Apocalyptic Financial Crisis?

Governor Stevens at the RBA stepped forward and slashed O/N funding by 1% last night. Icelandic CBankers take a bow. They just pegged the Crown to a basket of currencies this morning. UK banks seem to be on hand and knees. Are other Cbanks expected to follow the ‘Aussie way’? The ‘House of Cards’ needs a coordinated interest rate cut at the very least!

The US$ is weaker in the O/N trading session. Currently it is lower against 10 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Cbanks seem to be lacking leadership. No matter what regulators have implemented, cash hoarding continues to flourish as Money-Market rates print new highs on speculation that the seizure in credit markets is deepening and may prompt more financial institutions to collapse. Bold actions from Berlin over the past weekend (Hypo Real estate and German savings a/c’s) has done little to head-off further market instability. The whole financial system remains very tight; Capital Markets seek strong guidance from Cbanks. Governments have tried to take the upper hand, but, so far it’s been all in vain. Risk aversion trading strategies continue to dominate, causing commodities and global equities to plummet. The element of ‘trust’ has quickly disappeared from the market despite record cash infusions form policy makers. The Fed has committed to adding extra short term cash. Yesterday, they said they will double its auctions of cash to banks ($900b) as Bernanke continues to seek alternative steps to ease the tightening cycle. They intend to increase its auctions under the 28-day and 84-day TAF (Term Auction Facility) operations to $150b each. The two forward TAF auctions in Nov. will be increased to $150b. They also announced that they will pay interest not only on required reserves, but, also on excess reserves, which should allow it to keep the federal funds rate closer to the desired target levels. Liquidity per-se is not the problem. Banks have plenty of it. It seems that Bankers are forcing borrowers to shore up their balance-sheets. Now, all we need is Banks to act rationally, otherwise the JPY and the USD will continue to print new records!

The US$ currently is lower against the EUR +0.48%, CHF +0.49%, JPY +0.01% and higher vs. GBP -0.33%. The commodity currencies are weaker this morning, CAD -0.27% and AUD -0.36%. The loonie managed to decline the most in 7-months yesterday after the USD strengthened against all its major trading partners and crude oil fell below $90 a barrel for the first time since Feb. With the greenback reigning supreme, fundamental data has only hastened the loonies’ demise. The currency extended its drop after Canadian Aug. building permits fell almost 10 times as much as anticipated (-13.5% vs. +2.5%). Over the last two weeks the loonie has depreciated 7% vs. its southern trading partner. Global fear that last weeks financial bail-out package will do little to appease the market has investors shying away from riskier assets and applying risk aversion strategies. The depreciation of commodity prices has led investors to put a firm ‘choke hold’ on the loonie. Capital markets fear that despite the approval of a credit market ‘bailout’, the US economy looks destined on paper to be entering an economic recession, which can only be a negative for the Canadian economy. Governments will not be able to prevent the spill over effect from ‘Wall Street’ to Main Street’, from ‘North America to Europe’. Canada remains guilty by its proximity and association to its southern neighbor. The US remains Canada largest trading partner, 75% of all exports head south of the border, and 50% of all exports are commodity based. Governor Carney has indicated that any further slowdown in the US economy will affect areas that matter most to Canada. He expects demand for Canada’s products to drop more than anticipated and inflation to slow. This should give Governor Carney the latitude to ease O/N borrowing costs (3.00%) by year end, as the downside risks for slower growth will intensify. Futures traders are pricing in a 50bp ease by Dec. In the short term, there no love for the loonie, as the greenback dominates the FX markets. Expect traders to be better sellers of the CAD$ on USD$ pull backs in the short term until proven wrong.

The AUD has managed to pare some of its losses (0.7160) and climb from a 4-year low as the RBA cut borrowing cost 100bp (7.00% to 6.00%), twice the amount expected by analysts. It is the Cbanks biggest rate cut in 16-years. Perhaps this will be the impetus for slashing global rates. Governor Stevens remains proactive as the currency has depreciated 24% in the past 3-months. Futures traders continue to aggressively price in further rate cuts.

Crude is higher O/N ($90.00 up +219c). Yesterday, crude oil traded under pressure as Capital Markets believed that the US economy will slip into a recession, thus forcing a global meltdown. Investors remain skeptical that the $700b bank-rescue plan, emphatically passed by the ‘house’ last week, will boost future demand. OPEC President Khelil indicated yesterday that the crude price slide will continue well into next year, and Saudi Aramco (the world’s largest state oil company) has already cut its prices to Asia and the US. In the O/N session, the black stuff was able to pare some of the recent losses, yesterday’s drop was deemed to excessive and the RBA cutting borrowing costs, triggered speculation that other CBankers will follow suit and ease policy to promote economic growth. Last week crude prices were down 12% on the week. Fundamental data is paving the way for a US recession. With the bank rescue plan receiving the rubber stamp of approval, by default, it has boosted the greenback, which has curtailed the appeal of commodities often used as a hedge against a weaker USD. The global economy remains very fragile, economic activity in Europe seems to be collapsing faster than in the US. Euro-land Bank bailouts are pressurizing the EUR vs. the greenback. With oil declining 42% form the highs printed in July, coupled with US manufacturing and employment contracting last week can only ‘fuel’ future demand concerns. In the event of a global recession, some analysts foresee crude prices collapsing to $50 a barrel. Last week’s EIA report showed a bigger than forecasted increase in supplies as fuel consumption dropped. The 4-week fuel usage has averaged +19m barrels a day (lowest since 2001). Technical analysts now believe with imports remaining high (increased +26% to +8.99m barrels a day) and refinery operations back on line (+72.3% capacity, up +5.6% w/w), the $85 price level is attainable. Gold advanced the most in two weeks yesterday remains better bid O/N ($882) as traders sought the sanctuary of a safe heaven asset as the credit crisis deepened in Europe.

The Nikkei closed at 10,155 down -317. The DAX index in Europe was at 5,357 down -30; the FTSE (UK) currently is 4,562 down -27. The early call for the open of key US indices is lower.10-year Treasury yields eased 7bp yesterday (3.47%) and backed up 3bp (3.50%) in the O/N session. Treasury prices remain better bid as global equities tumble and the freeze in credit markets have prompted new global bailouts (Hypo, Fortis and Landsbanki Islands hf in Iceland). Short term US debt has maintained its 6-week winning cycle as traders continue to speculate that the US will enter a recession regardless of Friday’s approved financial bail-out package. The 2-10’s spread has remained at 202bp despite traders increasing their bets that the Fed will lower borrowing costs 50bp later this month (if not sooner) as the credit crisis weighs on global growth.

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