors as market volatility dissuaded speculators from owning riskier assets. Canada has become guilty by its ‘proximity and association’ with its southern neighbor. On a cross related basis the loonie was sought after, as traders sold the lower yielding currencies like JPY and CHF. Fears of further financial meltdowns and stagnating global growth could add to the loonies’ demise in the short term. The US remains Canada’s largest export market, over 75% of our exports head south and 50% of that is commodity based. With global growth issues a major concern, commodity prices will continue to drag on the Canadian economy going forward. Expect traders to be better buyers of US$ on these pull backs, even if they seem exaggerated.

The AUD and NZD found some deserving support once again especially vs. JPY, as Bernanke and Co. seek US legislation to help financial institutions clear their balance sheets of illiquid assets and ease credit-market losses. Renewed capital market confidence has investors seeking higher yielding assets funded by loans in Japan (positive carry trade-0.8357). Is this positive momentum to persist? Will the Fed’s plans avert further global slowdown?

Crude is higher O/N ($106.00 up +159c). The last three day’s oil price appreciation has been the largest rally in nearly 10-years. The black stuff advanced nearly 7% on Friday (in line with other asset class volatility levels), on speculation that new measures to be introduced to resolve the global financial crisis would stimulate the US economy and boost commodity demands. Geo-political concerns in Nigeria, coupled with output disruptions (due to the hurricane season in the Gulf of Mexico) continues to provide an undertone bid for the crude market. On Friday, in a matter of hours, capital market investors went from weeks of pessimism to euphoria, forcing bears to quickly cover short positions as the Fed and Treasury seek to shore up the credit market crisis. Billions has been spent by CBankers to instill consumer confidence and by default promote future growth. It is anticipated that crude will continue to find a bid this week after recent EIA reports revealed lower US inventory levels since the hurricanes Ike and Gustav made land. To date, US energy companies have resumed about +11% of oil production and a quarter of natural-gas output in the Gulf of Mexico after shutting almost all of its production platforms before the hurricanes. Last week’s EIA report showed that US crude inventories fell -6.33m barrels vs. -3.5m to 291.7m, w/w. It was the 4th straight inventory decline. Fuel demand averaged +19.9m barrels a day over the past month (-4.4%, y/y), while gas consumption averaged +9.21m barrels a day (-2.6%, y/y). Gas stocks declined -3.31m barrels to 184.6m (the lowest level in nearly 20-years). With refineries due to come back on line in the Gulf of Mexico, speculators will once again be focusing on demand levels and not inventory. Market fundamentals and financial issues could continue to combine to provide weaken prices until the end of the year. Gold prices aggressively retreated on Friday, despite recording one of the biggest weekly returns in a decade, as global equities surged on the back of US government’s plans to ease the credit crunch and ‘curb’ bets against financial stocks. But, in the London session, the market has advanced ($881) as some speculators question how deep will the Fed’s plans go in resurrecting global growth?

The Nikkei closed at 12,090 up +169. The DAX index in Europe was at 6,182 down -7; the FTSE (UK) currently is 6,297 down -14. The early call for the open of key US indices is lower. 10-year Treasury yields backed up 20bp on Friday (3.80%) and are little changed O/N. Treasuries prices have collapsed along the curve, especially the short end (largest yield rise in 26-years) as Treasury Secretary Paulson and Bernanke announced plans to help curtail a collapse in financial-market confidence. Investor’s initial reaction was to abandon the ‘safety’ of the FI class and replace these assets with global equities and higher-returning assets. For the foreseeable future there will be no shortage of government debt issuance, hence the initial dramatic sell off reaction.

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