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The Financials Pit Review

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For the week of October 6th, 2008

Tue, Oct 7 2008, 07:14 GMT
by Kalvin O’Brian

Pit Guru

U.S. Economy

After rejecting the earlier proposal, the House approved the $700 Billion financial rescue plan by a vote of 263-171 and it was quickly signed into law by President Bush. Although the initial reaction was positive, the stock market heads lower to start the week as the potential global slowdown sends investors packing. Bailout or not, at home the evidence of deepening credit concerns and employment meltdown is mounting. It was announced Friday that there was no immediate change to the unemployment rate which remained at 6.1% in September.
However, underneath the surface the real story is non-farm payrolls were down 159,000, marking the largest job loss in over five years. In August, non-farm payrolls were revised higher from a loss of 84,000 jobs to a loss of 73,000. Add to that the banking situation and the concerns that more institutions may fail and we start to see early speculation that the Fed might seriously consider another rate cut. This would create some waves depending if and when they decide to do so. The main focus will be on the world stage and the resolutions – if any – that may come from the Euro zone. Credit issues are widespread and until we have a clear picture of the overall damage, the downside is the path of least resistance.

Currencies

There is a growing concern across the Atlantic that economic issues have extended rapidly beyond the housing market. A service index in the UK dropped from 49.2 to 46.0 in September. This marks the lowest since they began keeping records 12 years ago. The Bank of England Governor King is prepared to take all actions necessary to ensure the banking system has access to sufficient liquidity. The expectation for a rate cut is back and the pound is testing fresh lows because of it.

The Canadian dollar has taken a historic dive. The Canadian had the largest weekly drop off in over 35 years. The declining price of commodities due to the US dollar rally after the bailout appears to be the clear-cut cause but economic slowdown in the US and lowered expectations for US consumer demand will cut deeply into our northern neighbor’s revenue. Like the Euro and Pound, the Canadian dollar will continue to falter this week.

Keeping an eye on the Fed minutes release is important though; the same suspicions of a rate cut from the Federal Reserve could feed losses in the US dollar and turn the tables again.

Published on  Thu, Oct 9 2008, 11:15 GMT