Is the Party over for Forex and Equities?

What is the going value of ‘optimism’? So far it seems to be about $4trillion dollars worth of pledges. Is it enough to solidify consumer confidence? There is no side stepping a recession, perhaps the length of one is all we can manipulate!

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Capital markets continue to digest the Banks bail-out package orchestrated by governments either side of the Atlantic. Billions have been pledged to stave off the worst financial disaster in 70-years. Initial market reaction was one of euphoric relief, which pushed global equities higher and encouraged some risk taking again in currencies. Investors happily strapped on carry trades, similar to those entered before last week’s meltdown. Cbanks are taking a proactive stance to flood financial markets with billions of dollars. Their objective is to liquefy credit markets and encourage lending once again. They are trying to shore up capital for a Wall Street problem, before it spills over into the Real Economy. Treasury Secretary Paulson intends to use $250b to purchase stakes in ‘thousands of financial firms’ to defrost the credit freeze that threatens to bankrupt companies and cause mass unemployment. The US government expects recipients to ‘deploy’ monies as loans to try and stave off a deeper recession. Will Capital markets be allowed adequate time to perform the function of lending? Will the investor allow the financial tools to work or are markets experiencing a short wave of euphoria before commencing their downward spiral similar to what we witnessed last week?

So far, the European Bank Bailout plan has been more detailed than the one set forth by the US treasury. The size of the intended monies promised is worth pointing out. The scale and magnitude has certainly solidified European unity (for a brief moment the question of the EUR currency surviving was definitely raised).

• Germany announced a Eur70b injection to re-capitalize banks, with an additional Eur10b in reserve, on top of a Eur400b bank pledged finance guarantee.
• France has offered Eur40b to re-capitalize and is to set up two vehicles to fund the Bank Bailout scheme, with another Eur320b earmarked for bank debt fund guarantee.
• Italy had previously established a Eur40b Swap facility for banks to swap debt.
• Spain announced a Eur100b guarantee for bank debt.
• Netherlands have set up a Eur20b fund to inject capital, with around Eur17b already been injected into Fortis/ABN.
• Belgium Treasury transferred a total amount of Eur5.7b to the SFPI.
• Austria announced a package of up to Eur85b for deposit guarantees and another Eur15b for possible equity injections in the bank sector.

Do we feel safer now? Not half!

And so it begins, UK unemployment claims rose to its highest level in 2-years for Sept. Companies anticipating a recession amidst this global financial crisis are starting to speed up their ‘firings’ of employees from financials to construction. Claims for jobless benefits rose +31.8k to +939k. The unemployment rate for the 3rd Q jumped to 5.7% (the most since 2000-and will continue to rise).

The US$ currently is higher against the EUR -0.27%, CHF -0.27% and lower against GBP +0.31% and JPY +1.06%. The commodity currencies are mixed this morning, CAD +0.12% and AUD -0.47%. The Canadian dollar had its largest weekly decline in 40-years last week as the deepening credit crisis steered investors towards owning the US$. The currency managed to depreciate 8% vs. its southern neighbor, despite recording the largest 1-month employment gain in 30-years. Even with global equities finding some traction and commodities managing to halt their recent decline (not for long), the loonie traded under pressure during yesterday’s session. Fundamental data, even positive data, is not being reflected in most currencies. Fear and lack of investor confidence has over extended most currency values of late. The coordinated economic aid package for Banks has provided some short term ‘loonie strength’. But with global growth heading for a major downturn, commodities, the backbone of the Canadian economy and exports, are expected again to come under intense pressure and by default should underpin the loonie going forward. With the US in a recession and being Canada’s largest trading partner (75% of all exports head south of the border) does not bode well for export demand. The Canadian economy should expect a spill over effect as it will be impossible for the economy to bypass any recession. Futures traders continue to price in another 25bp ease by the BOC, despite the 50bp cut earlier in the month (2.50%), as the global financial crisis and liquidity constraints continue to seek one. Expect the loonie to trade under pressure as investors remain concerned about the global economy slipping into a ‘deeper’ recession (moving from Wall Street to Main Street). As anticipated, PM Harper once again was returned to office, but, as a minority government and not with the majority he coveted.

The AUD$ declined in the O/N session as global equities and commodity prices pared their recent gains on concerns that the ‘monies’ pledged to shore up the global financial system will fail to prevent a global economic recession. Weaker company earning continues to pressurize the Dow, futures remain negative. Some investors are unwinding the ‘euphoric carry’ trade that they entered after this weeks historical equity advance. For now, expect traders to be better sellers on upticks (0.6974).

Crude is lower O/N ($77.83 down -80c). Yesterday morning, crude prices briefly rebounded from its 13-month low and its 17% plunge achieved last week, as governments both side of the Atlantic poured and pledged billions to stave off the worst financial crisis in over 80-years. But, the markets remain skeptical that the aid package will do anything in the short term to promote growth and influence fuel usage. Their object is to once again grease the wheels and get the financial markets lending again. Already last week, the IEA has indicated that it foresees growth advancing at its slowest pace in 15-years as economies slip into a recession. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package proposed last weekend. The stimulus package will require time, and time is a variable that’s been in short supply of late. Some analysts have once again reduced their year end target price, due to their ‘underestimation of depth and duration of the financial crisis will have on economic growth and commodity demand’. They have aggressively adjusted prices down from $115-$70 (WT). The fear of global contraction has traders heading to the sidelines as recession fears are expected to further impede crude price. OPEC last week announced that it will be holding an ‘extraordinary’ meeting in Vienna on Nov. 18th. They are expected to cut production because of prices falling so ‘dramatically’ according to the group’s President Khelil. Last week’s bearish EIA report provided no support for the ‘black-stuff’ (this week’s numbers will be released on Thursday). It seems that demand issues will remain an eyesore regardless of what policy makers will do to try and kick start the ailing economies. Gold has rebounded in the London trading session ($848) as investors seek an alternative investment to the greenback and an ailing stock market, thus boosting demand for the yellow metal as an alternative investment.

The Nikkei closed at 9,547 up +99. The DAX index in Europe was at 5,075 down -124; the FTSE (UK) currently is 4,256 down -137. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 7bp yesterday (4.07%) and have given this up in the O/N session (3.98%). Treasury prices declined yesterday on the back of global equity markets finding some needed traction after the announced Bank bail-out package on either side of the Atlantic. With renewed optimism (for how long?), the short end of the yield curve backed up the most in two weeks and flattened the curve by 20bp to 220. But, with equities trading under pressure this am and San Fran Fed President Yellen believing that the US is already in a recession is providing new found strength for Treasury prices. Will retail sales provide further support for the FI market? Futures contracts continue to show a 96% chance that the Fed will cut its O/N 1.5% target rate by 25bp on Oct. 29th meeting.

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