With Global Equities plunging once again, what financial leader is driving the bus? There is no one staying on and no faith in any driver!

Is anyone surprised that a rescue package will eventually be implemented for the US Auto industry? What is the alternative? Millions unemployed now! This will be another futile exercise of throwing good money after bad. The US auto industry is hemorrhaging from everywhere; they burn through cash like cheap ‘oil’. Management and Unions continue to be a drag on the industry, so why postpone the inevitable again!!

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 ‘volatile’ trading range.

Forex heatmap

Global fundamentals remain weak as investors continue to liquidate their holdings and seek risk adverse opportunities. The quarter from hell continues its one dimensional direction and offering little hope to equity investors in the short term. Yesterdays US unemployment claims surged by +27k to 542k, w/w, printing the highest level since 1992. The total number of people staying on benefits from the previous week rose to the most since Dec. 1982. The Philly Fed index faired no better, falling to a 19-year low this month. This suggests that the ISM manufacturing index could fall even further after hitting a 26-year low last month. Digging deeper, the worrisome aspect of the report is that we are now seeing a decline in prices. The report showed a shift in prices paid and prices received from last month, from positive single digits to negative double-digit territory, suggesting that the manufacturing sector is finally seeing prices decline. Prices ‘paid’ fell from +7.2 in Oct. to -30.7 in Nov. while prices ‘received’ dropped from +5.3 to -15.5 as manufacturers are being forced to lower prices in the face of weaker demand. With that new orders dropped to -31.4 while shipments remained at -18.8, both remaining in contraction territory. Inventories also continued to fall while the employment component deteriorated further to -25.2, along with the average workweek, suggesting we will see another decline in manufacturing employment in Nov. (this will not surprise anyone). Looking ahead 6-months, the general business activity index fell to -10.4 as the economic outlook remains bleak. New orders and shipments are also expected to continue to contract, along with employees, average workweek and inventories. It seems that pink slips will be the order of the day.

SNB delivered their second rate cut this month, following the Nov 6th 50bps move. Yesterday’s 100bp ease was taken on the basis of a more favorable outlook for inflation. Falling oil and raw material prices imply that ‘price stability will be restored sooner than expected, and inflation is likely to fall below 2% as early as the end of this year’. Moreover, ‘international economic conditions have worsened appreciably bringing a higher risk of a marked slowdown in Switzerland’. Earlier this month the SNB said that growth ‘could be negative next year’. Their next official meeting is scheduled for Dec. 11th.Given the bank’s aggressive response to the deteriorating economic scenario, another easing move could be expected. With respect to the Fed, some analysts are calling for benchmark borrowing cost to hit 0% by Feb. With the aggressiveness of Cbanks, coupled with deflation or disinflation it would not be a surprise to see Bernanke and Co. ease inter-meeting. Already US 2-yr yields are trading below 1% (lowest on record).

The US$ currently is lower against the EUR +0.43%, GBP +0.69% and higher against CHF -0.41% and JPY -1.23%. The commodity currencies are stronger this morning, CAD +1.18% and AUD +2.49%. Risk aversion trading strategies and weak commodity prices continue to impede any advance for the loonie at the moment. The currency remains under pressure as commodities come under assault as the reality of a deeper recession takes hold. The loonie this quarter alone has lost 17% to its southern neighbor as investors seek sanctuary in the greenback. 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 remains vulnerable as oil is finding it rather difficult to advance from its new 20-month lows. Governor Carney this week said ‘that the risks to the country’s economy from a global credit crisis and recession have increased in the last month and will probably lead to a further reduction in interest rates’. Traders have priced in another 50bp ease next month, this will push borrowing costs below the psychological 2% mark as further monetary stimulus will be required to achieve the banks 2% inflation target over the medium term (2.25%). Traders continue to be better buyers of USD’s on pullbacks.

The AUD$ is heading for another weekly loss vs. the USD as global equities slump to a decade low, convincing investors to sell higher yielding assets. In the O/N session, the RBA intervened in the market and purchased its own currency as it approached a five-year low against the greenback (0.6010). For now traders continue to be better sellers on rallies (0.6265).

Crude is higher O/N ($50.20 up +78c). Crude prices managed to fall below $50 a barrel yesterday, the first time in 24-months on the back of a deepening global recession that is expected to reduce global energy demand further. Even analysts that were bullish less than two months ago (2009 target of $150 a barrel) have aggressively revised next years targets to $80. Already oil has lost close to $100 from its record high prints witnessed at the beginning of the summer. Crudes continuing slide will add to concern that the global economy faces deflation, threatening investment in oil and gas production projects around the world. Technically we overshot prices on the way up (Chinese Olympics) and we will definitely overshoot on the way down (some analysts are looking for $40 a barrel 1st Q 2009). Fear is destroying future demand at the moment. This weeks IEA report showed that inventories climbed more than forecasted as fuel demand dropped. Stocks climbed +1.6m barrels to 313.5m w/w vs. an expected jump of +1m barrels. Not surprising, US fuel demand over the past month has averaged +19.1m barrels a day, that is down -7% from a year ago (where is the cold weather). This is obviously worrying times for OPEC, technically the market is hell bent on a sub $50 print on the back of deterioration in demand and negative consumer confidence in the global economy (to date, OPEC has lost $700b in revenue from falling prices). Gas inventories rose +539k barrels to 198.6m w/w. Yesterdays US fundamental data has done little to support the black stuff. Speculation that the recession will further curb demand will help send prices lower. To date, crude prices are down 65% from their summer highs and down 45% y/y. This scenario will back OPEC further into a corner. They have already cut production quotas 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. The erosion of future demand continues to be a ‘big’ question mark for global economies. Gold has advanced as traders speculate that the Fed will lower interest rates soon to stimulate the economy, thus boosting the appeal of the ‘yellow metal’ as an alternative investment ($758).

The Nikkei closed 7,910 up +207. The DAX index in Europe was at 4,287 up +67; the FTSE (UK) currently is 3,941 up +66. The early call for the open of key US indices is higher. The 10-year Treasury yields eased 17bp yesterday (3.08%) and backed up 10bp O/N as global equities rallied (3.18%). Treasury yields managed to print record lows, forcing 2-year notes below the 1% mark for the first time as investors pared equity positions and sought the sanctuary of Government debt. Traders once again raised their bets that Bernanke and Co. will cut interest rates next month to boost the US economy (1.00%). After the SNB actions yesterday there must be a strong possibility that the Fed will go inter-meeting with 2-year notes trading at theses levels.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell