A Herculean Greenback is aided by TARA (Troubled Asset Relief Act.)

A financial apocalypse is amongst us, political grandstanding by every available lobby group continues to eat away at the last shred of consumer confidence that ‘main street’ holds. Will today’s political and financial actions change the course of Capital Markets history for the better? Other CBankers continue to provide financial support (Bradford & Bingley and Fortis in Belgium), but G7 members, who are highly critical of US financial actions, wait to see……

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies, in another ‘volatile’ trading range.

After Friday’s dismal US data, one can only say that the Fed is not getting a break on the fundamental front either. This will percolate throughout other global economies. The US economy expanded more slowly than previously estimated in the 2nd Q, further proof that consumer spending (the Fed’s go-to variable) was weakening before the credit crisis intensified. A full half-point was knocked off consumer spending and that carried straight through as the dominant factor behind a 50bp downward revision on GDP growth, to +2.8% (from 3.3% initial). Digging deeper into the sub-components, exports and business spending on equipment and software were also revised lower from earlier estimates. Consumer spending on durables fell in 2nd Q; this was largely due to the pressure of vehicle sales, while non-durables spending grew as a reflection of a return to spending on staples, such as food and energy costs pressurizing household budgets. It remains the case that inventories, housing investment, business spending on equipment, and durables consumer spending all subtracted from growth. Net exports remain a big ‘positive’ contributor to growth, but, face downsides risks going forward. However, the core personal consumption expenditures deflator (the Fed’s preferred inflation measure) was revised a touch higher to +2.2% vs. +2.1%, m/m. The market will not be too concerned as there are more reason to be worried about growth risks than inflation going forward (inflation is expected to retreat in a hurry). The University of Michigan sentiment index has thrown its weight behind the retreating consumer. Confidence among US consumer fell this month (+70.3 vs. +73.1), a sign the worsening credit crisis will prompt more consumers to curtail their spending patterns even further (last years average was +85.6 reading).

Expect Capital markets to be pre-occupied with the late financial aid bail-out package proposed this w/d. It’s expected to take center stage as analysts and traders, with a fine tooth comb, seek reassurance that the US government will finally be able to apply the brakes to this runaway financial and credit debacle. Will other timely covert operations need to be implemented at the same time? (Like reducing global borrowing costs for instance). Will the stand alone aid package be sufficient to win support of the ‘Main Street’ consumer? Wall Street has already been lost, banking rules and regulations have changed for the better. The greed factor solidified the decline!

The US$ currently is higher against the EUR -1.36%, GBP -1.70%, CHF -1.04 and JPY -0.03%. The commodity currencies are weaker this morning, CAD -0.60% and AUD -1.09%. The loonie remained under pressure during this morning’s London session and after printing a 2-month high last week as US law makers agreed on a ‘set of principles’ for a financial rescue plan to inject fresh capital into the paralyzed credit markets. The on again off again tentative deal was finally finalized over the w/d and the market expects both houses to vote on it by Oct.1st. Despite the US being Canada’s largest trading partner (75% of all exports head south of the border), the currency had appreciated +1.5% last week vs. the greenback. Capital markets expect the plan to stabilize the US economy and by default could be a plus for the loonie. With weaker global fundamentals dictating stagnant growth, this will surely hinder the performance of commodity currencies. Growth and demand go hand in hand. Crude appreciating +4% last week (50% of Canada’s exports are commodity based) continued to provide an undertone bid. But, analysts now expect global growth concerns to weigh on the ‘black stuffs’ prices this week. The market will have to wait until the financial aid package is passed before the loonie has any short term hope of appreciating. Governor Carney has indicated that any further slowdown in the US economy will affect areas that matter most for Canada. He is confident that domestic banks are ‘faring well amid the crisis’, but, expects demand for Canada’s products to drop more than anticipated and inflation to slow. This should give Governor Carney the latitude to ease O/N borrowing costs (3.00%) by year end, as the downside risks for slower growth will intensify. Expect traders to be better sellers of the CAD$ on USD$ pull backs in the short term until proven otherwise. PM Harper is currently pre-occupied with domestic issues as the country goes to the polls on Oct. 14th (he is trying to improve on his minority stance).

The AUD dollar continued its decline vs. the greenback (0.8183), after US lawmakers reached a tentative agreement on a capital markets rescue plan this weekend (it will be voted on by the two houses before Oct.1st). Its objective is to instill confidence in both the US currency and the US financial system. It will take some time before these filtrates down through capital markets. Despite the anticipated temporary euphoria, the world economies remain weak and this does not bode well for commodity currencies. Traders have increased their bets that the RBA will cut O/N borrowing costs (7.00%) next month by 50bp, to encourage banks to boost lending amid a global credit freeze rather than hoarding cash. Expect this to be the new mantra of most CBankers.

Crude is lower O/N ($103.86 down -303c). The energy market was unable to hold onto its weekly bid on Friday. Despite a rescue package being hastily tabled and debated on the w/d, fundamental concerns look to put pressure on the ‘black stuff’ prices this week. Over 48% of market analysts expect crude prices to retreat, on concerns that US fuel consumption will weaken because of lower economic growth. Overall, last weeks price action supported the bull’s positions. The EIA weekly report showed that US gas inventories had dropped to its lowest level in 40-years, and traders bought commodities because of increased optimism on both the economy and demand. Gas inventories fell -5.9m barrels to 178.7m (the lowest since 1967). With refineries operating at only 66.7% of capacity last week (lowest level in 20-years) and a bullish crude inventory report earlier on in the week, had ‘bear’ traders seeking shelter. Oil has advanced +25% since US lawmakers pledged 12-days ago fast consideration of Treasury Sec. Paulson’s plan to buy devalued mortgage-related securities. Fundamentals are expected to kick in after last Friday’s negative data. US fuel demand averaged +19.5m barrels a day over the past month (the lowest level in 5-years). With the sales of new homes in the US falling to a 17-year low, combined with orders for durable goods falling more than forecasted on Friday, this has provided further proof that economic issues will once again weigh on the market. It’s only a matter of time before the global economic slowdown spreads further afield (China, India) and cut consumption even more. Gold remains offered ($876) as traders believe that the ‘toxic waste’ disposal plan put forward by Paulson and to be voted later on today will finally stabilize financial markets and reduce the appeal of the ‘yellow metal’ as a safe haven asset.

The Nikkei closed at 11,743 down -150. The DAX index in Europe was at 5,876 down -187; the FTSE (UK) currently is 4,958 down -130. The early call for the open of key US indices is lower. 10-year Treasury yields backed up 4bp on Friday (3.81%) and gave all that up in this morning’s session (3.78%). Even though traders cheapened up the FI curve for the government debt auctions last week, treasury prices remained better bid this morning after congressional leaders debated this w/d the tentative agreement to revive US credit markets by authorizing a $700b plan to buy troubled assets from financial institutions. The House and Senate are expected to vote today on the proposed bail-out. One has to believe that the FI market have fully priced in the aid package, maybe this will allow investors to shy away from government debt as a safe heaven alternative. With Cbanks financial ‘bail-outs’ remaining in vogue (BOE with Bradford and Bingley and Benelux counties with Fortis Bank Cash injection), should have treasuries well sought after. What will Bernanke’s next move be? Preparing the market for an interest rate cut? This will soon be followed by other Cbanks. If so, treasuries would look mighty cheap at these or any levels!

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