Where is the Financial Leadership? Brown, Bernanke or Bozo….!!

Bernanke ‘hopes’ the financial markets will stabilize given time, he does not expect ‘economic recovery to happen right away’. Investors need stronger reassurance than ‘hope’ from the Fed. No wonder last week’s freefall may not be an aberration. It’s an academic wakeup call; reality is a lot different than writing a thesis!

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 ‘whippy’ trading range.

And so the fun continues, it was not surprising that North American data found no love amongst investors yesterday. Sept. retail sales managed to post the worst reading in 3-years (-1.2% vs. -0.4%). Hardly any category was spared; there were declines in every major category except for health care and gas. Discretionary spending fell a sharp -1.6% on the month, and is now 5.0% lower vs. last year (the weakest on record). All this is on the back of escalating job losses, tumbling home prices and the deepening credit crisis. Of course this reading was taken ahead of the coordinated Cbanks record cash infusion announced last week, but , do not expect miracles just yet.. Core-retail sales faired no better (-0.6% vs. -0.3% expected-last months was also revised down another 2/10’s). Last weeks market record debacle is expected to further undermine consumer confidence going forward. The natural reaction will see most consumers paring back any excess spending and the retail sector experiencing a very difficult quarter. Consumer spending fell at an annual rate of 2% in the 3rd Q, finally bringing to a halt the record expansion. Analysts expect purchases to drop at a 0.9% pace in this Q and little changed in the 1st Q of next year.

Analysts are looking beyond the +0.4% jump in Core-PPI yesterday, they believe the underlying details point firmly towards further retreating PPI going forward, which would suggest that last months -0.4% decline has ways to go yet. Producer goods prices are rapidly retreating further up the supply chain. The raw materials component fell by -7.9%, while intermediate goods fell by -1.2%. Only food, prescription drugs, and vehicles pushed producer prices higher. One can expect further commodity declines and unwillingness of consumers to spend impeding any price hikes for the foreseeable future. Can we shout disinflation loud enough!

And for the tri-factor of miserable data, we managed to witness a record low reading for the Empire Manufacturing headline index (-24.6 vs. -7.4). The demand-side details were again bleak, revealing that New Orders fell to a record low (-20.45 vs. +4.38). Not to be outdone, shipments reached the lowest level since the 2001 tech-recession (-8.85 vs. +0.64). No wonder Fed President Yellen believes that the US is already in a recession.

The US$ currently is higher against the EUR -0.32%, GBP -0.12%, CHF -0.53% and JPY -0.60%. The commodity currencies are mixed this morning, CAD -0.29% and AUD +1.53%. The Canadian dollar is making a valiant attempt to record similar trading ranges that we experienced last week. Last week we witnessed the largest weekly decline in 40-years. The loonie continued its downward spiral yesterday as commodity prices remained under pressure. Reported US recession like data yesterday certainly did not help the currency’s cause. It has now deprecated 14% vs. the greenback since oil registered its record highs back in July. With the US its largest trading partner (75% of all exports head south) and Canada relying on commodities for about 50% of its export revenue, one cannot rule out the market revisiting last Fridays CAD$ lows north of 1.21 again. The plunge is consistent with commodity prices and analysts are aggressively revising medium term price objectives. For a long period it’s believed by some to have been too strong, average future 6-month levels are aprox. 1.2500. A stronger CAD$ will depend on whether commodities are capable of stemming their slide and economic aid ‘bearing some fruit’. Fundamental and technical data of late has no bearing on the currency value. Liquidity continues to remain an issue, as the volatile gyrations can attest to. Fear and lack of investor confidence has over extended most currency values of late. But with global growth heading for a major downturn, commodities, the backbone of the Canadian economy and exports, are expected again to come under intense pressure and by default should underpin the loonie going forward. The Canadian economy should expect a spill over effect as it will be impossible for the economy to bypass any recession. Futures traders continue to price in another 25bp ease by the BOC for next week (Oct. 21st). With the Political leadership question out of the way, no major surprises or fallout, expect traders to be better buyers of US$ on pullbacks, until proven wrong.

The AUD$ overall remains under pressure, but last night managed to find a bid due to ‘too many short positions’ and the recent currency price movements being over extended. The currency has fallen of late as global equities and commodity prices pared their recent gains on concerns that the ‘monies’ pledged to shore up the global financial system will fail to prevent a global economic recession. Some investors have been unwinding the ‘euphoric carry’ trade that they entered after equities advanced earlier in the week. For now, expect traders to remain better sellers on upticks (0.6700), analysts currently see fair value around 0.6900.

Crude is lower O/N ($72.22 down -232c). Oil has managed easily to penetrate the $75 a barrel (OPEC’s psychological low level), the first time in over a year. Investors and traders alike remain somewhat skeptical that the coordinated rescue package by governments will be enough to curtail a deeper recession and promote commodity usage. Currently crude prices and global equities trade hand in hand. OPEC cut its world demand forecast for 2009 yesterday, because of ‘dramatically worsening’ conditions in the financial markets. They supply 40% of the world’s oil and cut demand next year by -450k barrels or -0.5% to 87.21m barrels a day. OPEC last week announced that it will be holding an ‘extraordinary’ meeting in Vienna on Nov. 18th. They are expected to cut production because of prices falling so ‘dramatically’. The IEA has also indicated that it foresees growth advancing at its slowest pace in 15-years as global economies slip into a recession. Growth and recession will continue to be apart of the demand equation despite the economic stimulus package. The stimulus packages require time, and time is a variable that’s been in short supply of late. Some analysts have once again reduced their year end target price ($115-$70), due to their ‘underestimation of depth and duration of the financial crisis will have on economic growth and commodity demand’. Todays delayed EIA report is expected to show that both crude and gas inventories have once again jumped w/w, thus adding to further price pressures. Gold on the whole has remained better bid ($836) as investors seek an alternative investment to an ailing global equity market. But, during this mornings London session it has pared some of the recent gains as some investors raise cash and others fear the potential flooding of the market of the ‘yellow metal’ by Cbanks.

The Nikkei closed at 8,458 down -1,089. The DAX index in Europe was at 4,791 down -70; the FTSE (UK) currently is 3,985 down -93. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 10bp yesterday (3.99%) and are little changed O/N. Yesterday, despite weaker fundamental data being reported in the US, treasury prices stayed close to home most of the day until equities retreated aggressively by day’s end. Record cash infusion by governments and larger future issuances being tabled has investors tentatively buying the FI asset class at the moment. Traders continue to put on the steepener, 2-10’s +240. But, with global equities trading under pressure and San Fran Fed President Yellen believing that the US is already in a recession will eventually provide a stronger bid for government debt, despite the increase of debt sales. Futures contracts continue to show a 96% chance that the Fed will cut its O/N 1.5% target rate by 25bp on Oct. 29th meeting. The way the markets are reacting to the aid packages, expect 50bp to appear on traders radars.

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