Saxo Bank

• US Sep. Industrial Production dropped -2.8% vs. -0.8% expected
• US Sep. Capacity Utilization fell to 76.4% vs. 77.9% expected and vs. 78.7% in Aug.
• US Oct. Philadelphia Fed out at -37.5 vs. -10 expected
• US Oct. NAHB Housing Market Index fell to 14 vs. 17 expected and 17 in Sep.
• Japan Sep. Nationwide Department Store Sales fell -4.7% YoY

• Norway Q3 Existing Home Prices (0800)
• EuroZone Aug. Trade Balance (0900)
• US Sep. Housing Starts and Building Permits (1230)
• US Oct. Preliminary University of Michigan Confidence (1400)
• US Fed's Evans to Speak (1800)

Market Comments

We thought the Lehman CDS settlement issue was behind us after last Friday's auction, which was actually not the settlement, but only the auction intended to determine what Lehman's senior debt was worth in order to determine how much credit protection sellers would have to cough up in the estimated $360 billion settlement. Apparently, the fall-out from the situation is not over with - while it was initially stated that only a few billion dollars will need to change hands, other sources now claim that the real figure is closer to $250 billion (source of this information is an article over at the Telegraph from the incomparable Ambrose Evans-Pritchard). Have a look at this article for the moral hazard angle as well (AIG - i.e., the US government, having to pay up for the Lehman CDS that it insured.) And next Tuesday is when the actual settlement of the Lehman CDS' takes place after last Friday's auction. So it will be interesting to see if liquidation pressures can ease after that date and whether a more sustainable rally in risk appetite could unfold.

The more generalized problem here is that Lehman was just one of hundreds of companies in which CDS are actively traded - and this is causing a wider problem in financial markets. The opaque world of $55 Trillion in CDS contracts means that any counterparty may be on the hook for untold billions if a company goes bankrupt. This situation shows why Warren Buffett called them financial weapons of mass destruction. One wonders if the authorities can step in with some kind of new transparency rules or further "tear ups" to eliminate this risk to the financial system. This will be a key area of focus going forward.

The Philly Fed survey rolled in yesterday at an abominable -37.50, the lowest level since 1990 and indicative of a sharply contracting manufacturing sector. This and the recent Empire Manufacturing number suggest that the ISM for October is shaping up as possibly the worst since the 1990-1 recession as well. The ISM Non-manufacturing number is actually more important as the US economy is predominantly a service economy. This number was miraculously still levitating around 50 the last time around, but is likely to see a sharp drop this month as well.  US economic data today includes Housing Starts (can builders really be kicking off the construction of an annualized 872,000 new houses in this economic environment? We wonder about these numbers sometimes. The Sep. number should be bad, but the Oct. number is likely to be shockingly so.) An "as expected" reading would show new housing starts at the lowest since the early 1980's, when the population was 25% smaller. The NAHB Index measure of interest in new houses plummeted to a new record low in the 23 years of the survey.

Also out later we have the preliminary October reading for the University of Michigan Confidence. It appears from the weekly numbers that confidence is "double-dipping" as the initial bounce in confidence may have only been related to gasoline prices and the average consumer now has much larger things to worry about with this credit crisis quickly spreading to the real economy.

Yesterday showed a healthy rally attempt in the equity markets after a nominal retest of recent lows (missed by a few percent, but that's not much these days.) Still, the outlook is far from stable here, and we would have to recover enormous ground to bring this market out of the bearish trend in risk appetite - so any guesses at a rally are simply that for now. We still don't have enough of a contraction in the various credit indicators to build any serious hopes for a rally just yet.

Along with the rally in risk came a rally in crude oil, though only after crude scratched to new lows below 70 dollars. OPEC is out promising to cut production next week and US crude and gasoline inventories are building strongly after a recent supply scare. At these levels, the crude oil price is becoming destabilizing for various exporting powers as their expectations and budget expenditures grew quickly with the risk in oil prices over the last several years. The supply/demand equation will be very interesting going forward. A continued oil rally may provide for a large enough sell-off in USDCAD for brave participants to find new entry levels for longs. EURNOK is also well of its highs, but so far, these moves are relatively small compared to recent trends.

Technical levels to watch in the bigger picture are: 103.00-50 in USDJPY for risk appetite rally (we're in the red zone in risk as long as this area holds as resistance. For the status of the USD rally, we would focus on the 1.3350 area in EURUSD first. This was the low yesterday and comes in below the 200-week moving average - now around 1.3375 at which the pair closed last week.

As every, be very careful out there.

Chart: EURGBP
EURGBP keeps oscillating between support and resistance lately. We originally had a bearish outlook here before the last crazy two weeks of back and forth. The technicals are still nominally bearish, but the 0.7735 and 0.7700 areas need to give way for the pair to prove that it may have a stab at 0.7500 in coming weeks. The 0.7835 area 200-week moving average serves as key resistance for now.