Geithner and Bernanke seek ‘absolute power’?

Yesterdays slow grind allowed us to witness Bernanke and Geithner seek new powers to take over and wind-down failing financial companies. Currently the FDIC has the power to take over failing ‘deposit-taking’ firms and wind down their assets, but nothing exists for financial firms that are not classified as banks. The AIG fiasco has raised more questions about hedge funds that have extensive links throughout the financial system. This weeks PPIP announcement surely promotes more hedge fund activity……..now Ben and Tim want the ability to seize questionable private entities. Is this capitalism at its best! AIG has highlighted the need for new resolution procedures, but having the power to nationalize the whole industry does not promote competition.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in a ‘subdued’ trading range.

There is so much behind the scenes that is going on this week, it’s simply impossible to digest the implications on capital markets in one sitting. No wonder we have experienced narrow trading ranges as we try to get our heads around it. Obama is confident that things are starting to work, but, its congress that must pass the budget to shore up the economy. His confidence has given the dollar a small boost. However, China’s call for the creation of a ‘new international reserve currency’ signals its concern at the greenbacks weakness. This is political posturing ahead of next weeks G20 summit. Aside, the IMF has difficulty running its own administration let alone been in charge of a currency. Quantitative actions by CBankers have weakened their own currencies (a form of covert protectionism-BOE, SNB and Fed). The million dollar question is whether the ECB will join them? Several ECB members have certainly given a stronger indication that it’s possible. Papademos said that ‘they would consider embarking on quantitative easing if all other options to revive the economy had been exhausted’. But, to date all other options may not be exhausted, some analysts now expect Trichet to ease rates by 50bp next week. If and when quantitative easing is used by the ECB, we will have seen the top for the EUR!

The USD$ currently is higher against the EUR -0.01%, GBP -0.15%, CHF -0.02% and lower against JPY +0.05%. The commodity currencies are little changed this morning, CAD -0.08% and AUD -0.16%. The loonie remains range bound as investors and traders alike contemplated the fallout effects of Treasury Secretary Geithner’s plans on toxic assets. This week, the currency has been driven by the strength of commodity prices (50% of Canada’s total export revenue is commodity based). It has soared over the last couple of trading sessions as the USD$ plummeted vs. its largest trading partners. Robust commodity prices have certainly given the currency a temporary leg up, but after yesterday’s price action, we probably seen their top in the short term. It’s all about the big dollar, for now look to buy USD$ on pull backs as Canadian fundamental data does not support a stronger loonie. Capital markets seem to have got ahead of the curve with the ‘euphoric’ announcements this week.

The AUD$ has pared some of its 11-day gains (longest winning streak in nearly 3-years) as investors believe the recent advance on the back of the ‘cash for trash’ idea may have gone too far too quickly. Global growth is the key to this commodity high yielding asset and investors want to take a back seat to digest all announcements of late (0.6940). Depending on what commodities do, traders prefer to sell the AUD on upticks for now.

Crude is lower in the O/N session ($53.10 down -88c). Not a surprise that crude retreated from its 4-month highs yesterday. With the greenback regaining some of its lost luster, it has reduced the appeal of some commodities (less attractive as a hedge against inflation). Investors are also speculating that today’s weekly EIA report will once again reveal another increase in stock levels. The fundamentals of supply and demand do not justify oil penetrating that psychological level of $60 a barrel anytime soon. Crude price are been dictated by both the big dollar and the strong correlation with equities at present. The depth and scope of the Fed’s announcement on quantitative easing has temporarily at least instilled optimism about the outlook for the US economy. But, yesterday was probably a ‘sit back and ponder’ this weeks announcements. We are back to moving on the USD$, crude prices rose 10% last week and year to date has advanced 15%. Global demand destruction remains a concern, there is nothing to suggest that demand has increased or will increase in the short term. Crude prices could remain vulnerable unless the greenback continues on this path of weakness. Last week’s EIA report was bearish for crude prices. Inventories climbed +1.94m barrels to +353.3m vs. an expected increase of +1.5m. Supplies of gas and distillate fuel (heating oil and diesel) also increased. Gold remains under pressure on optimism that the US government plan to rid banks of ‘toxic assets’ will revive lending and the economy ($933). Once again on deeper pullbacks expect support for the metal.

The Nikkei closed 8,479 down -9. The DAX index in Europe was at 4,203 up +16; the FTSE (UK) currently is 3,928 up +17. The early call for the open of key US indices is lower. The 10-year Treasury backed up 4bp yesterday (2.69%) and are little changed in the O/N session, while the long bond eased as the Fed announced its buyback starting today. With the onslaught of new product this week ($98b-2’s $40b, 5’s $34b-Wed. and 7’s $40b-Thurs.), traders are happy to cheapen up the middle of the US curve to absorb new record issues. Despite global equities aggressively advancing after Geithner’s ‘new’ proposed plan to deal with toxic assets on banks balance sheets, treasuries remain better bid on pull backs. Policy makers are determined that yields will not aggressively rise given the current economic environment. The Fed is manipulating and flattening the curve which makes it difficult for traders to make money!

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