European Session Overview

Market buzz
 
Current Futures: Dow +52.00, S&P +5.60, NASDAQ +3.75
 
European Trade: European shares opened below the breakeven line, once again, as equity traders remain skeptical about the efficiency of the new financial rescue plan. Asian shares also closed lower, while the U.S. futures turned positive overnight.
Bad news came out of China tonight. First, a former Chinese central bank member and current head of the Chinese Academy of Social Sciences, Mr. Yu, said the U.S. should guarantee the Chinese holdings of foreign debt. Currently, China is the biggest holder of U.S. debt, totaling $682 billion. Ironically, a large bulk of the U.S. deficit comes from Chinese based imports.

If the Chinese government changes its strategy, and eventually stops buying Treasuries, the Fed might have another headache in the following period. Certainly, the Treasury will have some hard times finding buyers for its debt, which means the Fed will have to ultimately act as one. As such, the Fed will have no other choice than to print more dollars, something that will devalue the greenback.

Continuing with news from China, exports declined by 17.5% in January, the biggest slump in the last 13 years. More than anything else, this shows that global trading is drying up, on very poor demand coming from the world’s biggest economies. However, the Chinese economy is very likely to keep its huge trade surplus, since, at the same time, Chinese imports dropped by a whopping 43.1% from one year earlier. It should also be noted that a rising number of analysts question the Chinese reports, mostly referring to the methodology of calculating the numbers.

In Switzerland, 2008 was a rough year for the banking sector. The two biggest Swiss banks, UBS and Credit Suisse reported huge losses, on bad investments. In the fourth quarter alone, Credit Suisse lost 6 billion Swiss Francs, or about $5 billion. Its biggest rival, UBS, lost a whooping 19.7 billion Swiss Franc, or $17.1 billion in 2008. UBS has agreed with the Swiss Government for a credit line, while Credit Swiss denied any help

In Europe, the declines were lead by the financial stocks and car manufacturers. The U.K. Ftse fell down 5.49 points (0.13%) to 4,207.59, while the German Dax declined 11.40 points (0.25%) to 4,494.14

Crude oil dropped in the last sessions of trading on lower demand outlook. Crude oil for March delivery gained $0.50 to $38.20.

Gold acted as a safe heaven in the last period. Bullion for immediate delivery rose $0.30 to $916.80.

Previous Asian trade: Tonight, the Nikkei was closed for business. The Australian S&P lost 14.30 points (0.41%) to 3,474.40.

Currency Overview 

Overall, the currency market traded mixed in the overnight sessions. The euro, swissy and the yen advanced against the dollar, while the rest of the major currencies declined for a second consecutive day. The market again lacked momentum and volume in the Asian session, but regained some during the European trading hours.

The Euro (EUR/USD) rose again in the overnight session, gaining 70 pips. For the moment, it seems that the euro is following the same pattern of trading as yesterday, when the euro, together with the swissy, were the only major pairs that advanced against the dollar. However, the euro now approaches the 20-day simple moving average, where some traders might use it as an exit point.

The German CPI fell by 0.5% in January, in-line with the market’s expectations. Last month, in December, the German CPI rose for the first time in the last 5 month. Year-over-year inflation in Germany reached 0.9%, dragged lower by the huge declines seen in the energy market.

The Pound (GBP/USD) dropped another 140 pips in the overnight sessions, as the market prepared itself for the BoE Inflation Report. The pound tumbled in the last two days of trading nearly 500 pips, breaking below the 50-day simple moving average and under a very important trend-line that connected the peaks from November to January.

The unemployment rate increased again in the U.K. in the latest three months to December 2008, to the highest rate seen in the last decade. The released rate of 6.3% is in-line with market expectations. The annual rate of growth in average earnings excluding bonuses was 3.6% in the three months to December 2008, unchanged from the three months to November. The number of people seeking unemployment increased again in January, to the highest value in the last 10 years. The report shows there were 1.23 million persons on he claimant count in January, and up by 73,800 from one month earlier

The Aussie (AUD/USD) traded without a clear direction in the overnight session. The pair had some small swings around the Asian open price, but never succeeded to break anywhere. For the moment, the aussie is trading near a very important swing area, near the 20-day simple moving average and near the 0.6500 support level.

Home loans in Australia grew twice as much as analysts’ estimates of 3.6 percent to an astounding 6.4 percent in December. In trend terms, the total value of dwelling finance commitments increased 0.8%. Owner occupied housing commitments increased 1.7%, while investment housing commitments decreased 1.3%. The consumer sentiment indicator for Australia fell to -4.6 percent from last month’s -2.2 percent reading. The sentiment index came in at 85.8 points in February and this is the twelfth month that the index has held below 100.

The Cad (USD/CAD) extended the gains seen one day earlier, and added another 50 pips. Most of the gains came shortly after the London Open, while earlier, during the Asian trading hours, the cad traded mostly flat. The cad is getting close to the 1.2500 resistance level, which has held the pair for about three weeks.

The Swissy (USD/CHF) advanced 60 pips in the early part of the Asian session, but shed every pip gained soon after. During the European session, the pair fell another 50 pips, and tested the low of the previous day of trading, very close to the area formed by the 20 and the 100-day moving averages.

The Yen (Usd/Yen) tested the 20-day simple moving average, after declining 45 pips overnight. The pair moved lower and broke below the previous day’s low even though the S&P futures advanced a little overnight. In the last three days, the yen has lost 210 pips.

Dollar Index Review 

Dollar Index: The dollar was driven higher against the better-yielding pound, euro and Australian dollar (and lower against the yen) when stocks plummeted after Treasury Secretary Tim Geithner's speech regarding the Treasury's plan to aid the financial sector.

The problem for investors was not only that it offered few details regarding subjects such as the asset-purchase plan, which Mr. Geithner did say is designed to be done in partnership with the private sector. The Treasury Secretary implied that the administration still does not have a comprehensive plan for dealing with the housing situation, when he said a plan for dealing with struggling homeowners would be announced "in coming weeks."

Mr. Geithner did say that the Treasury will commit $1 trillion to the Federal Reserve's Term Asset Lending Facility, and the Fed announced an expansion of the program this morning.

Also troubling investors was that the speech raised more questions than it answered regarding the ultimate fate of many of the nation's lending institutions.

"First, we're going to require banking institutions to go through a carefully designed comprehensive stress test, Mr. Geithner said.”We want their balance sheets cleaner, and stronger. And we are going to help this process by providing a new program of capital support for those institutions which need it."

The only problem is that it will be the government, not the banks themselves, who will be determining whether such "stress" exists, which implies that the government will be able to force ownership stakes in banks based on its own criteria. At this point, no one knows exactly what those criteria may be.

Despite the forceful words, Mr. Geithner noted his office was still exploring options and details for an asset value program, with little answer on what to do about banks' toxic assets.
 
One Tuesday, dollar index futures rose 95.5 basis points (1.12%) to 86.005.

The Financial Review 

XLF Introduction: Treasury secretary Timothy Geithner described in a speech today the government's latest effort to stem the financial crisis. But the speech itself outlined few if any details as he sought to inject a measure of reality into the situation, saying the plans to jumpstart the economy will “cost money, involve risk and take time.”

“The financial system is working against recovery, and that’s the dangerous dynamic we need to change,” Geithner said in his prepared remarks. Without credit, economies cannot grow, and right now, critical parts of our financial system are damaged.”

Mr. Geithner said the government is taking a comprehensive approach designed to address both sides of the issue.

“It is essential for every American to understand that the battle for economic recovery must be fought on two fronts,” he said. “We have to both jumpstart job creation and private investment, and we must get credit flowing again to businesses and families.”

Mr. Geithner described previous efforts to stem the crisis as “essential” but “inadequate” to support the financial system and the secondary-lending market.

As a result, “the American people have lost faith in the leaders of our financial institutions” and are "skeptical" regarding the government's ability to fix the problems.

“In our financial system, 40% of consumer lending has historically been available because people buy loans, put them together and sell them,” Geithner said. “Because this vital source of lending has frozen up, no plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses -- large and small.”

Equity markets had a poor reaction to the speech in part because critical details of the plan remained unanswered despite the weeks of planning. Mr. Geithner said the plan to stem foreclosures would be announced in coming weeks and he also provided few details of the asset-purchase plan, which is designed to be done in partnership with the private sector.

The Fed made a truly astounding announcement before Mr. Geithner made his remarks. According to a statement released on its website, the Federal Reserve said that its Term Asset Lending Facility (TALF) could be expanded "to as much as $1 trillion" and that the range of eligible securities it will lend against could be expanded to include AAA rated ABS written on commercial mortgages, private-label residential mortgages, and other asset-backed securities.

The TALF was originally slated to be a $200 billion program when it was announced last November. Eligible securities originally included AAA rated ABS backed by auto loans, credit card receivables, student loans and loans to small businesses backed by the government's Small Business Administration.

Fannie Mae and Freddie Mac, the mortgage-finance companies seized by regulators, may need more than the $200 billion in funding pledged by the U.S. government if the housing market continues to deteriorate, Federal Housing Finance Agency Director James Lockhart said.

The companies’ needs will depend largely on the direction of home prices, Lockhart said in an interview in Las Vegas yesterday. His comments followed statements from Fannie Mae in November and Freddie Mac Chairman John Koskinen last week that the government’s funding commitment through 2009 may fall short of what the companies need to make good on their obligations.

“When we sized the amount in September, we obviously looked at stress tests and what was happening in the marketplace,” Lockhart said. “There’s been some significant events since then that weren’t in our forecast.”

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owed more than their homes were worth.

On Tuesday, the XLF fell 1.01 points (-10.20%) to close on 8.89. The volume was very heavy; 324,470,283 ETF's changed hands against a daily average of 178,344,000.