MAJOR HEADLINES – PREVIOUS SESSION
- US Oct. Monthly Budget Statement out at -$237.2 vs. -$200B expected
- New Zealand Oct. Non-resident Bond Holdings out at 74.7% vs. 74.3% in Sep.
THEMES TO WATCH – UPCOMING SESSION
Events Today:
- Sweden Oct. Average House Prices (0830)
- EuroZone Oct. CPI (1000)
- EuroZone Q3 GDP (1000)
- Canada Sep. Manufacturing Shipments (1330)
- US Oct. Import Price Index (1330)
- US Oct. Advance Retail Sales (1330)
- US Fed's Bernanke and ECB's Trichet to speak at conference (1330)
- US Nov. University of Michigan Confidence (1500)
- US Sep. Business Inventories (1500)
- US Treasury's Kashkari to testify before Congress (1500)
- US Fed's Pianalto to Speak (1730)
- New Zealand Sep. Performance of Services Index (Sunday 2130)
- Japan Q3 GDP (Sunday 2350)
- UK Nov. Rightmove House Prices (Monday 0001)
- Australia Q3 Retail Sales (Monday 0030)
Market Comment:
The US Fed's Plosser was out last night talking out against the idea of cutting the Fed funds rate any further due to "technical ramifications" for money markets (the difficulty of maintaining positive yields, perhaps) and was comfortable with where rates stand. This was one of the most hawkish Fed members previously, however, so it's a bit doubtful that his words carry much weight. As for the Fed funds rate, it is largely academic at this point anyway, with the Fed essentially already performing de facto "quantitative easing" measures similar to those that the BoJ did in its ZIRP days. The Fed's balance sheet has expanded to some $2 trillion, no small portion of which is doubtless backed by toxic waste in various forms of ABS - and they haven't even begun to employ the money market fund bailout plan. Now Congress and some in the private sector want to know who is getting all of these funds. The Fed is not the lender of last resort - it is the ONLY lender right now.
On the US political front, it appears that the potential size of and stimulus plan and auto industry bailout is contracting by the day as the lame duck Congress may have a hard time coming up with any bipartisan measure. And if the Obama camp is already playing politics, they may want to wait until Obama is sitting in the White House before any major stimulus measures are extended in order to take credit for any beneficial effects of said stimulus. Meanwhile, the shift in focus by Paulson and company toward more directly supporting consumer credit is in flux as it is clear that the Fed and Treasury want to get the consumer spending again - this is key because so much of aggregate demand in the US economy is centered on private consumption and getting this part of the economy rolling again is critical as long as the financial system is propped up enough to not fall apart. It will be a tough if not insurmountable task in the short run, however. While interbank spreads have been falling of late, the consumer is still experiencing a tightening noose in the credit market and not seeing any of this benefit. Today's October Retail Sales could be one of the worst ever as October was when the biggest part of the crunch set in across markets.
The pound keeps getting pounded for further losses after the negative view trotted out by King and company midweek and by the backdrop of the country's current account deficit and huge fiscal challenges. These are the same types of problems faced by the typical emerging market country in a global crisis and some are even starting to talk up the idea of a currency crisis for the UK. The negative momentum that GBP has worked up at this point is getting worrisome and may demand an official response very soon if GBPUSD moves to 1.4000 and EURGBP to 0.9000. We've been taken aback at the vehemence of the moves - the GBP crosses are dangerous territory.
There are hopes that this weekend's G20 may see strong new efforts aimed at stabilizing emerging market countries. Japan has offered as much as $100 billion of its reserves for the IMF to employ and China's PBOC was out overnight also making noises about possible help to EM via the IMF. A stimulus package of some kind is likely in the works, but none of the G7 countries save for Japan has the financial resources to contribute anything but a bunch of rhetoric. Any risk appetite generated by this weekend's event is likely to be fleeting.
On a technical basis, we have bullish reversal formations galore across markets, but traders should beware the nervousness of markets and question the motives for the latest moves at all times. Our guess is that yesterday was a short squeeze by risk averse traders stopping themselves out of their positions. This could continue ahead of the weekend here, and by all means, traders who can find a very attractive way to play the reversal/squeeze in terms of risk/reward should have a go, but we're staying aside on this rally in risk for now and we'll have a second look on Monday. The overall picture and negative momentum in the economy is getting worse and worse. Those looking for a move back to risk aversion should look at perhaps 96.25 in USDJPY, 0.6475 in AUDUSD, and 1.2600 in EURUSD. If these levels are failing again today, then the squeeze may be off, and another round of risk aversion may ensue.