Is this week over yet!!

Bankers once again seem to be at the root of all evil. Would you not think after last year’s financial debacle, transparency would be the order of the day? Not surprisingly, handouts are needed again for survival. In the NY times this morning, it is believed that Citigroup’s losses are so large that the US Government may have to take a majority stake. In Ireland, the Government nationalized Anglo Irish Bank as it was feared that it could be insolvent and trigger EUR’s 100b of liabilities. The US government is to invest another $20b in BOA and guarantee over $118b of its assets to push the Merrill Lynch deal through. The government agreed to the rescue ‘as part of its financial market stability’. Nothing is too big to fail!

The US$ is weaker in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies, in ‘whippy’ trading range.

No surprises, Trichet delivered his 50bp expected ease to 2.00%, but, said that inflation risks were ‘broadly balanced’ signaling that the hierarchy at the ECB may be unwilling to keep up their current pace of interest rate cuts. He now anticipates that policy makers may wait until Mar. before deciding to easing rates again. No wonder the EUR continues to trade under pressure vs. the greenback. All this despite the Euro-zone deteriorating more rapidly that the policy makers had anticipated last month. The financial crisis continues to hurt exports, discourage spending and threatens credit ratings (Spain and Portugal). Once again they seem to be falling into the trap of being reactive rather than the necessary proactive psyche.

US data yesterday showed that Producer prices dropped -1.9%, m/m in Dec. This was very much in line with expectations and was the first y/y decline since Oct. 2006. All this was made possible by weaker commodity and food prices and reduced pricing power. Gas prices plummeted -25.7%, m/m, the 3rd consecutive monthly decline, while energy dropped -9.3% along with food (-1.5%) and consumer goods (-2.6%). Excluding energy, producer prices retreated by a modest -0.2%, m/m. It is also interesting to note that prices also continued to moderate at the intermediate and crude stage of processing. This would suggest that prices for finished goods are not being pressured by pipeline gains.

A pleasant surprise was that the Philadelphia Fed index improved more than expected this month but continues to show that the manufacturing sector contracted for the 13th consecutive month. Digging deeper, new orders, shipments and the average workweek improved, but continue to remain negative, which to an optimist would suggest that the pace of deterioration may be slowing. However, all of the other categories including inventories, number of employees and delivery time continued to worsen with the number of employees falling from -28.6 to -39.0. January NFP is looking horrible so far! It’s worth noting that the future activity index rebounded from -10.4 to -7.4, as businesses expected new orders and shipments to start to grow in 6-months. However, the rest of the components remained negative, with the number of employees weakening even further.

US initial jobless claims pushed back above +500k, very much in line with expectations. This suggests we will see another large decline in NFP numbers for Jan. Companies continue to announce massive layoffs, while auto plant closures will add thousands to the tally. After the dismal US Retail sales this week, one can conclude that retailers will also aggressively reduce their workforce as they deal with the worst holiday sales season in 60-years. Continuing claims fell to 4.497mlast week, a tad surprising, but most likely due to the holiday distortions as many firms continue to announce hiring freezes. With bankruptcies starting to increase especially in the retail sector, this week’s number will be another eye opener for Capital Markets.

The US$ currently is lower against the EUR +0.50%, GBP +1.30%, CHF +0.13% and higher against JPY -0.62%. The commodity currencies are stronger this morning, CAD +0.37% and AUD +0.71%. Nothing technically or fundamentally has been providing support for the ailing loonie at the moment. Risk aversion strategies have dominated this week as investors sought sanctuary in owning the USD. The flight to quality aka the greenback has driven the CAD dollar to new month lows yesterday. The currency has remained under intense pressure as commodity prices continue to suffer. After this weeks EIA report, do not expect the loonie to outperform any time soon. Last summer, unprecedented peaks in oil prices helped buoy Canada’s export market (50% of all exports are commodity based). This provided a cushion for the Canadian economy as its southern partner fell into a recession. However, since oil prices have plummeted -80% since the peak in July, Canada’s exports have been deteriorating at a rapid pace, adding to economic weakness in other areas of the economy, and causing the BOC to continue its easing campaign. Futures traders are pricing in a 75bp ease next week (1.50%). The currency remains guilty by its association and proximity to its largest trading partner, the US. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

Despite weaker economic data down-under this week, robust global equity markets has convinced investors to abandon some of their risk aversion strategies and invest in some higher yielding currencies like the AUD for now (0.6778). Not a bad way to finish the week off.

Crude is lower O/N ($35.21 down -19c). Demand destruction remains the order of the day. Crude prices once again come under renewed pressure as OPEC said that demand for its black-stuff will decline -4.2% this year as the recession in the US, Europe and Japan curbs fuel consumption. It’s expected that consumption of OPEC’s oil will shrink -1.4m barrels a day to +29.5m barrels. This week’s EIA report has ended up being more of a hindrance than an aid for crude prices. The data showed that crude stockpiles climbed to a 16-month high as fuel demand continues to deteriorate. Crude stocks increased +1.14m barrels to +326.6m last week, the highest since August 2007. Fuel demand has dropped 6% to an average +18.6m barrels a day, surprisingly the largest 1-week decline in 5-years. Gas inventories rose +2.07m barrels to +213.5m, higher than the anticipated +1.85m expected. On the other hand supplies of distillate fuels (includes heating oil and diesel) surged +6.35m barrels to +144.2m, the biggest gain again in 5-years. The disappointing US data this week has not helped either, the data solidified global concerns that fuel demand will decline even further because of the global recession. The geo-political issues in Gaza and the on-going Russian Ukraine natural gas crisis is no match for demand destruction caused by weakening economies. Analysts anticipate that we will once again test Dec. lows of around $32 on the back of the North American reports been so poor. Gold has not deviated too far from its monthly lows, for most of this week the greenback had remained better bid vs. the EUR and eroded the appeal of the yellow metal. But, it seems the tide may be turning ($823).

The Nikkei closed 8,230 up +206. The DAX index in Europe was at 4,444 up +107; the FTSE (UK) currently is 4,200 up +80. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 7bp yesterday (2.23%) and a further 7bp O/N (2.30%). Treasuries pared some of this weeks gain after US economic data yesterday did not sway too far from market consensus. But, with global equities and specifically financial stocks remaining under pressure should provide better buying of the FI market on deeper pullbacks. With risk aversion strategies once again in vogue will encourage investors to seek the safety of government debt.

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