China’s half-a-trillion investment aids global equities and the ‘carry’ trade.

China unveiled ‘the’ package over the weekend worth $586b. This is a plan to stimulate the world’s biggest contributor to economic growth. Global equities and emerging currencies have found ‘love again’ as the ‘carry trade’ has the green light. Last week’s dismal economic data was expected and very much priced in. So far, financially the world is a better place. Expect the G20 meeting in Washington this week to continue to carry the Chinese torch.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

There is only one highlight from Friday, and that was the expected depressing North American employment numbers. Both sides of the border were weak, especially revisions in the US. The US labor market figures point to one of the deepest recessions in many a decade. Thankfully, market reaction has been muted, as investors have had a lot to chew on over the last week. Non-farm payrolls fell by -240k in Oct., following a -284k contraction in Sept. (revised down from -159k). The Aug. figures were also revised down (-127k from -73k). The weakness in the labor markets has become acute, as the effect of the financial crisis is finally filtering into the real economy. Tighter credit conditions have put the squeeze on US companies and they have responded by cutting jobs as they have problems funding payrolls. The Oct. unemployment rate (6.5%) was the highest in nearly 2-decades. Digger deeper into the reports, there is weakness everywhere. The most cyclical sectors have been badly hit by the current slowdown and financial crisis. Manufacturing payrolls fell by a record -90k. The services industry was also weak, cutting more than -100k jobs. In particular, business services payrolls fell by -45k from -39k in Sep. As expected, the retail industry also cut jobs, as retailers have been slow in hiring their temporary seasonal staff. The sluggish housing activity continues to weigh on construction payrolls that fell by another -49k from -35k. The evidence points to further weakness in the months ahead. The pool of available workers rose by another +502k in Oct., signaling increasing demand/supply imbalances. Looking at all of last weeks US data, the Fed will have to cut another 50bp soon to boost consumer confidence. All ready the G20 members are talking about further orchestrated interest rate cuts, while emerging markets and China are pursuing a ‘pro-active fiscal policy’ and a ‘moderately loose’ monetary policy.

The US$ currently is lower against the EUR +0.98%, GBP +1.03%, CHF +0.69% and JPY+0.31%. The commodity currencies are stronger this morning, CAD +0.46% and AUD +0.91%. Surprisingly stronger than expected Canadian employment numbers on Friday gave the loonie new found support. The CAD$ outperformed all its G7 partners last week and ended the week 2% stronger vs. its southern neighbor. Even the IMF has predicted that all of the G7 economies will contract next year except Canada’s. The Canadian economy was capable of adding +9.5k new jobs after last months eye popping +106k. Analysts had expected a decline of -10k. Will this take some of the pressure off governor Carney at the BOC? Year to date they have slashed interest rates 6-times and futures continue to price in another cut by year end (2.25%). Expect next week’s G7 meeting in Washington to look for other ways apart from further global rate cuts to boost growth (It’s a given that further cuts are warranted). If crude prices continue to slip and especially below the $60 a barrel level, the Tar-Sands projects in Alberta start to cost money. Already Canadian oil sands developers are cutting investment plans by -20%. The market is trying to decipher the depth of the BOE and ECB cuts; will it have any impact in the medium term? Traders continue to be aggressive CAD buyers on rallies, many corporate positions were executed on Friday in haste.

The AUD$ found traction in the O/N session after China pledged to spend $586b to prop up its economy, prompting investors to buy currencies linked to emerging markets. Global equities have rebounded strongly and the perception that the Fed will need to slash interest rates again soon to combat a deepening recession ‘state side’ will add further support to commodity based currencies (0.6914).

Crude is higher O/N ($63.38 up +234c). There was a tight trading range for crude on Friday and ended up on the day as investors speculated that the Fed will lower interest rates outweighed the woeful NFP data that was very much priced in. Overall it has not been a good week for the black stuff that happened to loose another 14% from the weekly highs last week, as equities found very little traction what so ever. So far in the O/N session China’s stimulus package has give commodities a lift. But, year to date the commodity has lost 37% and 59% from the historic highs witnessed in early summer. The erosion of future demand continues to have a chokehold on the black stuff pricing. The trading range has been ‘to and fro’ all week settling close to a new 19- month low. Oil and equity markets continue to trade under pressure in the course of a deepening concern that the economic slowdown is hurting corporate earnings. Some traders see the black stuff retreating back to the $50 level once again. This will only heighten the urgency amongst OPEC members. Weaker US fundamental data and last weeks unexpected EIA report remains bearish in the short term for crude. All this despite what the IEA stated last week that ‘oil-import prices will rebound to an average of $100 a barrel between 2008 and 2015 and that the threat of a supply crunch’ remains. Last week’s EIA report showed that US gas supplies rose +1.12m barrels to 196.1m w/w vs. an expected +650k. Inventories of crude rose +54k barrels to 311.9m. Analysts had forecasted a rise of +1m barrels. Euro-land has already declared the region’s economy has entered a recession and will stagnate next year. Recent global rate cuts have so far failed to inspire confidence that a ‘deeper’ recession can be avoided. Global equities and OPEC wanting to meet again next month has provided little support. OPEC indicated that they may call a new meeting if prices fail to react to the -1.5m barrel-a-day output cut it announced last month. Gold last week had its first winning week in a month. With the greenback under pressure, traders have been happy to own the ‘yellow metal’ as an alternative investment for now ($751).

The Nikkei closed 9,081 up +498. The DAX index in Europe was at 5,097 up +159; the FTSE (UK) currently is 4,510 up +156. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 8bp on Friday (3.78%) and a further 5bp O/N (3.83%). Unlike the long end of the yield curve, this has remained under pressure ahead of supply to be auctioned off this week. The short end prices actually rallied, as signs of economic weakness mounted and traders increased their bets that Bernanke and Co. will cut borrowing costs again below the psychological 1% to boost consumer confidence and revive growth. But, China’s announcement of $500b stimulus package has give global equities a boost and investors are shying away from the safer assets.

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