Reality bites!……Skip a deeper recession, go straight to Depression?

What is actually working? One day credit is tightening, another day it’s easing. Whatever it is, it’s not materially positive enough to oil any wheel so it seems. So, we are back to ‘beg, borrow, spend’, the equation that got us into this mess in the first place. Reality sucks sometimes; our problem is, we are not ‘all’ facing this same reality!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

The EUR has fallen to a 3-month low this morning vs. the “Mighty” greenback as traders increased their bets that Trichet and Co. will lower borrowing costs towards 1% by spring. The currency did not get a helping hand from S&P’s who implied that they may cut Spain’s top AAA long-term sovereign rating. While the currency remains on the floor, the IMF has added fuel to the fire by stating that Europe is ‘underestimating’ the need for fiscal stimulus. This has prompted Germany to spend EUR’s 50b to support Europe’s largest economy announced late last night. Once again we are back in ‘bear country’; both equities and commodities are to be sold by investors. Emerging market currencies continue to lose ground and ‘carry’ trades continue to perform very poorly. The daily release of bad news is not abating and capital markets continue to price accordingly.

The US$ currently is higher against the EUR -0.94%, GBP -0.91%, CHF -0.35% and lower against JPY +0.07%. The commodity currencies are weaker this morning, CAD -0.69% and AUD -1.39%. The loonie remains under intense pressure as commodity prices continue to plummet across the board. 50% of all Canadian exports are commodity based. The currency is guilty by its association and proximity to its largest trading partner, the US. Last weeks data revealed that the Canadian economy is entrenched in the global recession. Economic reports revealed that Canada not unlike the US, lost -105k jobs in 2- months and this has fully reversed the large late summer employment gains and puts Canadian job losses proportionately in line with its southern neighbor. Canada’s unemployment rate now stands at +6.6% vs. +6.3%. The rise was mostly driven by job losses, but the size of the labor force also increased by +12.7k. Industry-wide losses in construction led the way as was to be expected. The sector shed -44.3k workers as both residential and non-residential construction continues to deteriorate. With the housing sector to continue to weaken this year, we can expect to see several more months of job declines. With oil paring close to 7% yesterday has traders favor selling the currency on any USD pull backs. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

The Australian dollar fell aggressively in the O/N session after an increase in US unemployment numbers last week have signaled a deepening global recession, thus reducing demand for higher- yielding assets. The AUD$ had comfortably pared all of last weeks gains as the price of commodities continue to trade under pressure and investors once again undertake risk aversion strategies (0.6706).

Crude is lower O/N ($36.61 down -98c). A fear of a much deeper recession continues to undermine crude prices. A weakening equity market and rising number of jobless workers have intensified concerns that the recession will cut fuel usage even more. Demand destruction remains the order of the day. Oil has been unable to retain last week’s earlier gains after the weekly EIA report also took the market by surprise. The black stuff managed to lose another 7% yesterday on concerns that output cuts by OPEC will fail to counter a slump in demand. US supplies have climbed in 13 of the past 15-weeks as the economy slowed according to the EIA, last week’s data showed a bigger than expected increase across the board for crude oil, gas and distillate fuel. Inventories of oil rose +6.68m barrels to +325.4m, that’s the highest level in 8-months (the market had anticipated an increase of +800k barrels). Analysts are predicting that oil consumption will drop by +1m barrels a day as the US, Europe and Japan face their first simultaneous recessions in over 60-years. Contango trading has encouraged companies to increase stockpiles if they have available storage (hence the demand for supertankers to be used as a mobile storage facility). Dealers are encouraged to do so as the price of oil for delivery in 11-months time is 33% more than for next month. Gas stocks rose +3.33m barrels to +211.4m barrels vs. an expected +1m barrels. Finally distillate supplies (heat oil and diesel) jumped +1.79m barrels to +137.8m. Friday’s job’s data will impede future fuel demand as it provides stronger evidence that a deepening recession is occurring globally. The geo-political issues like the violence in Gaza and natural gas crisis, is no match for demand destruction caused by weakening economies. Analysts anticipate that we will once again test Dec. lows of around $32 on the back of the North American reports been so poor. Gold prices fell the most in nearly 2-months yesterday as the greenback advanced vs. the EUR and plummeting energy prices have reduced demand for the yellow metal as a hedge against inflation ($820).

The Nikkei closed 8,413 down -422. The DAX index in Europe was at 4,622 down -97; the FTSE (UK) currently is 4,353 down -73. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 13bp yesterday (2.31%) and are little changed in the O/N session. Treasuries advanced especially the short end of the US curve on speculation that US government reports this week will show that US retail sales and consumer prices fell last month. Global equities trading under pressure continues to provide added impetus to own the FI asset class. Investors are concerned that the global recession may be worsening, hence the flight to government debt.

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