Credit woes continue to haunt market while G8 fails to comment directly on FX
Market Highlights
Risk aversion continues to sweep through markets
Traders continue to shun risky assets this morning as both equities and commodities take it on the chin with dealers re-pricing their expectations for the global economy and taking cover from the ongoing issues in credit markets. The Reuters Jefferies CRB index of commodity prices is down an eye popping 13.32 points while both Asian and European equity bourses remain mired in red ink in response to the latest crisis of confidence in the markets. Yesterday, a Lehman Brothers analyst warned that Freddie Mac and Fannie Mae, two publicly traded but Federally mandated US mortgage lenders, may have to raise as much as $75 billion USD to meet their medium-term liquidity requirements. (And yes…I did mean “billion” with a B). Both shares were pummelled yesterday, falling just under 20% from already weakened levels before testing lows not seen since the early ‘90s as any capital infusion will further dilute the already depleted holdings of current investors.
Also weighing on markets this morning is a Wachovia analyst’s report claiming that Merrill Lynch will be providing for yet another round of write downs in the coming quarter, requiring an additional capital injection of $5B to maintain its capital adequacy. As might be expected, financial firms continue to shed value at a rate that is quite alarming to the average dividend fund investor, with no true end in sight at this point. Adding fuel to the liquidity fire is the notion we are not only facing a credit and risk crisis, but that the world is headed for a deep and prolonged economic downturn at the same time.
The FX market’s reaction to the carnage this morning is one that we may have expected months ago but have not necessarily seen all that much of as late in times of risk aversion. The USD is rallying firmly, not only across the cyclical commodity currencies of Canada, Australia and New Zealand; the European majors of the Euroland and UK but also the carry trade funding currencies of Japan and Switzerland that typically firm as market participants exit risky carry trade positions and cover their short plays. After a bit of an overnight swoon, the Dollar is putting together a nice rally as investors struggle with where they can safely park their liquidity.
As for Old Faithful, or what some refer to as the Canadian Dollar range trade, it remains firmly entrenched in the existing pattern, though certainly pushing to the high side of its recent range with a move over 1.02 again this morning. Commodities are bleeding red ink at an alarming rate this morning yet the CAD has lost only 70-basis points from its overnight high. Although some market participants have been puzzled that the Loonie has not followed the move higher in oil, the price “stickiness” appears to be working on the way back down as well.
Bernanke speaks on financial regulation and financial stability
US Federal Reserve Chairman Ben Bernanke stated this morning in a speech on financial regulation and financial market stability before the Federal Deposit Insurance Corporation that the Fed is contemplating a decision to maintain its newly created lending window for investment houses beyond the original 2008 end date. The facility, known as the Primary Dealer Credit Facility (PDCF) that offers liquidity to broker dealers at the discount rate from the Fed as a lender of last resort, has been widely hailed as providing a stabilizing influence to help restore credibility and confidence in the market. Any news of an extension of such facilities, although providing confirmation that we are still nowhere near the end of the liquidity squeeze, should help to alleviate the short-term pressure on US financial firms. If only Big Ben had another trick up his sleeve to stem the selling pressure today…
G8 sends veiled message on CNY, fails to comment directly on
The leaders of the Group of Eight nations wrapped up their summit in Japan today with a closing communiqué that spoke directly with respect to the inflation pressures resulting from elevated food and energy prices by saying that they were detrimental to global economic development. The text of the message failed to comment directly on the value of the US Dollar as some had hoped but the G8 leaders did offer some support for a bounce in the Dollar with a veiled warning for China.
Without naming China specifically, the communiqué stated, “in some emerging economies with large and growing current account surpluses, it is crucial that their effective exchange rates move so that the necessary adjustment will occur.” The statement was more direct than in the past in that it was no longer a general criticism of emerging market economies in that the word “some” was employed, though still not direct enough for some market participants who are calling for a significant adjustment in the Chinese Yuan.
With respect to the ongoing financial market turmoil playing out on equity exchanges and trading floors around the world, the G8 leaders offered, “financial market conditions have improved somewhat in the past few months…but that serious strains still exist.” I think we can safely call that the understatement of the year given the events of the past 24 hours.
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| Mark Frey, VP, FX Trading |
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