The ‘Thain Tax’ has been imposed!

Already President Obama looks like a prized fighter in the middle of championship match. He is consistently jabbing, his potent offence so far, but, his critics remain a formidable opponent. He has now ordered the capping of executive compensation for financial institutions receiving government aid. It was hard to accept ‘Government Employees’ being paid so much!

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.

Well we experienced a mild surprise in yesterday’s US private employment report. Companies cut -522k jobs last month after a dismal holiday sales season. The drop was less than analysts had anticipated (-528k) and followed a revised cut of -659k (-693k) for Dec. Perhaps this number will set us up for another surprise on Friday. Employers remain persistent and consistent in their firing policies; the blame is being put squarely on the credit markets and sub-sectors of housing and manufacturing which threaten to push global economies into a deeper recession. This will lead to a trickle down effect impeding consumer spending even further (it is still the largest variable of the equation, representing 70% of the economy). It is worth noting that ADP revised its methodology last year to try and eliminate the wide spread between its calculations and the NFP payroll numbers. Consensus at the moment has the US economy shedding another -535k+ jobs and pushing the unemployment rate to a 16-year high of 7.5%. Digging deeper into the ADP report, it shows that the weakness was broad-based. Large businesses (+500 employees) saw employment decline -92k, while medium-size businesses (50-499) declined -255k. Employment amongst the small-size (less than 50) declined -175k. Analysts conclude that the ‘sharply falling employment at medium and small-size businesses indicates that the recession continues to spread well beyond manufacturing and housing-related activities.

The ISM non-manufacturing index bounced back this month, following in the footsteps of its sister manufacturing report. Even with the positive uptick, analysts remain cautiously optimistic, especially since both reports still suggest that the services and manufacturing sectors in the US are contracting, albeit at a slower pace. After plunging to a record low in Dec. the index has edged up gradually, increasing to +42.9 for Jan. as the subcomponents like new orders (41.6), business activity (44.2), imports (40.5) and prices paid (42.5) all moved up during the month. Offsetting this strength, new export orders declined to 39.0, which suggests that the weakness abroad is intensifying. But, on the positive side it may also suggest that domestic activity may be strengthening!

The US$ currently is higher against the EUR -0.17%, JPY -0.23%, GBP -0.17%, CHF -0.18%. The commodity currencies are mixed this morning, CAD -0.20% and AUD +0.74%. The loonie remained little changed despite an appetite for the currency on the back of some M&A requirements coupled with commodities remaining better bid all day. Risk aversion trading strategies continues to dominate the currency’s value, as investors seek a percentage of safer heaven assets 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 (0.6489).

Crude is higher O/N ($44.82 up +153c). Crude paired earlier gains yesterday after the weekly EIA report did not surprise by posting another gain. Inventories rose +7.2m barrels to +346.1m, w/w, vs. an expected increase of +3m. 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? Saudi Arabian Oil Co., (the world’s largest state-owned) has raised the official selling prices for all of the crude types that it will export to customers next month. 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. A risk aversion strategy has investors looking at ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remain under pressure ($923).

The Nikkei closed 7,949 down -89. The DAX index in Europe was at 4,473 down -0.4; the FTSE (UK) currently is 4,221 down -7.2 The early call for the open of key US indices is lower. The 10-year Treasury yields went down 4bp yesterday (2.86%) and are little changed in the O/N market. Yesterday the US treasury announced a record supply of product to be issued. It is increasing the size of the 3-yr note by $2b to $32b, the 10-yr note by $1b to $21b and the 30-yr bond by $4b to $14b. The 10’s and Long Bond offerings were slightly less than expected, but this was because the Treasury decided to bring back the 7-yr note and to have 4-Bond re-openings (Mar., June, Sept., and Dec.) All in all that’s a record amount of $67b of debt to be auctioned next week. Greater supply will equate to lower prices. Let’s see the dealers cheapen this curve up!

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