Like a House of Cards, Global Economies are falling. ‘The Buck’ is King!

Accountability is called for. Paulson’s credibility is once again being questioned as he his changing ‘the’ mandate like the wind. The German economy, Europe’s largest, has officially slipped into a recession, as it contracts the most in a dozen years this morning (GDP -0.5 vs. -0.2). The UK is having a torrid time, a record slump in housing sales, massive announcements of future layoffs (BT +10k), all reminiscent to the Thatcher era continue to support the ‘greenback’. Oil below $55 could pressurize the Russians to devalue the RUB. It has already caused Kuwait to suspend the trading as they regroup.

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies, in a ‘whippy’ trading range.

Treasury Secretary Paulson has seen the light and is already changing the music in midstream. He said yesterday that purchasing mortgage-related assets from financial institutions is not the most effective use of TARP and that the funds should be used to inject capital in the financial industry. He also alluded to expanding such a capital injection program beyond financial institutions (someone has to explain away the AIG backing). To date, the US government has already committed $250b for the purchase of bank stock (temporary nationalization), and this week injected another $40b into AIG. Quick math’s, which leaves approximately $60b of the first $350b tranche, originally approved by Congress for the purpose of unloading toxic assets from banks balance sheets. The remaining monies should now be used to reinforce the capital stability of the financial system and reduce the risk of foreclosure among US homeowners. Treasury is also evaluating programs which would further leverage the impact of a TARP investment by attracting private capital, potentially through matching investments. But, would this include the Auto sector? President elect Obama was not even in the door of the White house and he sought Auto aid. Democrats in Congress are already drafting legislation that would give the Big 3 access to $25b of the rescue fund.

The US$ currently is higher against the EUR -0.18%, GBP -0.22%, CHF -0.49% and JPY -1.21%. The commodity currencies are stronger this morning, CAD +0.34% and AUD +0.10%. It’s all about commodities. The loonie continues to trade under pressure as commodities come under assault as the reality of a deeper recession takes hold. This quarter alone, crude has pared 42% of its value, while the currency has retreated only 14%. The black stuff accounts for approximately 10% of all of Canada’s export revenues. Mathematically and technically the loonie has further to fall. The loonie continues to look very vulnerable as oil is finding it rather difficult to advance from its new 20-month lows. Despite some positive economic data of late, the pressure remains on the BOC to ease borrowing costs one more time before year end, all this despite the IMF predicting that all of the G7 economies will contract next year except Canada’s. BOC Senior Deputy Governor Jenkins said policy makers will probably cut interest rates again amid ‘major shocks’ including the global credit crisis, world economic slowdown and plunging commodities. He said yesterday that ‘some further monetary stimulus will likely be required to achieve the banks 2% inflation target over the medium term’ (2.25%). Traders are better buyers of USD on pullbacks.

Same story different day, the AUD slid to a new two-week low as equities and commodities prices slumped, convincing once again investors to dump high-yielding assets. Traders remain better sellers on rallies for now (0.6408).

Crude is little changed O/N ($56.33 up +16c). The market continues to speculate that the IEA will lower its 2009 oil-demand forecast as slowing economic growth cuts fuel consumption continues to weigh on oil prices. The further global economies find themselves in a recession, the deeper demand destruction will be. To date, crude prices are down 63% from their summer highs and down 41% y/y. The market had been questioning China’s appetite for crude, the Chinese government responded by introducing an economic stimulus package to promote economic growth and by default increase consumption of raw materials. They plan to spend the money over the next 2-years on housing and infrastructure. Despite being the world’s second largest consumer of oil, the bullish gesture has not been sustainable. The market remains very pessimistic on demand, and to date the weather is not helping the situation. The IEA has already made several revisions to their projections already this year. This scenario will put OPEC further into a corner. They have already cut production last month, and every time they cut production they are building up spare capacity. Similar to the last cut, there is also a risk that they may make further cuts (rumored for next month) and prices still will not rebound (just look at last month). The erosion of future demand continues to be a ‘big’ question mark for global economies. Weaker US fundamental data and last weeks unexpected EIA report was bearish for crude prices. Today’s report is also expected to show that inventories advanced w/w and again will be bearish. Recent global rate cuts have so far failed to inspire confidence that a ‘deeper’ recession can be avoided. The fear of a deeper global recession continues to weigh on commodities and reduce global demand for the ‘yellow metal’. The flight to the greenback does not help commodities cause ($717).

The Nikkei closed 8,283 down -456. The DAX index in Europe was at 4,653 up +32; the FTSE (UK) currently is 4,185 up +3. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 3bp yesterday (3.70%) and are little changed O/N. Treasuries prices have rallied despite yesterday’s 10-year auction. US 2-year notes managed to print a five-year low (1.20%), as a drop in global equities boosted the demand for government debt. Traders have increased their bets that Bernanke and Co. will cut borrowing costs again below the psychological 1% to boost consumer confidence and revive growth.

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