Forget disinflation, Panic is coming and it’s supporting safe heaven US dollar for now.

Global equity markets continue their one way direction due to the loss of confidence with the shift in the TARP emphasis undermining stock values and a questioning belief in the effectiveness of ‘plans in place’. Renewed pessimism has convinced investors to sell equities and put their money into safer places such as gold and US Treasury’s. This can only be good for the ‘big dollar’. All this leading to lower prices, deflation or Trichet’s new buzz word disinflation!

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Yesterday’s US inflation data fell the most in 61-years last month, but the decline in core-CPI remains the big issue as it excludes food and energy. Heightened fears of deflation will surely increase the probability that the Fed will cut rates by another 50bps on Dec. 16th. Headline inflation fell -1.0% vs. 0.0% m/m, as gas prices plunged -14.2% on the back of a $30 drop in crude oil prices for the month. Digging deeper, the data showed that vehicles prices fell by -0.7%, computers and cloths by -1%, which led the core to decline by -0.1%. Not to be outdone, US housing starts managed to print a new record low (+0.79m vs. +0.83m m/m). This is the lowest level on record; as builder confidence continues to drop m/m and new homebuyers remain on the sidelines. Analysts note that despite a small pick up in existing home sales, foreclosed inventories continue to flood the market, depressing prices further. The market does not see any light at the end of the tunnel until the end of next year. New home sales continue to be depressed as homebuyers in the market turn to existing homes. One should expect housing to continue to subtract from real GDP for a few more quarters.

Not to be outdone, currency markets yesterday whipped around with new found abandonment, cumulating in wider spreads. Once again Hedge funds were the root of the cause. They managed to create a ‘massive short squeeze’ triggering all the s/l on the top side in the EUR. This initial euphoria had technical traders talking about new trading ranges and key reversals, only to run into the CBR (Central bank of Russia), who were selling EUR’s which they have accumulated in defending the Ruble. Many articles over the past week have questioned what the ‘motherland’ will do as the interventions to stabilize the currency have become so large. Traders speculate that last weeks interventions accounted for about $14b, while all of Oct. totaled a ‘massive $50b’. There is heightened belief that the CBR will widen the currency band against ‘the basket’ again. The Government is adamant that the currency will not be devalued. They were on the offer in Gold on the way up as well, rubbing salt into most peoples wounds!

The US$ currently is lower against the EUR +0.19%, CHF +0.06%, JPY+0.29% and lower against GBP -0.73%. The commodity currencies are weaker this morning, CAD -0.12% and AUD -1.40%. Risk aversion trading strategies and weak commodity prices continue to impede any advance for the loonie at the moment. The currency remains under pressure as commodities come under assault as the reality of a deeper recession takes hold. The black stuff accounts for approximately 10% of all of Canada’s export revenues. Mathematically and technically the loonie has further to fall. The loonie remains vulnerable as oil is finding it rather difficult to advance from its new 20-month lows. Governor Carney yesterday said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. Traders have priced in another 50bp ease next month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%). Traders continue to be better buyers of USD’s on pullbacks.

The AUD$ in the O/N session has retreated the most in a week as the global slump in equities and the prospect of more interest-rate cuts has convinced investors to shy away from higher interest currencies. Once again the ‘carry trade’ remains under pressure and traders remain better sellers on rallies for now (0.6263).

Crude is lower O/N ($52.13 down -149c). Crude prices continue to fall after the weekly IEA report showed that inventories climbed more than forecasted as fuel demand dropped. Stocks climbed +1.6m barrels to 313.5m w/w vs. an expected jump of +1m barrels. Not surprising, US fuel demand over the past month has averaged +19.1m barrels a day, that is down -7% from a year ago (where is the cold weather). This is obviously worrying times for OPEC, technically the market is hell bent on a sub $50 print on the back of deterioration in demand and negative consumer confidence in the global economy. Gas inventories rose +539k barrels to 198.6m w/w. Yesterdays US fundamental data has done little to support the black stuff. Speculation that the recession will further curb demand will help send prices lower. US housing starts and permits for future construction both dropped to record lows last month (see above). To date, crude prices are down 63% from their summer highs and down 43% y/y. This scenario will back OPEC further into a corner. They have already cut production quotas last month, and every time they cut production they are building up spare capacity. Similar to the last cut, there is also a risk that they may make further cuts (rumored for next month) and prices still will not rebound. The erosion of future demand continues to be a ‘big’ question mark for global economies. Gold advanced once again in the O/N session as global equities remain under pressure, increasing the ‘yellow metals’ appeal as an alternative investment ($744).

The Nikkei closed 7,703 down -570. The DAX index in Europe was at 4,222 down -131; the FTSE (UK) currently is 3,921 down -84. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 16bp yesterday (3.35%) and another 10bp in the O/N session (3.25%). Long end treasuries prices remain better bid after yesterdays CPI data managed to drop once again and print new 61-year lows. Not to be outdone, 2-yr notes have touched their lowest yield in 5-years as traders once again raised their bets that Bernanke and Co. will cut interest rates next month to boost the US economy (1.00%).

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