Forex Investment and Currency Trading

Another volatile day on the stock markets with the credit markets still frozen. A G7 statement is expected at about 6 pm Friday (New York time) and reports suggest that it is likely to be stronger than originally planned. But it is not clear whether it will include specific proposals. It might include a promise that no systemically important bank will be allowed to fail, according to one report. Monday is a holiday in the US markets but all eyes will be on whether the US can come up with some comprehensive measures before the market opening on Tuesday. And preferably before international markets open Monday.  One measure definitely being planned by the US Treasury is a term sheet to offer capital to institutions which want it – probably preferred stock. Germany is also reportedly looking at this. Other measures which have been suggested include some kinds of guarantees for banks liabilities, perhaps all deposits (currently only up to $250k in the US) or even all interbank lines. This latter would obviously require international cooperation. But with all the finance ministers in Washington for the IMF meetings (with all the banks there too twisting their arms) and the stock markets crashing this might be a flyer. We definitely do not think that a comprehensive plan will prevent a US recession – it almost certainly started in Q3 anyway if not earlier - but it is needed to stop the recession becoming very severe.

The Nikkei fell 9.62%, the HSI fell 7.19%. European markets also crashed with the FTSE down 8.85%. The US markets were down more than 8% at times during the day but closed mixed with the S&P off 1.18% and the NASDAQ up 0.27%. Banks rallied sharply in the last hour, with financials finishing up 5.26%. Industrials were up slightly but everything else was down with oil and gas the worst hit, down 7.72%.  

The overnight LIBOR fix fell sharply to 2.46% from 5.09% yesterday but the 3 month fix rose slightly to 4.81% (4.75% Thursday). The TED spread hit 4.64% up from 4.23%. This is still not quite a record – slightly higher levels were seen in 1970, 1974 and 1980. 3 month T Bills were yielding just 18 bps at 3.30 pm. The 2 year UST yielded 1.63% up 10 bps from yesterday while the 10 year yielded 3.87% up 12 bps, pushing up the spread by 2 bps to 214 bps. The long end is worrying about increased supply, due to the recession and the cost of bank bailouts. Fed fund futures were little changed with a 74% chance of a cut to 1.25% at the end-October meeting and 26% of a cut to 1%. 

WTI dropped $8.84 to $77.75. The CRB commodity index dropped 6.6% with copper and silver off sharply as well as oil. During US trading the USD was stronger vs EUR and JPY and about the same vs the GBP (EUR 1.3460, GBP 1.6974 and JPY 99.66)

The Lehman CDS auction settlement valued Lehman paper at 8.625 cents on the dollar, lower than expected and reportedly left $270 billion to be paid by the losers to the winners. But regulators reportedly said that the auction had “little or no” unanticipated costs. It has been concern about who might be hit by this as well as the need for the losers to post collateral that has been one of the key factors in the credit freeze.  

The NYSE and NASDAQ stock exchanges are considering a new short selling rule which would ban short selling for 3 days if a stock closes down more than 20%.

Tuesday in the US brings second order data. The September budget statement may receive some attention as the Federal budget is set to soar in the next couple of years. Later in the week we have retail sales, industrial production, consumer confidence, and leading indicators, all of which are likely to confirm recession. Also consumer and producer prices and house prices. Most attention will be on whether the credit and stock markets respond well to whatever measures are announced.