How the mighty have fallen….Citibank a crumpling empire!

Bernanke said in a speech yesterday that the government may need to buy or guarantee banks’ tainted assets to ‘further stabilize and strengthen the financial system’. Right on cue, Citibank is contemplating breaking up into two, ‘good bank, bad bank’, while Deutche Bank this morning announced another $6.3b loss for the 4th Q. The once mighty financial institutions that were the cornerstone of our capitalist society are again testing both investor and government’s patience!

The US$ is weaker in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies, in another ‘whippy’ trading range ahead of this morning US Retail Sales data.

Yesterday’s data revealed a larger than expected improvement in the trade balance. The improvement in ‘nominal’ terms was mostly driven by lower oil prices, but the sharp improvement in the ‘real’ volume-based trade deficit was 2/3rd driven by a very sharp drop in imports excluding oil. This is a strong sign that the US domestic economy is in ‘dire straights’. The headline value of the deficit improved to -$40.4b for Nov. from a revised -$56.7b in Oct. Digging deeper one notice’s that imports fell -12%, while exports dropped -6%. Most of this was via lower oil prices and lower oil import volumes. If one excluded oil the trade deficit improved by a smaller margin to $21b from $24b the month before. But the ‘real’ trade deficits sharply improved from an Oct. balance of -$45.6b to -$39.5b in Nov. Analyst’s expects this to add to the overall growth by a greater than expected amount. However, this is only a partial offset to generally worse than expected readings on other parts of the economy, as evidenced by worse than expected imports of consumer and capital goods that reflect weakness in the US consumer and business spending. Not surprising, auto exports plunged -10.8%, m/m, which is the largest decline since Aug. Recent US oil EIA reports are supported by the fact that the price-controlled barrel volume of oil imports plummeted -19% on the month.

The US$ currently is lower against the EUR +0.30% and GBP +0.9391% and higher against CHF -0.05% and JPY -0.61%. The commodity currencies are stronger this morning, CAD +0.28% and AUD +1.63%. The loonie has remained under intense pressure as commodity prices continue to suffer. After yesterday’s data, do not expect the loonie to outperform any time soon. Last summer, unprecedented peaks in oil prices helped buoy Canada’s export market (50% of all exports are commodity based). This provided a cushion for the Canadian economy as its southern partner fell into a recession. However, since oil prices have plummeted -77% since the peak in July, Canada’s exports have been deteriorating at a rapid pace, adding to economic weakness in other areas of the economy, and causing the BOC to continue its easing campaign. Futures traders are pricing in a 75bp ease next week (1.50%). Nov. was no exception as the value of exports plunged -6.8%, m/m, outpacing the -4.8% decline in imports, all this on the back of lower oil prices and weaker auto-exports, this causing a more than expected narrowing in the trade surplus to +$1.28b, the lowest level in 11-years. Even worse Oct. trade surplus was also revised down to +$2.25b from +$3.78b, once again due to energy prices and volumes. The currency remains guilty by its association and proximity to its largest trading partner, the US. Consensus has the loonie trading under pressure for the remainder of this quarter and backing up towards the 1.2800 level again.

The AUD has rebounded from its one-month low as global equities managed to scrape some gains, coupled with higher commodities prices has boosted demand for higher-yielding assets. Government reports showed that home-building approvals in Australia for Nov. (+1.4% vs. +1.3%), this would suggest that the interest-rate cuts (4.25%) are helping combat a slowdown down-under. (0.6728).

Crude is higher O/N ($38.97 up +119c). The ‘black stuff’ briefly rose for the first time in nearly a week yesterday morning after the Saudis said it will make deeper supply cuts than previously announced. But, a fear of a much deeper recession continues to undermine crude prices. According to Saudi Oil Minister al-Naimi their Feb.’s production levels will be ‘lower than the target’ agreed to at the OPEC meeting. Demand destruction remains the order of the day. Oil has been unable to retain last week’s earlier gains after the weekly EIA report also took the market by surprise. The black stuff managed to lose another 1% yesterday on concerns that output cuts by OPEC will fail to counter a slump in demand. US supplies have climbed in 13 of the past 15-weeks as the economy slowed according to the EIA, last week’s data showed a bigger than expected increase across the board for crude oil, gas and distillate fuel. Speculators continue to be concerned about this morning inventory reports, once again they expect another increase in stock levels. Last week, inventories of oil rose +6.68m barrels to +325.4m, that’s the highest level in 8-months (the market had anticipated an increase of +800k barrels). Analysts are predicting that oil consumption will drop by +1m barrels a day as the US, Europe and Japan face their first simultaneous recessions in over 60-years. The geo-political issues in Gaza and the on-going Russian Ukraine natural gas crisis is no match for demand destruction caused by weakening economies. Analysts anticipate that we will once again test Dec. lows of around $32 on the back of the North American reports been so poor. Finally gold prices found a ‘toe hole’ yesterday on speculation that the global recession will deepen, thus boosting the appeal of the ‘yellow metal’ as a safer heaven asset class ($824).

The Nikkei closed 8,438 up +24. The DAX index in Europe was at 4,606 down -30; the FTSE (UK) currently is 4,346 down -53. The early call for the open of key US indices is lower. The 10-year Treasury yields backed up 1bp yesterday (2.32%) and are little changed in the O/N session. Treasuries remained very much close to home ahead of this morning US sales data. With credit conditions softening and a plethora of higher yielding corporate bonds hitting the street, do not be surprised if Government debt temporarily looses some of its luster.

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