Asian Session Overview

Market buzz

Asian trade: Despite the positive close down the Wall Street, Asian shares and U.S. futures are both currently down, posting significant declines.

Investor confidence is being affected by Mr. Paulson’s testimony in front of the House Financial Services Committee, refusing a $25 billion loan to the U.S. car manufacturers from the pool of $350 billion available money. GM is headed with giant steps towards bankruptcy, even before the year-end, while the other two major producers, Ford and Chrysler are in similar positions. It is said that the bankruptcy of the three major players would shed about 3 million jobs in the U.S., while the government will lose more than $150 billion in taxes. Estimates are that the jobless rate would reach 8% from the current 6.5%, while the GDP will drop by 1% in nominal terms in case the U.S. car industry is left to die.

U.S. futures are currently running deep into the red, having the Dow down by103 points, while the S&P future contracts have already fallen by 10.30 points. Asian markets share the same negative momentum, especially after Mitsubishi UFJ, Japan’s largest bank announced lower than expected earnings. The Nikkei fell 148.28 points (1.78%) to 8,180.13. In Australia, the S&P/Asx fell 54.50 points (1.55%) to 3,468.70.

Crude oil traded mixed, moving around the low of the year. Crude oil for December delivery gained $0.12 (0.22%) to $54.51.

Gold rose in the Asian session, reversing some of the declines seen earlier. Bullion for immediate delivery gained $5.90 (0.81%) to $738.60.

Previous Wall Street trade: Things looked rather shaky there for a while, but U.S. equity markets managed to hold above the low for the financial crisis set on Nov.13. The question now is whether or not the market is in the process of at least putting a short-term bottom in.

"Stocks may have held above the Nov.13 lows, but they did so with far less enthusiasm than before," said Matthew Carniol, chief currency strategist at TheLFB-forex.com. "As for how far things could go let's see what happens if and when the S&P reaches its 21 day moving average, which is currently around 920."

Previous European trade: The London real-estate business has been shelled by the credit crunch. In addition to the ongoing declines in the housing markets, London’s West End, where the biggest concentration of European hedge funds is located, is posting record declines. Hedge funds have seen the longest losing streak since the 1990s, this year and at the same time record requests for withdrawals.

Currency Overview 

Overall, the currency market moved a very small number of pips lately. This general lack of momentum and direction was also seen in the Asian session, having most of the pairs come to a standstill. These could be either a return to normal, which was seen before the credit crunch begun and characterized by smaller trading ranges and low volatility, or is just another quiet sea before the storm. Chances are the market will continue the same way in the European session, where, except for a U.K. release, the calendar is empty.

The Euro (EUR/USD) moved along side the neutral pivot point (1.2630) in the last day of trading, having only some weak attempts to break higher or lower. In the Asian session, the pair continued the same side-ways move, in a 30 pips range.

The Pound (GBP/USD) spent much of the last day moving along the 1.50 area in a tight channel. The pound saw some shy attempts for a breakout, but as expected they were unsuccessful, until late in the U.S. session when the pair fell lower. The pound re-tested the low made yesterday in the Asian session, but failed to break lower. 

The Aussie (AUD/USD) traded between some well-defined swing points. In the early part of the day, it bounced off the 0.64 area. After that, the pair headed up and tested TheLFB R1 (0.6580), where the 20-day moving average is found. In the Asian session, the aussie fell 30 pips.

Headlining a light day in regard to economic releases, the Australian MI leading index came in at a -1.0 percent month over month. Westpac has said that the figure indicates that growth in Australia will likely slow and be “barely positive” or possibly negative into the first half of 2009. The coincident index came in flat when compared to the previous months 0.3 percent rise. The main source of the decline was seen in the fall of the unemployment rate index, as it decreased from 0.1 to -0.2 and the civilian employment index that was down to 0.4 from 0.5.

The Cad (USD/CAD) had a weak day yesterday, trading within the range of the last few days. The pair made a quick test at the 20-day moving average around the U.S. open and this was the only thing that happened yesterday. In the Asian session, the cad moved only 20-pips.

The Swissy (USD/CHF) finished the last day having a very small trading range, less than 80 pips. However, the pair was very volatile, bouncing endlessly around the important areas. Yesterday, the pair made a new high for the current year, but in the Asian session, the pair moved side-ways in a 15 pips range.

The Yen (Usd/Yen) traded within the same tight support and resistance areas for a third day in a row. The pair is not able to break under the 96.00 area, or above the 97.40, even though the S&P futures market moved a lot in this period. In the Asian session, the pair traded mixed.

The Japanese all industry activity index came in at negative 0.1 percent for the month of September when compared to the previous month. This is in line with what economists were forecasting and an increase from Augusts upwardly revised -1.7 percent. The most heavily weighted sub-component, the tertiary index, fell by 0.6 percent month over month for September while the manufacturing index increased by 1.3 percent following Augusts 4.1 percent decrease.

Dollar Index Review 

Dollar Index: The dollar index traded lower when stocks were bought in the morning, gained when they were sold in the afternoon and still managed a net gain on the day even as stocks managed to finish the day in positive territory.

Willem Buiter, writing on FT.com, believes a currency crisis could ocurr in the U.K. if the government proceeds with its "reckless" plan for a fiscal stimulation without first reducing its exposure to the U.K. banking system.

"I believe that the risk of a UK sovereign debt crisis and a full-blown sterling crisis would be much diminished if the authorities were to reduce their contingent exposure to the balance sheet of the UK banking system," wrote Buiter on his blog. "To attempt a significant fiscal stimulus (say 2 percent of GDP or £30 bn per year for two years) without at the same time reducing the government’s financial exposure to the UK banking sector would create an unacceptable risk of a sovereign debt crisis and sterling crisis."

He also said "the threat of a foreign exchange liquidity crunch" would be reduced if the UK announced it was "actively pursuing EMU membership at the earliest possible date and adopting a peg with the euro."

"With the maintenance of an exchange rate peg as its overriding target, the Monetary Policy Committee of the Bank of England (MPC) would, if required, hike interest rates to deter or defeat an attack on the peg," he wrote. "Because the MPC would continue to be operationally independent, it would be unlikely to suffer the Norman Lamont credibility problem of 1992. The markets knew that no elected Chancellor of the Exchequer would be able to put Bank Rate up to 15 percent and survive. The peg (band) therefore collapsed. With an unelected MPC, the threat that rates would be raised to whatever level required to defend the peg would be credible. Consequently, rates probably would not have to be raised to very high levels at all."

On Tuesday, the Dollar index gained 55.4 basis points (0.64%) to close on 86.919.

DXY The Usd is on over 90% of all currency tickets, and it makes up the value of all synthetic cross pairs. Knowing where the Usd is trading, and what is driving it, is key to sustained success in reading and really understanding the nuances of Forex charts.

Overall: Pressure was brought to bear on the dollar index in recent tests of 88.00, and now most technical signals are revealing that the currencies that make up the index are at 4 hour chart resistance areas, and as such may start to push the Usd towards a test of 80.00. Debt valuations and and forward guidance on growth and interest rates may now weigh on major regions globally through 2009, and although none are fairing much better than the U.S. there are also none that carries the amount of debt that is wrapped up in the dollar. If 80.00 gets tested there will be plenty of eyes watching.

The Financial Review 

XLF Introduction: It will be the XLF, the exchange traded fund for the Financial sector, that signals when the equity markets are really making moves that are likely to hold- if the market is buying or selling the XLF they are signaling that they are prepared to be buying or selling risk. Look for a day where over the average 130 million shares are traded on above average price action (+/- 1%).

The XLF established a new yearly low on Monday. The current YTD return on the XLF is -58.77% and the total fall from the peak on 38.02 made during the week of May 29 2007 is 69.09%.

If you are of the mind (as we are) that financial shares are leading the market it will be very useful to watch how this trades. Average daily trading volume has been decreasing lately and is presently just over 232M.

The Financial Sector: Treasury Secretary Hank Paulson went out of his way to explain to members of Congress that the TARP program was not meant to be a "panacea" for all of the problems now plaguing the economy.

"The rescue package was not intended to be an economic stimulus or an economic recovery package," Paulson said in testimony to the House Financial Services Committee in Washington. "It was intended to shore up the foundation of our economy by stabilizing the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis."

The Secretary said it was "unrealistic" to expect the $700 billion rescue plan to reverse the economic woes inflicted by the financial crisis but believes an economic recovery will occur much sooner now than if the TARP was never passed by Congress.

Focusing the program on recapitalizing the banks with the goal to bolster lending was deemed a faster and more effective approach to stabilizing the financial system than buying distressed assets from financial institutions, the centerpiece of the original plan, Paulson said.

Buying those toxic debts would have required a "massive commitment" of the bailout money, Paulson said. As economic and financial conditions quickly worsened, it became clear that the first installment of the money, $350 billion, "simply isn't enough firepower," he said.

Mr. Paulson also reiterated that the administration remains firmly opposed to dipping into the government's $700 billion financial bailout fund to provide the Big Three automakers the $25 billion rescue they are seeking.

Speaking at the same hearing, Fed Chairman Bernanke said lending in the U.S. is “still far from normal,” even after the Fed's interest rate reductions creation of numerous credit facilities.

“There are some signs that credit markets, while still quite strained, are improving,” Bernanke said today in testimony to the House Financial Services Committee. “However, overall, credit conditions are still far from normal.”

Using the TARP for capital injections and other steps, including taking action to “prevent the disorderly failure of a systemically important financial institution,” will be “critical for restoring confidence and promoting the return of credit markets to more normal functioning,” Bernanke said.

On Tuesday, the XLF fell 0.17 points (-1.43%) to close on 11.75 after making a new low for the year just last Wednesday. The volume was a bit heavier than recently seen; 215,977,332 ETF’s changed hands against a daily average of 232,560,000.