Monday, November 10, 2008

Market updates by Finexo

China gets serious on stimulation China announced a massive CNY 4 trillion stimulus package over the weekend as the global economic growth deceleration is finally hitting the Chinese growth miracle with full force. This enormous package represents some 20% of Chinese GDP, making the puny 1-2% stimulus package ideas being bandied about by US lawmakers look puny in comparison. Some have suggested that growth rates of 5-6% would represent a truly hard landing for the China due to its historic shift to an industrial economy that creates massive pressures to increase the numbers of jobs as the population migrates from the countryside to the city. China will be sorely pressed to avoid this hard landing due to the imbalances in its economy that focus so heavily on production rather than consumption. For now, markets have decided that this is good news, but the rally in risk it has brought on is unlikely to last beyond the shortest term.

G-20 meeting

The G20 meeting over the weekend talked up coordinated action of various stripes and heavier involvement from the developing nations in stimulating its way out of weakening economic conditions. The UK's Gordon Brown is calling for coordinated action and is showing off to the world how willing he and Chancellor Darling are to pump up the UK budget deficit to an estimated 7% next year and in 2010. Things are not looking well for the pound, which is teetering on the precipice of new lows vs. the EUR (or DEM, really, since we are closing in on the weakest level since the mid-1990's here). We are a bit doubtful going forward of the developed world's commitment to developing countries as long as economic woes are keeping domestic pressures. Politicians are acutely aware that the voting public becomes very selfish in hard times.

US employment report

The US employment report was even worse than expected, with not only the nonfarm payrolls number coming in 40k worse than expected, but with the previous month's number also adjusted down a huge -125k. This sent the unemployment rate 0.4% higher to 6.5%, the highest level since 1994. We fear that the crunch in US consumption, which is such a large part of the US economy at over 70% and which hasn't seen a recession since a brief dip in the early 1990's, could send the unemployment rate far higher for the cycle as droves of service sector jobs are eliminated.

Heavy supply in new US treasuries this week

This week will be an interesting one for measuring the demand for US Treasuries, as the US treasury will auction some $55 billion of securities this week, the most in one week since 2004. The amount of issuance arriving in the coming year is mind-boggling and one wonders where the buyers will come from. If yields begin to rise due to insufficient treasury demand while economic data remains weak, this could add to pressure on the markets. Keep an eye on the US 10-year note futures, therefore. Signs of strong demand would be USD bullish.

CAD: still on borrowed time

The Canadian employment data for October released on Friday was far better than expected, but as we discussed, the Canadian economy has historically been closely coupled with the US economy and will not escape its growing negative drag. USDCAD should eventually try back toward the 1.3000 area and we would expect the pair to find support in the 1.1500-1.1800 area.

Key data on the way

This week's economic calendar is relatively quiet, with focus likely on the German GDP data out on Thursday and the US Retail Sales report for October, released on Friday and could show the weakest retail sales environment in the 16-year history of the survey.

Trading stance

We see the rally in risk appetite as an eventual opportunity to look for new entry levels to play the predominant trend/theme of global deleveraging. Keep an eye out for reversal patterns that suggest new entry points for going long the USD, JPY and CHF against the EUR and virtually any other currency.


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