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Panic continued to grip global markets in London/NY trade

Tue, Oct 7 2008, 14:07 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

News and views

Panic continued to grip global markets in London/NY trade, with cash hoarding and attempts to preserve capital proving positive for USD Index as it punched to new highs dating to Aug07. The falls in Asian equities Monday were easily exceeded in Europe and the US, with DJIA sitting -725pts/-7% in late trade. Financials were among the worst hit despite new Fed measures to boost the amount of cash available to money markets. There were predictions of an emergency Fed rate cut – and perhaps even ECB too – but this was not delivered. NZD/USD had started London trade somewhat calmly, close to 0.6500 but then started to slip and a wave of yen cross selling in the NY morning smacked it to lows under 0.6200.

AUD/USD sat in the mid-high 0.7400 area in the European morning but sank to a staggering low of 0.6985 in NY as equities tumbled. Gold rallied about $35/oz in the heaviest wave of risk aversion in NY, but other commodities were under substantial pressure.

All manner of stories swirled over European banking but the euro easily outperformed e.g. AUD even as EUR/USD fell further, from above 1.3600 to the 1.3470 area in late NY.

USD/JPY sat comfortably above 103.00 until late morning NY when heavy selling from accounts reportedly including Japanese life insurers sent the pair crashing to as low as 100.22.

US Fed boosts liquidity further – but no rate cut yet. The Fed will now pay interest on reserves, will double the size of the Term Auction Facility to $600bn and will hold more frequent auctions. There was no US data today although Chicago Fed president Evans said he expected the economy “to be quite sluggish in H2 2008 and into 2009”, however “the inflation outlook remains a risk”. Some might argue with that last point: collapsing commodity prices and slowing economies could see deflation fears soon re-emerge.

Euroland Sentix investor confidence down from 20 to 28 in Oct. We expect similar or steeper falls in investor and business confidence surveys in coming weeks as the full impact of the banking crisis, now hitting Europe with full force, is captured in the surveys.

Canadian building permits fall 13.5% in Aug. Both residential and commercial building permits fell sharply, adding weight to the view that the domestic economy is losing some momentum. In contrast, the Ivey PMI rose from 51.5 to 61.0 in Sep. The index is not seasonally adjusted but a rise of this magnitude in Sep is not typical so survey respondents seem to have been genuinely up-beat (which is surprising).

Outlook

A reluctance to enter fresh trades in the current volatile environment appears to be helping NZD versus AUD but we suspect that data revealing another weak quarter in Q3 will leave the kiwi vulnerable to selling on key crosses in coming days and weeks. NZD/USD looks to have further to fall.

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Published on  Tue, Oct 7 2008, 14:16 GMT