The summer rally is over!

We have moved from Tier 1 financial intuitions in the US to some of the bigger regional banks failing at a good clip. This news will probably mark the official end of the US summer equity rally and revive worries over the financial health of other regional banks. Regulators have closed Colonial BancGroup Inc.’s banking operations and shut two companies in Arizona, one in Las Vegas and one in Pittsburgh. That brings the official tally of failed banks this year to 77! Colonial was not a minnow either, it had assets of $25b and deposits of about $20b!

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

The ‘dollar’s’ summer of discontent is probably over. Factors favor the greenback to remain coveted by investors. For an investment reason, probably not, for risk-aversion needs, absolutely. That being said, there are improving fundamentals in the US which are providing some support for green shoot economics. The narrowing trade gap is always good news for the ‘buck’. The trade deficit accounts for +90% of its current account deficit is back to levels last seen in 2001! GBP largest 5-month rally in 24-years is ending as Governor King at the BOE floods the UK economy with ‘newly printed cash’. S&P expects UK Government debt to double to +100% of GDP by 2013! Who would want to own Cable? Global bourses are giving back their gains at an alarming rate (retreat is far quick than attack), dragging gold and oil lower in tandem. Perhaps we are beginning to realize that we have got ahead of ourselves again. We are not arguing that the recession is not over; just commenting that fair value is probably over-stated! We are running before we walk.

The USD$ currently is higher against the EUR -0.46%, GBP -1.06%, CHF -0.34% and lower against JPY +0.15%. The commodity currencies are weaker this morning, CAD -0.94% and AUD -1.10%. Like a lead weight, the loonie has fallen from grace, dropping for a 2nd-straight week as losses in stocks and commodities overshadowed Canadian fundamental reports that is persuading investors that the recession may be abating. Despite being the strongest currency last month of all the developed currencies vs. the USD, last week it led the charge lower vs. its Southern partner. With equities ending their summer rally, look for higher yielding currencies to lead the charge lower! Last weeks data was mixed, both sales (+1.9%) and trade (deficit narrowed -$55m) were a pleasant surprise, but housing starts took some of the shine off some economists optimistic views (-4.1%). The trade gains can be attributed to the double-digit surge in crude exports (oil had advanced +20.0% in a month!). The loonie, like most of the other major currencies rise has been rapid and certainly somewhat overdone in the short term. It’s anticipated that weekly oil stocks will once again show an increase which will only further pressurize commodity currencies. For now, investors are looking to buy USD on pull backs.

Right on cue and inline with other high yielding currencies, the AUD declined the most in 6-weeks vs. the greenback and 2-weeks vs. JPY as regional bourses fell the most this year on the back of global confidence numbers and the renewed threat of regional Bank financial failure in the US. If the US summer equity rally is over, look for investors to want to sell the AUD on rallies (0.8185).

Crude is lower in the O/N session ($65.84 down -116c). Finally, crude is starting to take notice of bearish fundamentals that do not warrant elevated energy prices. On Friday, oil tumbled just under -5% to a 2-week low, dragging with it gas prices, after a report showed that confidence among US consumers unexpectedly declined this month. Naturally the market is questioning if fuel demand will rebound this year, already the strength of demand remains suspect. Last week the IEA raised its oil demand outlook for this year and next on accelerating Chinese industrial activity, but, is it sustainable? They have already built a large reserve of commodities. The EIA reported higher crude inventories last week. This has certainly capped short term gains! The data showed that crude stocks in the world’s largest energy consumer rose by +2.5m barrels last week, against expectations for just a +700k build. The latest data on industrial production for some of the larger countries remains negative and should provide support for further demand destruction. We are now officially over the hump of the US driving season and just about to enter historically a weak demand month of Sept. We have technically been subjected to elevated prices for too long. In reality, we may have seen the worst of this recession, but global growth will remain very subdued. This certainly does not bode well for any strong rebound in the coming months. Reality continues to tell us that inventories are high, demand is still really weak and the risk is increasing that we will see a bigger correction towards $60. Similar to most commodities, the ‘yellow metal’ pared gains and managed to print new 2-month lows again this morning as the greenback rallied on weaker confidence numbers, thus eroding the ‘yellow metal’s’ appeal as an alternative investment ($939).

The Nikkei closed at 10,268 down -328. The DAX index in Europe was at 5,229 down -80; the FTSE (UK) currently is 4,646 down -67. The early call for the open of key US indices is lower. The 10-year bond’s eased 11bp on Friday (3.57%) and a further 7bp (3.50%) in the O/N session. Treasury prices rose (largest gain in 8-months), after last weeks US data showed that the cost of living was unchanged and that retail sales surprisingly fell last month, confirming that inflation continues to remain subdued. All this occurred despite the record quarterly refunding of $75b being issued!

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