Seasons Greetings-‘Back to the future’!

Fundamentally we are trying to hit the ‘reset’ button with economies and indices retracing back to levels of past years, levels that are attractive to invest in. Not a bad thing, as globally and individually, we the consumer exposed ourselves on many accounts creating this mess. None of the negative headlines is news anymore now that the market is finally finding ‘fair value’ of risk. This will lead to a New Year of optimism.

The US$ is mixed in the O/N trading session. Currently it is higher against 8 of the 16 most actively traded currencies, in another ‘whippy’ illiquid trading range.

As anticipated US data continues to provide stronger evidence that the world’s largest economy continues to contract. Sales of US single-family houses dropped once again last month and by the most in 2-decades. Analysts vocally believe that resale prices are collapsing at a pace similar to that of the Great Depression. There is truly no light at the end of the tunnel just yet. Purchases of existing and new homes plummeted -7.3%, m/m (4.43m units). The median sales prices collapsed -13%, the largest decline in 40-years. These numbers beat all analysts’ expectations and provides further proof that the battered US housing market is taking us deeper into recession. This data has taken a lot of the joy out of this holiday season as a large percentage of consumers fear for their solvency and jobs.

Yesterday, as expected there was no final revision to headline US GDP in 3rd Q (remaining at -0.5% q/q). Digging deeper, one notice’s that prices were revised down from the initial report while certain sub-components also eased, especially the services component. This 3rd Q is expected to mark the first of four consecutive quarters of negative growth in the US; with 4th Q real-GDP expected to contract by -4.5%, q/q. The headline GDP Price index moderated to 3.9% q/q vs. 4.2% in the preliminary report. Personal consumption was revised down to -3.8% m/m, pulling GDP down 2.75% in 3rd Q, while the services sector turned negative for the first time in nearly 2-decades, easing -0.1% q/q. Non-residential investment weakened further to -1.7% while residential investment improved from both the preliminary and advanced reports although still down in double-digit territory and still reducing real-GDP. Exports also deteriorated to +3.0%, q/q, down from +5.9% in the advanced report, providing even less of a support than previously, while imports declined to -3.5% m/m.

The US$ currently is lower against the EUR +0.23%, CHF +0.08% and JPY +0.68% and higher against GBP -0.22%. The commodity currencies are mixed this morning, CAD -0.24% and AUD +0.04%. Yesterday, the initial reaction to the Canadian government reaching a deal with banks to restructure the insolvent $26b CP market favored the loonie. The CP market has been in limbo since Aug. 2007 and the net result will give investors access to their money by Jan. But, with commodity prices easing once again, the loonie managed to pare its early morning gains. Crude accounts for 10% of Canada’s net exports each year. The black-stuff remains under pressure on concerns that the global recession will curb demand faster than OPEC can make production cuts. By default, this will hurt commodity based currencies and in this holiday trading environment, most price movements tend to be exaggerated. Fundamental data continues to point to the BOC easing borrowing cost again next month from their 50-year lows (1.5%). On a cross related basis the loonie remains under pressure, with the holiday that’s in it; do not be surprised to see the currency trade back up towards the 1.2500 in the short term.

The AUD$ pared gains as global equities continue to have difficulty finding traction. This has persuaded investors to shy away from higher yielding assets. A deepening global recession may lead to further interest-rate cuts (4.25%), thus eroding their appeal of the so called ‘carry-trade’ (0.6816).

Crude is lower O/N ($8.59 down -39c). Same theme different day, crude remains under pressure and cannot find any traction as yesterday’s US data confirms that the worlds largest economy will contract even further. This crude market is a bottomless pit; it continues to break all technical barriers and seems dead focused on a sub $30 handle. Fundamentally we have only corner trying to provide support and that’s OPEC. This week they reiterated their intent to enact record production cuts announced last week during this global economic slowdown. The Saudi oil minister al-Naimi said that all members are ‘determined’ to stabilize the oil market. Even non-OPEC member Russia is signaling that it too will trim production in the New Year. But so far very little traction can be seen as ‘negativity outweighs consumption’. Year-to-date oil is down 55%. Already OPEC is hinting that they may meet again next month to discuss further production cuts. It’s expected that that they will continue to reduce output as demand falls. The world is currently awash with the ‘black-stuff’. To date OPEC’s actions have done little to elevate prices that have dropped 75% from their record highs during the summer. This deep recession has had a profound effect on global consumption. With the greenback under renewed pressure investors are happy to once again own the ‘yellow’ metal as an alternative investment ($840).

The Nikkei closed 8,517 down -206. The DAX index in Europe was at 4,629 down -7; the FTSE (UK) currently is 4,217 down -39. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 2bp yesterday (2.15%) even with a record of new issues this week. Investors are now betting that GM will not survive despite the Government handout. With global equities and a never ending plummeting US housing market, consumer confidence is very much being continuously tested. Even with yields at record lows, investors continue to seek safety in the FI asset class.

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