The arrogance of US Financials will persist despite being semi nationalized!

Words are cheap, are they falling on deaf ears? To half the US deficit by the end of first term? Is it possible? Anything is, but let us begin with the basics. We are not up for re-election just yet. Expect North America to be on collision course with its European counterpart when the financial industry gets overhauled, and we are not talking a facelift! The possibility of being semi-nationalized will put further pressure on the greenback, increase the risk appetite of speculators, but not change the landscape whatsoever.

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

The possibility of a quasi nationalization proposal for some US financials(the same ones that were too big to fail) has once again put the greenback under pressure, but at the same time introduced the idea that increasing one’s risk appetite is again ‘hip’. Global equities have found a bid at their historical lows, is this sustainable? The investors psyche is so battered and bruised its going to take an enormous amount of momentum to change their pessimistic viewpoints.

The US$ currently is higher against the EUR -0.63%, GBP -0.59%, CHF -0.85% and lower against JPY +0.60%. The commodity currencies are weaker this morning, CAD -0.30% and AUD -0.93%. Despite weaker economic data this week, the loonie managed to advance against its largest trading partner south of the border as the greenback systematically lost ground against most of its major trading partners coupled with the fact that commodities remain better bid. The economy, who relies heavily on its southern partner (over 70% of all goods head south), does not expect any pick up soon. Some analysts are already revising their numbers and expect the economy to shrink 2% this year as opposed to 1.5% recommended a few months ago. Dismal exports, jobs and manufacturing growth will only impede the economy and currency even further.

The AUD dollar like most currencies advances as investors speculated that the US will take a 40% control of Citi bank, thus semi nationalizing the US financial system (0.6524). This action will only hurt the greenback temporarily.

Crude is higher O/N ($40.45 up +28c). The Crude bears once again took command on Friday. They temporarily lost control late in the week but the black-stuff managed to retreat from its largest gain in 7-weeks, as global equity indices declined on concern that the recession is deepening. With the Dow closing at its lowest level in 12-years, crude managed to pare 50% of the previous day’s 14% rally that was supported by a surprising US weekly inventory report. Expecting stocks to rise for the 19th time in 21-weeks the market rallied as supplies fell -138k barrels to +350.6m last week vs. an anticipated increase of +3.2m barrels. It seemed finally that this years OPEC production cuts are making an impact. Imports of crude declined -859k barrels a day to +8.79m, the lowest level since Sept. 2008. But fundamental data and negative psyche can only weigh on energy prices once again as demand destruction dominates. There will be no sustainable rally witnessed until we see global demand increase or inventory levels ‘consistently’ pared due to the OPEC production cuts. Year-to-date, crude is down 20%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. A risk aversion strategy has investors looking a ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remain under pressure ($980). Investors are gravitating towards precious metals as a safe heaven asset class.

The Nikkei closed 7,387 down -28. The DAX index in Europe was at 4,087 up +73; the FTSE (UK) currently is 3,936 up +47. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 3bp on Friday (2.79%) and are little changed in the O/N session. With equity markets remaining under pressure, flight to quality is a necessity. With another record amount of US FI product needed to be issued this week, the US would require higher yields to attract outside interest. Expect to see traders to lean on the curve to absorb all the issues. The US treasury plans to sell $40b 2-ys, a record $32b of 5-ys notes and a record $22b of 7-ys notes. The total of $94b exceeds the previous record of $78b in a week in late Jan!

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