Dow advances +11.6%, Dollar dips……We happy yet?

With North American investors returning after the long weekend, market movements must seem like a mirage. Cbanks pledging the largest bail-out monies in history has sent all asset classes on a wild ride. Are we capable of maintaining the positive momentum? Or will political grandstanding de-rail the confidence boosting ‘cool aid’ we are about to drink?

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

Europe, Asia and the US all agreed to guarantee bank borrowing and prevent failures that would further batter the credit markets. Basically, G7 members have pledged to take all the necessary steps to stem further market turmoil. It’s a start, does not necessarily mean the end of the ‘apocalyptic’ trading strategies that we all witnessed last week. Governments once again are trying to liquefy the credit markets and bolster consumer confidence. So far, we have been subjected to the fall out of ‘Wall Street’ problems, that been the liquidity constraints of the credit markets. The plunging equity markets last week saw investors trying to get ahead of ‘Main Streets’ problems, that of a global recession. Is it much deeper than analysts are anticipating? The common investors trading patters say so. Cbanks have finally coordinated their efforts and are willing to ‘flood the financial system with as many dollars as banks want or need’. This will back up government efforts to revive confidence and help to reduce money-market rates. Fundamental or technical data has not influenced currency prices of late; safer-heaven and risk aversion trading strategies remained dominate. Has the tied turned? North America was on holidays yesterday, and did not witness first hand the EUR, commodities or equities rise. This morning, with no economic data to chew on, let’s see if investors embrace the ‘bank bail-out’ package with the same enthusiasm as overseas.

The US$ currently is lower against the EUR +0.34%, GBP +0.84%, CHF +0.20% and higher against JPY +0.57%. The commodity currencies are stronger this morning, CAD +0.08% and AUD +1.37%. The Canadian dollar had its largest weekly decline in 40-years last week as the deepening credit crisis steered investors towards owning the US$. The currency managed to depreciate 8% vs. its southern neighbor, despite recording the largest 1-month employment gain in 30-years on Friday (+106k vs. +15k-albeit +113k part-time). Fundamental data, even positive data, is not being reflected in most currencies. Fear and lack of investor confidence has over extended most currency values of late. The past weekend’s coordinated economic aid package for Banks has provided some short term ‘loonie strength’ (the currency opened up 4-cents stronger after the announcement and is currently 7-cents from it low). Initial market reaction was to pare back long US$ positions as investors became less risk averse. But with global growth heading for a major downturn, commodities, the backbone of the Canadian economy and exports, is expected again to come under intense pressure and by default should underpin the loonie going forward. With the US in a recession and being Canada’s largest trading partner (75% of all exports head south of the border) does not bode well for export demand. The Canadian economy should expect a spill over effect as it will be impossible for the economy to bypass any recession. Last week, Governor Carney, a member of the band of 7 who cut key lending rates by 50bp (2.50%) has futures traders believing that he is not done yet. The yield curve continues to price in another 50bp ease at least by year end. Cbanks are using all the financial tools available to them to try and boost consumer confidence and encourage lending again. The global financial crisis and liquidity constraints continue to build a strong case for further easing. But, both the ECB and the Fed require time for last week’s initiatives to bear fruit. Expect the loonie to trade under pressure as investors remain concerned about the global economy slipping into a ‘deeper’ recession (moving from Wall Street to Main Street). Canada goes to the polls this evening to elect a new Government. The current PM, Stephen Harper, 2-weeks ago clung to a majority position, now there is a distinct possibility of being voted out of power due to his interpretation of the current financial crisis.

Again the AUD$ was the largest mover in the O/N session, as the currency has experienced one of the most volatile trading ranges of late (0.7100). The currency (like most currencies) rallied to its biggest 2-day gain vs. both the US$ and JPY as global equities rallied after CBankers announced that they would buy stakes in financial institutions. The AUD has moved from being priced in a global financial panic to being priced in a relief rally. Before the euphoria can set in, let’s see how North America embraces last weekends announcement.

Crude is higher O/N ($83.54 up +235c). Yesterday, Crude prices rebounded from its 13-month low and its 17% plunge last week, as governments both side of the Atlantic poured and pledged billions to stave off the worst financial crisis in over 80-years. Both global equities and the black-stuff edged higher during North American holiday trading after a coordinated pledge by CBankers to flood the financial system with ‘cash’ to boost consumer confidence. Object is to once again grease the wheels and get the financial markets lending again. Already last week, the IEA has indicated that it foresees growth advancing at its slowest pace in 15-years as economies slip into a recession. Of late, the pessimism trade managed to push commodity prices to over extended levels. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package proposed at the weekend. Currently, investors seek some sort of reassurance that perhaps there will be no need to undertake an ‘apocalyptic trading approach’ to ones own investments. The stimulus package will require time, and time is a variable that’s been in short supply of late. Some analysts have once again reduced their year end target price, due to their ‘underestimation of depth and duration of the financial crisis will have on economic growth and commodity demand’. They have aggressively adjusted prices down from $115-$70 (WT). The fear of global contraction had traders heading to the sidelines last week, recession fears are expected to further impede crude price. Perhaps the economic aid package will provide investors better levels to sell commodities once again. Technical analysts believe the market is well on course to penetrate OPEC’s psychological $75-$80 level (penetrated last week). OPEC last week announced that it will be holding an ‘extraordinary’ meeting in Vienna on Nov. 18th. They are expected to cut production because of prices falling so ‘dramatically’ according to the group’s President Khelil. The US, who consumes approximately 24% of production, is technically in a recession. Last week’s bearish EIA report provided no support for the ‘black-stuff’. It reported a bigger than expected gain in both crude and gas inventories, as the global downturn impedes demand. It seems that demand issues will remain an eyesore regardless of what policy makers will do to try and kick start the ailing economies. Let see how long oil can maintain its upward momentum. Gold has rebounded in the London trading session as investors seek an alternative investment to the greenback, which has declined against most of its major trading partners. Now with trading desks fully manned after yesterday’s brief holiday, it’s now we will get to see if markets can maintain their momentum.

The Nikkei closed at 9,447 up +1,171. The DAX index in Europe was at 5,279 up +217; the FTSE (UK) currently is 4,452 up +195. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 10bp on Friday (3.87%) and another 13bp in the O/N session (4.00%). With a North American holiday yesterday, this morning will be the first time to see how the market will react to the Bank pledge bail out proposed by most Governments. A massive amount of supply will enter the US market over the coming weeks and traders are expected again to cheapen up the curve to absorb these new issues. Investors have been so nervous about the financial crisis that they have been holding on to collateral and not lending it out. With global equity markets finally finding some traction, one can expect investors to shy away from the safer heaven FI class. Futures traders continue to price in a 50bp cut by the Fed on Oct.29th.

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