Market outlook 18 Nov 2008

The euro moved lower vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.2510 level and was capped around the $1.2595 level. The National Association of Business Economists released a survey that concludes the U.S. economy will shrink 2.6% in Q4 and another 1.3% in Q1, exacerbating the current economic recession in the U.S. Group of Twenty officials convened in Washington , D.C. this weekend and issued a communiqué that read “Against this background of deteriorating economic conditions worldwide, we agreed that a broader policy response is needed, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries.” Officials pledged “urgent and exceptional measures” to deal with the current market turmoil and indicated a “college of supervisors” would be instituted by the end of March to monitor the world’s largest financial institutions. Many had believe this weekend’s meeting with essentially lead to a second Bretton Woods arrangement but this was deemed unlikely on account of the forthcoming transition in power in the U.S. Global leaders pledged to reconvene by the end of April. In eurozone news, Italy pledged €80 billion to support its economy and traders are closely watching ongoing strikes across France . Data released in the U.S. on Friday saw an uptick in mid-November University of Michigan consumer sentiment while October retail sales were off a record 2.8%. Data to be released in the U.S. today include October industrial production and capacity utilization. Euro bids are cited around the US$ 1.2135 level.

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥95.85 level and was capped around the ¥97.55 level. Data released in Japan overnight revealed that country is in a recession for the first time in seven years as Q3 gross domestic product was off 0.1% q/q and an annualized 0.4%. Bank of Japan convenes a two-day Policy Board meeting on Thursday and is likely to keep the overnight call rate unchanged at 0.30%. Data released in Japan overnight saw the September tertiary sector index off 0.6% m/m while September wages were upwardly revised to +0.2% y/y. Prime Minister Aso spoke at the weekend’s G20 meeting saying “It is the worst crisis in 100 years but the crisis could be a chance at the same time. History tells us that when we overcome crisis, a new order is created. We should not be just flustered by the crisis. The crisis in 1929 led to the outcome (that it did) because we were flustered. But it is different this time because we have a framework for cooperation.” Aso also expressed “firm” support for the U.S. dollar-centered global currency system saying “There is a voice questioning if it's stable for the U.S. dollar of the world's largest-debt country to continue to be a key currency. But (we) stressed that no currency but the dollar can be used as a key currency.” French President Sarkozy had suggested the U.S. dollar not be the world’s reserve currency any longer. Finance minister Nakagawa verbally intervened against the yen’s recent gains last week saying “Rapid foreign exchange rate swings would have a negative impact on the economy.” The Nikkei 225 stock index climbed 0.71% to close at ¥8,522.58. U.S. dollar offers are cited around the ¥104.15 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥120.15 level and was capped around the ¥122.85 level. The British pound moved lower vis-à-vis the yen as sterling tested bids around the ¥140.35 level while the Swiss franc lost ground vis-à-vis the yen and tested bids around the ¥79.85 level. In Chinese news, President Hu Jintao urged global leaders to guard against protectionism barriers to international investment and trade.

The British pound moved lower vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.4640 level and was capped around the $1.4775 level. Data released in the U.K. today saw Rightmove November house prices off 7.1% y/y. Chancellor of the Exchequer Darling said global leaders are unified in using fiscal policy to help contend with the ongoing market crisis, noting it is “almost universally accepted.” Darling with released the government’s pre-Budget report on 24 November and is expected to reveal a package that includes tax cuts and spending increases. Regarding sterling’s recent depreciation, Darling said volatility is to be expected given “the nature of what’s happening at the moment.” Speaking on the same subjects, Prime Minister Brown countered Tory official Osborne’s comment that “We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound. The danger of that is that it pushes up long-term interest rates.” Brown “regretted the partisan talk from the opposition.” Sterling is partially on the defensive because Bank of England Governor King has made it abundantly clear the central bank “is certainly prepared to cut interest rates again if it is necessary.” Cable bids are cited around the US$ 1.4315 level. The euro moved lower vis-à-vis the British pound as the single currency tested bids around the ₤0.8510 level and was capped around the ₤0.85 level.

The Swiss franc depreciated vis-à-vis the U.S. dollar today as the greenback tested offers around the CHF 1.2005 level and was supported around the CHF 1.1960 level. The Swiss government last week agreed an economic stimulus package valued around CHF 890 million to counter the anticipated economic recession next year. The government reported “ Switzerland is still currently in a comparatively good economic and employment situation, but due to global economic developments, the prospects have become noticeably more gloomy since September.” Data released in Switzerland last week saw the November ZEW expectations index improve marginally to -88.5 while October producer and import prices rose 2.9% y/y and were off 0.6% m/m. U.S. dollar offers are cited around the CHF 1.2120 level. The euro and British pound lost ground vis-à-vis the Swiss franc as the crosses tested bids around the CHF 1.5000 and CHF 1.7555 levels, respectively.