General Custer and Bernanke, will he suffer a similar fate?

Cbanks are looking less like lenders of ‘last resort’, but rather lenders of ‘first and only resort’. What would happen if the US ratings were lowered? Should they not be? Now that is a nervous thought!!

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Yesterday’s data painted a bleaker picture for the US economy. The job’s market continues to deteriorate. Last week’s initial jobless claims (+455k vs. +445k) came in just above consensus. Analysts note that a portion of the spike was caused by the fact that state of Louisiana was unable to report claims when Hurricane Gustav landed a few weeks ago and took out power to government offices (last weeks data included the blip). The pace of claims is consistent with a trend for NFP losses to edge north of a +100k print. Analysts now anticipate that claims and jobs figures will become bleaker due to the global credit crunch we are experiencing. Despite continuing claims falling w/w to +3.4m, it is still one of the highest levels recorded in 4-years. Americans are unable to find work amidst the growing fear of further economic weakness. Now that certain financial institutions existence remains questionable, the market should expect to see continuing claims move higher, encroaching on 2004 levels. The spiral effect will lead to further increase in the unemployment rate. US leading economic indicators fell more than forecasted in Aug., providing further proof that US growth outlook remained shaky ahead of the financial collapses that we have witnessed over the past 10-days (expect more mergers or acquisition by w/d). The forward looking index anticipates the economy’s direction over the next 6-months. Aug. numbers declined -0.5% on the back of -0.7% fall for the previous month. The housing and financial debacle has firmly brought the US economic expansion to its knees. We are witnessing the spill over from credit crunch into the mainstream ‘real economy’. One can expect consumer spending to ‘hibernate’ for some time as family’s net wealth and disposable incomes evaporate when opening this months ‘mutual fund statements’!

I wonder if Bernanke feels like General Custer. Congress is allowing Paulson and Bernanke to go alone until after the US elections, basically hanging a ‘do not disturb’ sign out until next Feb. The well orchestrated global cash intervention needs time to regain consumer confidence. The fear of further financial institutions failing is real and will happen. We are witnessing the end of the investment banker and how they use to do business. How much more cash will be needed to buy our trust? How long can the Cbanks keep the credit agencies at bay!!

The US$ currently is higher against the EUR -1.07%, GBP -1.11%, CHF -1.70% and JPY -1.93%. The commodity currencies are mixed this morning, CAD -0.35% and AUD +0.50%. Yesterday, Canadian data revealed that wholesale trade remains one of our ‘rare’ bright spots. Nominal sales were up +2.3%, m/m vs. +2.0% (not annualized), while real sales were up +2.2%. Digging deeper, the gains were diversified across most categories. But, almost all of the gains in wholesale trade for July were due to higher volumes and not prices. Analysts expect it to be a strong contributor to GDP readings. Despite commodities rallying somewhat yesterday, the loonie remains range bound as ‘risk aversion’ trading strategies dominated the FX market. Heightened investors concerns about global growth have had a negative effect on oil. Prior to Cbanks ‘cash injection’ the loonie found no love amongst investors as market volatility dissuaded speculators from owning riskier assets. Canada has become guilty by its ‘proximity and association’ with its southern neighbor. Fears of further financial meltdowns and stagnating global growth could add to the loonies’ demise in the short term. The US remains Canada’s largest export market, over 75% of our exports head south and 50% of that is commodity based. With global growth issues a major concern, commodity prices will continue to drag on the Canadian economy going forward. Expect traders to be better buyers of US$ on pull backs.

The AUD and NZD found some deserving support once again especially vs. JPY, as Bernanke and Co. seek US legislation to help financial institutions clear their balance sheets of illiquid assets and ease credit-market losses. Renewed capital market confidence has investors seeking higher yielding assets funded by loans in Japan (positive carry trade-0.8099).

Crude is higher O/N ($99.25 up +137c). Commodities remain a safe heaven option for investors. Crude prices attempted to rebound despite global growth fears heightening as financial failures appear. In yesterday’s morning session investors sought the safety of the commodities on concern that the credit crisis will deepen, leading more financial institutions to fail. Crude printed a $100 a barrel when the greenback extended its slump vs. the EUR. But, the market still clings to the idea that the ongoing financial turmoil may weaken the global economy and reduce demand even further. Investors fear that a further deterioration of the US financial system will spread to the real economy and affect demand for oil. Fundamentally commodity prices have the potential of falling much further, despite the threat of supply issues. Market consensus has us believing that OPEC is content with $90-$100 a barrel. This week’s EIA report showed that US crude inventories fell -6.33m barrels vs. -3.5m to 291.7m, w/w. It was the 4th straight inventory decline. Fuel demand averaged +19.9m barrels a day over the past month (-4.4%, y/y), while gas consumption averaged +9.21m barrels a day (-2.6%, y/y). Gas stocks declined -3.31m barrels to 184.6m (the lowest level in nearly 20-years). With refineries due to come back on line in the Gulf of Mexico, speculators will once again be focusing on demand levels and not inventory. Market fundamentals and financial issues should continue to combine to weaken prices over the rest of this year. Gold prices have aggressively retreated in the overnight session, as traders speculate that the ‘yellow metals’ safe heaven rally this week may technically have overshot its true value mark. Especially after the coordinated Cbanks steps to support financial companies and prevent the global financial crisis from spreading ($834).

The Nikkei closed at 11,839 up +350. The DAX index in Europe was at 6,111 up +248; the FTSE (UK) currently is 5,235 up +355. The early call for the open of key US indices is higher. 10-year Treasury yields backed up 10bp yesterday (3.54%) and a further 8bp O/N (3.62%). Treasuries prices fell as the co-coordinated efforts by CBankers injecting emergency funds into the financial system to revive lending and to boost demand for global equities seems to be working. Infusing cash has provided some relief and confidence in the capital markets. Policy makers took the extraordinary steps to ‘elevate pressures in US dollar short-term funding markets’. They will ‘continue to work together closely and will take appropriate steps to address these ongoing pressures’.

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