The Great Recession!

World equity markets remain under pressure and indices such as the Dow and the S&P 500 closed at an 11-year low yesterday whilst the Nikkei reached levels last seen 27-years ago. Renewed fears around the globe that the recession will become bigger than what is already priced in and the fear of potential failure to come up with proper solutions to tackle it will continue to push these markets southwards. Hence the 11-day decline with no reason to show any positive signs just yet!

The US$ is weaker the O/N trading session. Currently it is lower against 14 of the 16 most actively traded currencies, in another ‘whippy’ trading range.

Currency volatility remains heightened but volumes once again have receded of late. Predicting and participating in these markets has been a crapshoot for most. Global fundamental data has been dismal, giving no positive spin on ‘any’ markets. Investors and consumer psyche continues to take a beating, forgetting markets and livelihoods for a moment, the next big issue we will experience as a society will be heightened social unrest. For instance regionally, all of the Asian and Australasian currencies are so dependent on China’s growth rate, over dependent just like the rest of the world. It’s very difficult to find favor with Asian currencies (INR CNY TWD and AUD etc). Their economies all remain vulnerable, for example, despite the RBA aggressively slashing rates as required by all CBankers, the currency technically has the opportunity to trade down towards the 0.5500 level sooner than we think. Global optimism is shattered; we are straddling between a recession and a depression. The thought of nationalizing the financial industry in places like the US, UK, Ireland, can only bring further short term hardship and we have not even talked about the social cost, civil unrest and all of the other byproducts from a depriving society whose standard of living suddenly changes. The world fears for unrest in both China and Russia. But, we wait patiently for some of the fiscal, monetary and quantitative easing measures implemented to gain some traction. It’s all we got!

The US$ currently is lower against the EUR +0.40%, GBP +0.21%, CHF +0.70% and higher against JPY -0.90%. The commodity currencies are stronger this morning, CAD +0.13% and AUD +0.93%. Canadian retail sales fell at a pace that was double the expected decline in Dec. It was down -5.4% m/m, which translate to a -6.4% decline y/y (this is the largest contraction in 20-years and consistently widespread across all industries). In price-adjusted, volume terms, sales fell by -4.1% m/m and analysts are now embracing themselves for a larger hit to next weeks 4th Q GDP numbers. On the other hand these numbers provide further proof for Governor Carney at the BOC to justify slashing rates another 50 bps on Mar. 3rd (1%) as the Canada’s economy deteriorates at a quickening pace. It’s worth noting that digging deeper into the report, autos fell -13.2%, m/m, while gas station sales also dropped -11.7%, accounting for much of the weakness. But, if you excluded the dismal auto sector, sales only contracted -1.8%, m/m. Despite the weak data of late, the loonie found some support yesterday on renewed optimism by investor’s that the US government would increase their ownership of domestic banks to shore up the financial system. None of this has aided the equity markets, one can expect this USD weakness an excellent opportunity to sell the CAD$ at advantageous levels.

The AUD dollar like most currencies advanced as investors speculated that the US will take a 40% control of Citi bank, thus semi nationalizing the US financial system (0.6470), but, one should expect speculators to once again shy away from higher yielding currencies as global equity markets remain under pressure.

Crude is lower O/N ($37.97 down -47c). Crude prices briefly rallied yesterday reaching an 8-day high on the back of reports that OPEC members collectively reduced output -3.8% to +25.3m barrels a day in Feb. According to the Algerian oil minister, members may be in a position to implement further cuts to production at their next meeting on Mar. 15th. But once again the depth of this global recession continues to contribute to the demand destruction theory. Global equities are finding it very hard to maintain positive traction; by default such negativity will weigh on energy prices for the time being. Last weeks EIA report is truly the only positive piece of data that has prevented crude from falling out of bed. Weekly supplies fell -138k barrels to +350.6m vs. an anticipated increase of +3.2m barrels. It is logical to conclude that this years OPEC production cuts are making an impact. Imports of crude into the US declined -859k barrels a day to +8.79m, the lowest level since Sept. 2008. There will be no sustainable rally witnessed until we see global demand increase or inventory levels ‘consistently’ pared due to the OPEC production cuts. Year-to-date, crude is down 20%, for the past month speculators had bought into the theory that the substantial cuts undertaken by OPEC this year (who represent 40% of global supply) will eventually curb these surplus global inventories and bolster prices. A risk aversion strategy has investors looking a ‘store of value’ and buying the ‘yellow metal’ as financials and global equities remain under pressure ($988). Investors are gravitating towards precious metals as a safe heaven asset class.

The Nikkei closed 7,268 down -107. The DAX index in Europe was at 3,833 down -102; the FTSE (UK) currently is 3,806 down -44. The early call for the open of key US indices is lower. The 10-year Treasury yields eased 2bp yesterday (2.77%) and are little changed in the O/N session. With equity markets remaining under pressure, flight to quality is a necessity. With another record amount of US FI product needed to be issued this week, the US would require higher yields to attract outside interest. Expect to see traders to lean on the curve to absorb all the issues. The US treasury plans to sell $40b 2-ys today, a record $32b of 5-ys notes Wed. and a record $22b of 7-ys notes Thurs.

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