The ‘Sea of Red’ never-ending!

The bad news never ends. Despite this week already shaping up to be the ‘watershed of political consensus or not’ at the G20, the Obama administration have put there foot on the gas and forced some resignations amongst the US auto giants that seek further help. Both GM and Chrysler must overhaul their recovery plans with deeper concessions to justify further taxpayer aid or face the perils of bankruptcy. It was impossible for the industry to complete their tasks within the deadline and yet the market reacts as this is all ‘new’ news. Geithner’s rhetoric this weekend will surely not appease other G20 member’s fears about the US financial industry being on the road to recovery sometime soon. He believes that some banks are going to need some ‘large amounts of assistance’ for survival. He wants banks to take more risks while at the same time implement stronger regulatory policies. The fear of losing investor confidence must be mounting.

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

The markets were difficult enough until the US auto task force gave their recommendations. Capital markets have gone into risk aversion mode and the flight to quality intensifies. The EUR was already on its own slippery slope as the market tries to decipher and anticipate ECB policy maker’s next move this week. Investors are questioning if Trichet and Co. will join the quantitative easing club or not. The pressures on the EUR which started on Friday have us believing that they will ease once again and perhaps provide bail out details for certain entities. On the other hand, the USD and JPY strength has more to do with aversion strategies rather than year-end repatriation in Japan. This is a big week for Capital market’s, the fear of losing further consumer confidence will surely intensify the social and political discord which may not be easily rectified in the short term.

The USD$ currently is higher against the EUR -0.61%, GBP -0.90%, CHF -0.37% and lower against JPY +1.90%. The commodity currencies are weaker this morning, CAD -1.00% and AUD -1.84%. On Friday, the loonie fell to its lowest level for the week as a decline in equities and commodities signaled diminishing investor appetite for risk. This has certainly carried on in the O/N session. All week the currency had been driven by the strength of commodity prices (50% of Canada’s total export revenue is commodity based). But, oil has once again taken it on the chin as global equities come under intense pressure. Fundamental or technical data is providing no guidance to investors. It’s currently all about the ‘big’ dollar and commodities. However, the US auto task force scrutiny will not help the Canadian Federal stance on their auto industry, who also seeks federal aid. Look for investors to want to buy USD on any pull backs.

The fear of the global recession deepening has once again pressurized the AUD$ and pushed it to its lowest level in over a week (0.6788).With global equities and commodities tumbling once again in the O/N session has investors wanting to sell the currency on upticks as many have been caught in an offside position. The concern that the G20 meeting will not achieve anything has investors looking to the sidelines.

Crude is lower in the O/N session ($50.67 down -171c). Crude prices have tumbled since Friday morning. After a relatively upbeat start to last week, the greenback’s gain vs. the EUR has reduced the appeal of commodities to investors. Global equities paring their strong run of late has not help crude’s plight. With the recession deepening in Europe, flight to quality via the greenback has helped wipe nearly 8% of crude prices since Thursday. The fundamentals of late do not warrant higher prices that we have been experiencing as demand destruction remains healthy. Crude prices had encroached on its 4-month highs as advancing global equities psychologically signaled that fuel demand would increase. Last weeks EIA report showed that US inventories climbed to their highest level in 16-years as demand wanes. It was the 22nd gain in 26-weeks and left stockpiles 13% higher than the 5-year average for the period. Inventories rose +3.3m barrels, w/w, vs. an expected rise of +1.1m. This is another bearish report that requires demand to move higher for prices to at least stabilize, it will once again shift focus towards OPEC and further production cuts scenario. However, supplies of gas and distillate fuel (includes heating oil and diesel) dropped as refineries cut utilization rates. Gas stocks fell -1.14m barrels to +214.6m last week. The fundamentals of supply and demand do not justify oil penetrating that psychological level of $55 a barrel anytime soon. Global demand destruction remains a concern; there is nothing to suggest that demand will increase in the short term. The fear of inflation occurring on the back of the Fed’s plans to buy debt has investors wanting the ‘yellow metal’ on pull backs as an alternative form of investment ($928).

The Nikkei closed 8,236 down -390. The DAX index in Europe was at 4,043 down -160; the FTSE (UK) currently is 3,796 down -102. The early call for the open of key US indices is lower. The 10-year Treasury’s backed up 2bp on Friday (2.76%) and eased 8bp in the O/N session (2.68%). Treasury prices fell last week as stocks rose and the US government sold another $98b in securities. The decline would have been deeper only for the fact that the Fed bought back $15b off-the run product to keep long dated interest rates lower. Traders remain concerned that government supply will exceed demand going forward. It is believed that debt sales will triple this year to a record of $2.5t. However, despite good reasons for not wanting to own the FI market, the fear of global recession deepening has encouraged risk aversion strategies that have given the bond market its bid.

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