Russia loses control, Iceland in deficit, Swiss nearing zero, Sarkozy wants stimulus-this is only a ‘technical’ recession!!!

The SNB has eased O/N rates to -0.5% this morning. The race is on to be the first Cbank to have ‘Zero’ borrowing costs. Globally we are suppose to be in a technical recession, only one Cbank admits that they are in recession and that’s the BOC (Governor Carney take a bow-your government does not see it that way). Because of information flow, the spiraling speed of this recession is quickening. Forgetting the ostrich syndrome, which many continue to suffer from, what is actually working? What program that has been implemented over the past 8-months is achieving its objective? Will we move from a recession to a depression? We need some sort of reality check at this point!

The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Very little fundamental data this week has provided any support for the greenback. The US auto aid package potentially failing in the Senate has once again put the currency under renewed pressure. With global bourses advancing (mind you volume is questionable) the perception of increasing risk appetite has had a negative impact on the USD. This morning’s data should provide further pressure, but month end and year end adjustments always have an unusual impact. The Fed is considering issuing its own debt for the first time, a move that would give Bernanke and Co. additional flexibility as it tries to stabilize these financial markets. Historically Government debt issuance is largely the responsibility of the Treasury department. To date, the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from this deep recession, Fed officials are looking ‘broadly for new financial tools’. The ballooning balance sheet is presenting complications for the Fed. It has grown from less than $900b to more than $2t since Aug. The end result, with the additional cash it will make it more difficult for the Fed to maintain interest rates at ‘their’ desired level and cause inflation to be the main issue. So far we are not even taking the legal implications into account, the Fed vs. the Treasury!

The US$ currently is lower against the EUR +0.48%, GBP +0.83%, CHF +0.21% and lower against JPY +0.42%. The commodity currencies are stronger this morning, CAD +0.33% and AUD +0.19%. The loonie advanced vs. its southern neighbor as global equities and commodities rallied. So far this year the currency has depreciated -21% this year. Prices of commodities, which generate about half Canada’s export revenue, have plummeted as a global recession reduced demand. This week Governor Carney from the BOC delivered an unexpected ‘deep interest rate’ cut. The market expected 50bp, the economy warranted 75bp and Carney pushed rates to a new 50-year low of 1.5% vs. 2.25%. In his communiqué he signaled that more action may be needed as economic growth sputters in a ‘broader and deeper’ global slump. According to the BOC, the Canadian economy has entered a recession and his ‘dovish’ tone coupled with weaker economic data of late leads me to believe that the currency is capable of making an assault on this year lows before year end. The political and economic dynamics will push the currency towards 1.3300 in the medium term. Last week the unsettling political debacle in Ottawa has forced PM Harper to suspend Parliament to stave off a no confidence vote before he introduces the budget to the house in late Jan. Look for traders to be better buyers of USD on pull backs, of course all this could change after OPEC meet next week!

The AUD dollar advanced in the O/N session after regional bourses stayed in positive, fueling speculation that investors may increase their holdings of higher-yielding assets. The Australian employment showed that the economy shred -15.6k jobs down under, very much in line with expectation. Other data this week has provided some support for the currency, consumer confidence increased for the 2nd month in a row (due to the deep cuts by the RBA) and home loan approvals gained in Oct. for the first time in 9-months. To date the currency has remained better bid on pull backs as investors continue to speculate that Cbank interest rate cuts around the world will bolster economic growth (0.6616).

Crude is higher O/N ($44.94 up +142c). It was looking good for crude bulls early on yesterday until the weekly EIA report showed that inventories of gas and distillate fuel, a category that includes heating oil and diesel unexpectedly jumped. Earlier in the day oil climbed aggressively higher as investors speculated deep coordinated production cuts by Russia and OPEC would be implemented. Gas stockpiles rose +3.7m barrels to +202.7m w/w, while distillate inventories climbed +5.6m to +130.6m barrels. They were anticipated to fall -400k barrels and distillate supplies by -1.5m respectively. Inventories of crude rose +392k barrels to +320.8m (analysts had anticipated a 10th consecutive increase of +1.3m barrels). Refineries operated at 87.4% of capacity and were up +3.1% from last week. The 4-week US fuel consumption averaged +19.3m barrels a day, that’s down -6.1% for the same period last year. The Russian energy minister supposedly spoke with OPEC and will announce proposals for cutting output by Dec.17, when OPEC also meets. It’s expected that the group will reduce production by as much as +2.5m barrels a day. Earlier this week the US energy department stated that global demand will decline this year for the first time in 25-years. They anticipate that oil consumption will average +85.75m barrels a day, down -50k barrels from 2007. They also believe that demand will average +85.3m barrels a day in 2009, down -0.5% from this year. The 2009 demand estimate is -630k lower than they forecasted just one month ago. This will lead to a tug of war between demand destruction and OPEC production destruction. Demand is certainly putting a cap on prices and OPEC has it back very much against the wall, last months ‘cut’ has had very little impact so far. OPEC wants and needs prices between $70 and $80 a barrel, a desired level at which one can invest. Gold prices have rallied as the greenback has pared many of last week’s gains and commodities have advanced, thus increasing the appeal of the ‘yellow metal’ as an alternative investment ($821). Perhaps gold prices are beginning to adjust to excess printing of money?

The Nikkei closed 8,720 up +60. The DAX index in Europe was at 4,771 down -33; the FTSE (UK) currently is 4,358 down -8. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 2bp yesterday (2.68%) and are little changed in the O/N session. Treasury prices remain soft ahead of this week’s $16b 10-year auction of new Government debt. Investors are concerned that the government’s need to fund the financial system’s rescue will flood the market with debt, and by default want to cheapen the curve. Currently the market is priced very ‘richly’ after all of the recent bad news. This week we have already witnessed 1-month US T-bills trading in negative territory as investors sought the safety of US debt amid the worse financial crisis in 80-years. As discussed earlier in the week, year end demand has very much exasperated the situation as companies want to shore up balance sheets before the New Year. Traders are raising their bets that the Fed will ease by 75bp on Dec 16th.

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