Update:The Fed, ECB, BOE, PBOC, BOC and Sweden (Switzerland and Japan supporting the plan) lowered interest rates by 50bp in an unprecedented, emergency coordinated bid to ease the economic effects of the financial crisis.
Capital Markets are crying out for monetary easing, while Cbanks continue to pledge financial injection into their own domestic markets. This morning, PM Brown is undertaking bold measures to prevent a collapse of the UK banking system. ItÃ¢â‚¬â„¢s a surreal global environment that we have created in a short space of time. If anyone tried to script write this, no-one would believe them.
The US$ is weaker in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies, in another Ã¢â‚¬ËœvolatileÃ¢â‚¬â„¢ trading range.
The credit squeeze contagion is in danger of cutting off all Ã¢â‚¬Ëœlife linesÃ¢â‚¬â„¢ despite innovative tools being created and implemented by CBankers. Policy makers across the globe continue to act domestically to stem the Ã¢â‚¬Ëœsea of redÃ¢â‚¬â„¢ in the capital markets. The FedÃ¢â‚¬â„¢s Bernanke indicated yesterday, that policy makers are ready to Ã¢â‚¬ËœlowerÃ¢â‚¬â„¢ interest rates, as the credit freeze poses an Ã¢â‚¬Ëœescalating danger to the US economyÃ¢â‚¬â„¢. The Fed is considering if their current policy stance remains appropriate (2.00%), while the global financial markets remain under Ã¢â‚¬Ëœextraordinary stressesÃ¢â‚¬â„¢. ItÃ¢â‚¬â„¢s their belief that if left unchecked, it will create unprecedented damage to the real economy. In other words, the record loans used to try and liquefy the credit markets are insufficient and may not prevent a deeper economic downturn. Analysts have been seeking a coordinated interest rate cut by G8 policy makers. Global equities have maintained their steady slide as investors fear that banks and various companies are running short of cash as the credit crisis worsens. Investors have increased their bets that Bernanke will cut borrowing costs by as much as 75bp this month as premiums on loans between banks climbed to new daily records. True to his word, Bernanke continues to use the tools at their disposal to improve market functioning and liquidity.
Prior to Bernanke interest rate revelation yesterday, the Fed announced the creation of the Commercial Paper Funding Facility (CPFF). This is a tool thatÃ¢â‚¬â„¢s expected to complement existing credit facilities in helping to provide liquidity to Ã¢â‚¬ËœtermÃ¢â‚¬â„¢ funding markets. The CP market has been under considerable strain of late, as investors have become reluctant to purchase product, especially longer-dated maturities. This has resulted in the CP product market shrinking and interest rates aggressively backing up. In theory, the facility will provide a liquidity backstop to US issuers of CP. Through a special purpose vehicle (SPV) they will purchase unsecured short term paper and ABCP directly from eligible issuers. Policy makers believe this facility is necessary to prevent further substantial disruptions to the financial markets. This will be a radical departure for the Fed, Cbanks almost never make unsecured loans, and the Fed has never done so in its history. Bernanke and Paulson certainly must get an Ã¢â‚¬ËœAÃ¢â‚¬â„¢ for their innovative approach. They are using all available tools before they must Ã¢â‚¬ËœcutÃ¢â‚¬â„¢ rates. Timing is now important, the capital market warrant a coordinated rate cut!
Normally US consumer loan data does not warrant a second look (it is the change in the total value of outstanding consumer credit that requires installment payments). But, in these historic times, yesterdayÃ¢â‚¬â„¢s Aug. numbers showed the first reduction of credit in the crisis to date (-7.9b vs. +5.2b or -3.7% annualized). This is clearly a bearish signal for US consumer spending. It was the biggest monthly decline on record, and was concentrated in non-revolving credit (-$7.3b). What is more worrisome is that the data has yet to push into the Sept. and Oct. period, when the global credit markets seized up. One can only expect the data to be more of an eyesore!
The US$ currently is lower against the EUR +0.34%, GBP +0.43%, CHF +0.27% and JPY +1.45% and. The commodity currencies are weaker this morning, CAD -0.09% and AUD -3.99%. The loonie remained under pressure yesterday, the 4th straight day of losses and its longest loosing streak in over a month. Investors remain concerned about the global economy slipping into a deep recession. The currency has managed to pare nearly 7% of its value over the last week. With global growth concerns spreading to emerging economies (who tend to be staunch supporters of commodity prices), CanadaÃ¢â‚¬â„¢s commodity exports to these regions will naturally be curtailed. 50% of all exports are commodity based and there’s a concern that a main support for the loonie may no longer be there going forward. With the greenback remaining better bid, fundamental data has only hastened the looniesÃ¢â‚¬â„¢ demise. CanadaÃ¢â‚¬â„¢s largest trading partner, the US, (75% of all exports cross the boarder) continues to show fundamental signs of entering a recession, which sooner or later will spread, thus affecting the Canadian economy directly. Global fear that last weeks financial bail-out package will do little to appease the market has investors shying away from riskier assets and applying risk aversion strategies. Governments thus far have not be able to ease credit or liquidity concerns, as it spreads from Ã¢â‚¬ËœWall StreetÃ¢â‚¬â„¢ to Main StreetÃ¢â‚¬â„¢, from Ã¢â‚¬ËœNorth America to EuropeÃ¢â‚¬â„¢. Governor Carney has indicated that any further slowdown in the US economy will affect areas that matter most to Canada. He expects demand for Canada’s products to drop even further and inflation to slow. Australia has managed to get the ball rolling and was the first economy to start an easing cycle. Futures traders have priced in a 50bp ease by the BOC by year end. But, Capital markets still anticipate a coordinated interest rate move by G8 CBankers. Do date, traders strategy of selling the loonie on USD$ pull backs continues to be the most fruitful option.
Despite Governor Stevens slashing O/N borrowing costs earlier in the week (-100bp) the AUD has managed to slump to its lowest level vs. the greenback and JPY in nearly 5-years this morning (0.6508). The currency was the biggest mover O/N, as traders sold the Ã¢â‚¬Ëœhigher yieldingÃ¢â‚¬â„¢ currencies on concerns that the frozen credit markets will further impede the global economy. In the past 11-days the currency has managed to pare 18% of its value. Risk aversion trading strategies has investorÃ¢â‚¬â„¢s continuing to unwind their Ã¢â‚¬Ëœcarry tradeÃ¢â‚¬â„¢. The Fear factor is driving these markets; rational behavior has taken a back seat.
Crude is lower O/N ($87.25 down -281c). Yesterday, traders took advantage of the cheapest prices in over 6-months to purchase the black stuff; this was further reinforced by rumors that OPEC is considering cutting future production levels. Both Libya and Qatar oil ministers are seeking to reduce output in line with quotas. Over the past 5-days, crude has managed to pare back 13% of its value. Because of this OPECÃ¢â‚¬â„¢s President Khelil said that they will take Ã¢â‚¬Ëœappropriate measuresÃ¢â‚¬â„¢ to stabilize these volatile markets. Analysts believe OPEC will only become active once the $80 a barrel level is breached. Prior to this, market can expect increased bullish rhetoric. Over all sentiment certainly remains bearish (this morning crude remains better offered), Capital Markets believe that the US economy will slip into a recession, forcing a global meltdown, with Europe being worst hit. Investors remain skeptical that the bank-rescue plan, passed by the Ã¢â‚¬ËœhouseÃ¢â‚¬â„¢ and written into law last week, will boost future demand for the commodity. The Global credit squeeze continues to highlight the possibility of further bank failures and economies becoming deeply entrenched in a recession. This week, the RBA cut borrowing costs aggressively (-100bp), the market had hoped that their actions would have triggered other CBankers to follow suit. The objective is to ease monetary policy to promote economic growth (the BOE is expected to ease 50bp tomorrow). With the bank rescue plan receiving the rubber stamp of approval, by default, it initially boosted the greenback, which curtailed the appeal of commodities often used as a hedge against a weaker USD. The global economy remains very fragile, economic activity in Europe seems to be collapsing faster than in the US. Euro-land Bank bailouts and liquidity squeezes continue to pressurize the EUR. In the event of a global recession, some analysts foresee crude prices collapsing to well below OPECÃ¢â‚¬â„¢s psychological $80 a barrel. LetÃ¢â‚¬â„¢s see what this weeks EIA report brings us. Gold rallied for the 2nd consecutive day yesterday and again this morning during the London session ($912), as a plunging equity market has investors seeking sanctuary in a safe heaven asset class. In doing so, it has boosted the demand for the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative investment asset class.
The Nikkei closed at 9,203 down -952. The DAX index in Europe was at 5,023 down -303; the FTSE (UK) currently is 4,422 down -182. The early call for the open of key US indices is lower. The 10-year Treasury yield backed up 1bp yesterday (3.48%) and eased 3bp in the O/N session (3.45%). In the midst of the longest rally in a month, Treasury prices eased yesterday after the Fed indicated that they will buy CP in their on-going effort to liquefy short term lending. Invoking these emergency powers to support the financing needs had temporarily dampened demand for the safe haven of the FI asset class. With global equities continue to plummet, has investors once again seeking debt product. The 2-10Ã¢â‚¬â„¢s spread hovers around the 205bp level despite traders increasing their bets of late that the Fed will lower borrowing costs 50bp by month end.
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