Greenspan comes clean-faults led to Capital Markets tsunami!

In the O/N session a ‘Sea of Red’ was seen at all bourses, averaging down 7-10%. Not the best of weeks for anyone’s portfolio. North American session cannot escape what’s happened, strap in hunker down and let’s see what transpires!

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

It’s difficult to be optimistic in this current environment, sometimes the more you know or are exposed too is depressing. Of course there are two sides to every trade; there is a winner and loser, but, it feels like we are all loosing somehow. We have the doomsayers who say the US Treasury bail out package will ‘waste’ money. We have Alan Greenspan confessing that he found a ‘flaw’ in his free market ideology. No one cares about fundamental data at the moment, if it’s positive, it’s having minimal impact. The IMF is to approve new liquidity SWAP facilities for emerging economies by Nov. We are becoming accustomed to the ‘other shoe dropping’ mentality. How ‘low’ can these markets go? Every financial leader has been stomped by the magnitude of this apocalyptic financial fallout. That certainly does not give investors a ‘warm and fuzzy feeling’. We have OPEC today, optically they cannot seem to agree and they have not sat at any table yet. Can we rely on Mr. Buffets ‘be greedy when others are fearful’….yes you can, if you have the cash! Let’s focus on Vienna, the World Series, Best wishes to Ballesteros and get this week over with.

The US$ currently is higher against the EUR -2.95%, GBP -4.37%, CHF -0.29% and lower against JPY +4.57%. The commodity currencies are much weaker this morning, CAD -2.87% and AUD -7.22%. The loonie dropped to its lowest level in 4-years yesterday, on speculation that worldwide economic growth will slow as US investors continue to sell assets. Month-to-date the currency has managed to lose 16% of its value as commodities including crude oil fell, coupled with investor speculation that the BOC will need to extend interest-rate cuts (2.25%) in the face of slowing economic growth. Earlier this week Governor Carney reduced overnight borrowing costs by 25bp (2.25%), less than the market had anticipated, but added that it will probably need to act again to fend off the effects of a credit crisis and global recession. The market continues to see position covering and repatriation back to the US, which is driving the greenback higher across the board. The BOC MPR yesterday said that the global credit crisis will be ‘deeper, more persistent’ and more widespread than the policy makers had anticipated and signaled they will cut borrowing costs again as the economy teeters on the edge of a recession. Governor Carney said ‘that these financial headwinds will take time to dissipate, even with the extraordinary recent policy actions just announced’. Previously the BOC justified their less aggressive move in the context of how much action that has been taken since its last meeting (75 bps) and the cumulative cut in rates since Dec (225 bps). Looks like a good bet that borrowing cost could break the 2%mark by year end. For now the trend remains your friend, do not expect to find resistance from investors, who continue to better buyers on pull back.

One expects the AUD to underperform in recessionary times, and last night the currency finally delivered and eased vs. JPY and the greenback as tumbling equities and commodity prices prompted investors to dump higher-yielding assets. Despite a stronger inflation report earlier in the week giving the currency some support, one can expect investors to be better sellers on rallies (0.6217).

Crude is lower O/N ($66.22 down-262c). Crude prices oil rose yesterday, rebounding from a 16-month low before OPEC’s much anticipated meeting today in Vienna. But, growth fear are outweighing any cut in production, thus the black-stuff has come under pressure again. OPEC are meeting to discuss production cuts, what they will agree on is anyone’s guess, so far some members have already aired vastly different opinions, from shallow cuts to deep ones (Iran). The fears of a weakening global fuel demand outweighing the prospects of a production cut by OPEC has contributed to price declines thus far. OPEC is trying to halt the 50% slide in prices since the beginning of the summer. It is anticipated that they may pare production by 1m to 2m barrels a day in stages to stabilize prices. But, they are in a tight corner; they cannot contribute to further economic decline and all members will be hard pressed to agree on what production cuts. The fear or Iran and Venezuela opting out of any consensus vote remains strong, thus splitting the group. Earlier in the week traders and investors had been getting ahead of this, but the strength of the ‘big dollar’ has limited advancements. OPEC is panicking as commodity prices have tumbled on growth concerns, retreating from the highs archived in July ($147.27). They still produce over 40% of the world’s oil. This weeks EIA report showed that crude oil stocks rose +3.18m barrels to 311.4m, w/w, and again another bearish weekly. The market was expecting an increase of +2.6m barrels. Analysts continue to aggressively pare their future price estimates, down from $90 to a year end price of $60. Sluggish demand continues to be the catalyst for rising inventories. OPEC President Chakib Khelil said that the ‘ideal’ price for crude is between $70 and $90 a barrel. Gold remains under pressure as the greenback continues to dominate the FX market ($750). Gold declined once again to a new 2-month low as the big dollar rallied vs. the EUR and global equities declined, thus reducing the demand of the ‘yellow metal’ as an alternative investment strategy ($695). The market has forced investors to sell the precious metal to raise cash.

The Nikkei closed 8,460 down -213. The DAX index in Europe was at 4,451 down -79; the FTSE (UK) currently is 4,007 down -33. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 5bp yesterday (3.54%) and are little changed O/N. Treasuries came under pressure in the early session as global equities rose and the US government said it will sell $58b in 2’s and 5’s next week. Traders and convexity buying has made the curve very expensive of late. One has to expect further slippage. But with equities not able to hold onto ant gains, had investors once again seeking the safer heaven asset class. Futures contracts show a 100% chance that the Fed will cut its O/N 1.5% target rate by 25bp at the Oct. 29th meeting.

Treasury’s financing announcements yesterday was smaller than the market had anticipated. This Monday’s bill sales will total $50b rather than $51b, as the 6-month issue is being trimmed to $25b from $26b, but, the 3-month holds steady at $25b. Those auctions will raise $6b of ‘new cash’. The coupon offerings are all being held unchanged: the 2-year note at $34b, the 5-year at $24b and the 5-year TIPS reopening at $6b (the market had expected the nominal notes to be boosted by $2b each-I guess we will see that develop down the road).

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