Gentle Ben said the US banking system has not yet been stabilized. Does the US government have the ammunition to deal with this mess? We have had insurance companies operating like hedge funds, none of the plans been implemented so far is capable of wiping the slate clean. Policy makerÃ¢â‚¬â„¢s actions have yet to find any traction and their rhetoric sounds like they need more money to do the job. The TreasuryÃ¢â‚¬â„¢s Geithner said the budget ‘acknowledges that, as expensive as it already has been, our effort to stabilize the financial system might cost more’. Oh Brother!
The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies, in another Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.
Yesterday we saw once again US pending home sales fall -7.7%, m/m in Jan., with weakness widespread across the country. This does suggest further downside to re-sales in the coming months. Analysts point out that the recent passage of the US housing bill should help support growth in the housing market, but many potential home buyers still remain on the sidelines waiting for further clarity from this bill. With job losses continuing to mount and prices not bottoming, it is leaving many homebuyers more uncertain whether they should purchase now or wait. With inventory levels still close to record highs some analysts are looking at a further 12% decline in average prices for this year.
Yesterday the US Treasury announced that the Ã¢â‚¬ËœTerm Asset-Backed Security Lending FacilityÃ¢â‚¬â„¢ (TALF) is finally beginning (originally announced last Nov.). It will be the biggest in the series of programs implemented to target key problematic market segments that are important to the economy (mortgage loans, consumer loans, commercial paper) and where policy makers believe that intervention could make a difference. The Fed expanded the size from $200b to a potential size to $1t. Their objective is to increase new lending, by improving the availability of financing for a range of consumer, student and small business loans. The Fed will lend to an investor, with the loan collateralized by newly-issued issued ABS. The collateral will not be marked to market, and so there will be no margin calls. The Fed’s loan has no recourse to the borrower, which will make the loans attractive from the ABS investor’s standpoint i.e. hedge funds. But will it work? It will however increase the availability of consumer and other credit, and should help to tighten spreads on the related ABS securities at the very least, so time can only tell.
The US$ currently is higher against the EUR -0.56%, GBP -0.01%, CHF -0.48% and JPY -0.93%. The commodity currencies are weaker this morning, CAD -0.13% and AUD -0.41%. Governor Carney did the inevitable and was not dissuaded by Governor StevensÃ¢â‚¬â„¢s decision at the RBA. The BOC slashed rates by 50bp to 0.5% (lowest on record). If one can say it, CarneyÃ¢â‚¬â„¢s communiquÃƒÂ© indicated an Ã¢â‚¬Ëœaggressive dovishÃ¢â‚¬â„¢ tone. He said that the BOC target rate can be expected to Ã¢â‚¬Ëœ….remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken upÃ¢â‚¬â„¢. They are sending a strong signal that it may well not be done cutting rates and that it is moving toward outright quantitative easing. This is a huge shift in tone from the last communiquÃƒÂ© where they placed emphasis on how different Canada is compared to the problems being witnessed elsewhere in the world. This probably means that they have another cut in them (zero is now on the table) and will be expected to remain on hold until the end of 2010. More importantly, they said that they are Ã¢â‚¬Ëœrefining the approach it would take to provide additional monetary stimulus, if required, through credit and quantitative easingÃ¢â‚¬â„¢. The BOC stated that it will outline a framework for the possible use of such measures in its MPR report in April. On the growth front, they noted that the global outlook continues to deteriorate since the last update, pointing to Ã¢â‚¬Ëœa sharper decline in Canadian economic activity and a larger output gap through the 1st-half of 2009 than projected two months agoÃ¢â‚¬â„¢. This has pushed the loonie to test its yearly lows, one should expect strong USD demand on any CAD$ rallies.
A u-turn for the AUD$ yesterday as it fell to a new 1-month low after their GDP report showed that the economy unexpectedly shrank last quarter (-0.5% vs. +0.2%). This will put pressure on the RBA to resume interest-rate cuts again. Earlier this week in a surprise move Governor Stevens at the RBA kept O/N lending rates on hold (3.25%). With the general environment continuing to be one of high risk aversion, a stronger US$ dollar, expect the AUD to be sold on rallies in the short term (0.6382) until investor psyche changes.
Crude is higher O/N ($42.62 up +97c). Already this week Crude has pared 7% of its value on signs that manufacturing in the worldÃ¢â‚¬â„¢s two biggest energy consumers contracted last month. Yesterday we saw a report that showed OPEC had cut output by 2.7% last month as producers try to stem price declines. ChinaÃ¢â‚¬â„¢s manufacturing shrank for a 7th consecutive month and the USÃ¢â‚¬â„¢s ISM is fairing no better. Last week the black-stuff peaked at a 1-month high after the EIA report showed that US gas inventories fell as demand strengthened and refineries cut operating rates. Inventories plummeted – 3.32m barrels to +215.3m. The market is now trying to anticipate the future outcome of the scheduled OPEC meeting on Mar. 15th. During this recession they cut production 3-times last year and already they cut output -3.8% to +25.3m barrels a day in Feb. The market wonders if they will make additional cuts at these levels. Already some members have given opposing views. According to the Algerian oil minister, he believes that the group will Ã¢â‚¬Ëœmost likelyÃ¢â‚¬â„¢ reduce supplies to support prices when it gathers, while IranÃ¢â‚¬â„¢s oil minister said OPEC is Ã¢â‚¬ËœunlikelyÃ¢â‚¬â„¢ to lower crude production. Market consensus seems to be leading towards warranting another cut. However, itÃ¢â‚¬â„¢s expected that the commodity market will come under greater downward pressure as we become exposed to more bad economic news, further evidence of plentiful supply and spare production capacity. The issue with OPEC is that they have to maintain a fine balancing act between growth and stifling any potential growth (they represent 40% of global supply). Surprisingly gold tumbled the most in 7-weeks as the USD$ rally erodes the investment appeal of the yellow metal ($917) for the moment.
The Nikkei closed 7,290 up +61. The DAX index in Europe was at 3,784 up +94; the FTSE (UK) currently is 3,582 up 70. The early call for the open of key US indices is higher. The 10-year Treasury yields backed up 5bp yesterday (2.93%) and a further 5bp in the O/N session (2.98%). Treasuries remain under pressure as investors speculate that the US governmentÃ¢â‚¬â„¢s plans to rescue financial institutions, boost the economy and service a record budget deficit will require increased sales of new debt. Tomorrow we will get to see how much they plan to issue in next weekÃ¢â‚¬â„¢s auction. Supply issues will remain the order of the day for the foreseeable future.
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