Motor Industry in ‘Death Spiral’!

The debates are running wild in Washington. Build a Bad Bank vs. No Bank; debates on trying to be a little more innovative with the toxic ‘illiquid assets’, anything to boost investor confidence that would translate into these financial entities remaining viable at day’s end. President Obama will put the foot down and cap executive’s pays, is Capitalism as we know it dying? Finally credit rates this morning seem to be thawing a tad, T-bill yields are at a 3-month high. Greasing that squeaky wheel may be working!

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

Lets not get carried away just yet, but, the US consumer signed more contracts to buy previously owned homes in Dec. (+6.3% to 87.7 vs. 82.5, the first time in 4-months). Perhaps plummeting prices may be boosting demand? Psychologically, lower prices have changed people’s minds. Record foreclosures continue to push down house values, thus making them more affordable for the populous that are lucking enough to get financing in these tough credit times. Analysts believe that the ongoing restrictive lending practices and further price declines will continue to dissuade the majority of purchasers, which would provide stronger evidence that the housing slump will persist for another year. It’s worth noting that a record +19m US houses lay idle by the end of last year as the pace of foreclosures by banks quickened pushing prices even lower. The vacancy rate rose to +2.9% in the 4th Q, the most in over 50-years. This is making it more desirable for present owners to walk away from properties that are worth more than their mortgages.

The US$ currently is higher against the EUR -0.62%, GBP -0.63%, CHF -0.70% and lower against JPY +0.14%. The commodity currencies are weaker this morning, CAD -0.77% and AUD -1.55%. The 1st in 4-days and the loonie managed to show some teeth, albeit baby whites. Investors required a ‘mild appetite’ for commodities and equities and by default this led to acquiring the CAD$. Risk aversion trading strategies continues to dominate the currency’s value, as investors a percentage of a safer heaven asset rather than higher yielding commodity currencies in abundance. Pessimism expressed in lower equity markets has nervous investors unsettled about wagering the ‘farm’. North American employment data at the end of this week will provide a directional play, but until then, flows and sentiment will dictate an erratic path. In this current market mood, traders are content in buying USD on pull backs.

The RBA under Governor Stevens cut its benchmark rate to its lowest level in 45-years (3.25% vs. 4.25%), combine this with the government announcing that it will spend a further $42 billion to by-pass a recession has the currency out performing in the O/N session (0.6436).

Crude is higher O/N ($40.91 up +13c). Some speculators are buying into the theory that the substantial cut undertaken by OPEC last month (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. OPEC production averaged +28.57m barrels a, down -3.5% from Dec. According to refiners, both the UAE and Qatar will expand on crude shipments in Mar. Is the market slowly buying into this development or wishful thinking on the bull’s behalf? Continuous negative global data is impeding the medium term strength of any rally. Capital markets require stronger evidence for sustainability. Technically speaking we continue to gyrate around the $40 mark, and it’s a coin toss for any directional play at the moment. Oil is still down 73% from the high printed in July last year. Labor issues with steel workers and Royal Dutch Shell received a reprieve at the weekend. They have been able to extend negotiations on a new contract, thus delaying a potential strike that would have affected at least 2/3rds of production capacity. The negotiations cover workers at 86 plants including operations owned by Exxon, Valero, BP, Chevron and Shell. The IEA and OPEC continue to foresee a drop in global demand this year. This morning we have the weekly US inventory data, last weeks EIA report did not surprise in respect to crude inventories, they rose for the 16th time in 18-weeks. Weekly inventories jumped +6.22m barrels to +338.9m over the period vs. an expected climb of +2.9m. But, surprisingly gas stocks fell -121k barrels to +219.9m last week vs. an expected climb of +2m barrels. A risk aversion strategy has investors looking at ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remaining under pressure ($902).

The Nikkei closed 8,083 up +213. The DAX index in Europe was at 4,430 up +56; the FTSE (UK) currently is 4,225 up +61. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 5bp yesterday (2.83%) and another 7bp in the O/N session (2.90%). The FI asset class had found support earlier this week despite last weeks issues, with global equities struggling, some investors continue to consider seeking shelter in this asset class as recession seems to be deepening! Today we get the US 3’s, 10’s and 30-year bond announcements and the vast majority believes that the US government will increase its borrowing. Greater supply will equate to lower prices.

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