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Risk appetite rallying sharply in response.

Mon, Oct 13 2008, 08:42 GMT
by John Hardy

Saxo Bank

G-7 communique expresses intent to ease banking crisis with "all available tools", but specifics are vague.

LATEST HEADLINES

• US bond market closed for holiday

• New Zealand Sep. QV House Prices fell -5.8% vs. -4.5% in Aug.

• New Zealand Aug. Retail Sales rose 0.4% MoM and 0.8% ex Autos

• China Sep. Exports rose 21.5% YoY vs. 20.0% expected

• China Sep. Imports rose 21.3% YoY vs. 22.9% expected

• Switzerland Sep. PPI fell -0.5% vs. -0.3% expected and rose 3.7% YoY vs. 3.9% expected

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

• UK Sep. PPI Input/Output (0830)

• UK BoE's Sentance to speak (1030)

• US Fed's Hoenig to Speak about banking regulation (1200)

• UK Sep. BRC Retail Sales Monitor (2301)

• UK Sep. RICS House Price Balance (2301)

• Japan Sep. Domestic CGPI (2350)

• Australia Sep. NAB Business Confidence (0030)

• New Zealand Sep. Non-resident Bond Holdings (0200)

• Japan Sep. Consumer Confidence (0500)

Market Comments

A true whirlwind of developments this weekend, as the markets last week made it painfully clear to global officialdom that they better deliver the goods, or else. And indeed, we saw the powers that be coming through with the most dramatic and far-reaching measures yet. Some highlights of this weekend's developments in bullet form:

- The G-7 issued a broad statement of intent, saying that it would use "all available tools to support systemically important financial institutions and prevent their failure" as well as pledging to take decisive action and "all necessary steps" in this crisis. Critics point out rightly that the communique was a bit vague, but the clear intent to shore up the interbank market is there and importantly the clear intention is to "avoid another Lehman" as well. We'll inevitably see follow on measures to this communique in the coming days and weeks.

- EU leaders met already on Sunday on a coordinated plan aimed at guaranteeing all bank debt issues until the end of 2009 with maturities up to 5 years and avoiding failures of large banks by recapitalizing any banks in distress. The coordinated statement from all 15 EuroZone members at the weekend's summit was a key signs that the EuroZone countries are able to operate together effectively when the market forces them to do so (this was after the previous week's clearly uncooperative German stance). As long as risk appetite remains robust in the short term, this will boost the EUR. It was precisely the lack of such signs of coordination that weighed most heavily on the EUR previously.

- The UK govt. is rolling out its plan to recapitalize banks this morning. Under the plan, RBS, HBOS will be effectively nationalized and Lloyds TSB and Barclays will also receive government funds. Of the major British banks, this leaves only HSBC, which is seeking to avoiding the plan altogether. Apparently, the HBOS/Lloyds TSB merger is in flux today and this is weighing on GBP, as is the possibility that trading in key banking shares may be suspended this week as the government rolls out its capital injection/takeover plan.

- Australia announced that it will guarantee all bank deposits for 3 years in an effort to shore up confidence in Australian banks. This move and the generally recovering risk appetite have boosted AUD to open the week. AUDJPY is already over 5% off recent lows.

- The US Fed and the major European central banks to offer unlimited dollar funds at 7, 28, and 84-day maturities. This measure is important as it addresses the shortage of USD funding - especially for European banks that need to roll their debt - that has been one of the key drivers of the recent leg of USD strength.

- Japan over the weekend suggested that it would be willing to loan the IMF some of its enormous FX reserves to help out with emergency loans to emerging markets countries that also need to bail out their banks. With the move to healthier risk appetite to open the week, the EM currencies - which were hit the hardest last week - have also been the quickest to move stronger this morning.

- The Lehman CDS settlement on Friday went more smoothly than feared. This enormous settlement to the tune of $400 billion ended up, after netting, only involving the transfer of something like 2% of the settlement amount.

- Norway announced a massive NOK 350 Billion government bond swap facility that will allow Norwegian banks to swap collateral (including, importantly, mortgage-backed securities) in exchange for government bonds. This and the bounce in oil is seeing a recovery in NOK after EURNOK peaked at 8.500 overnight

- US Treasury Secretary Paulson is apparently accelerating plans to guarantee US bank debt. The original TARP provisions seemed to only discuss the lifting of bad debt from bank's books by buying it on the open market, but apparently there are enough back doors in this legislation to expand its implications into this kind of bank guarantee and to other areas as well. This is important, as the US could be vulnerable in a situation where Congress is out of session and campaigning for election while the rest of the world is enacting similar bank debt guarantees an other measures that would set up the potential for arbitrage - so it is probably an important background support for the USD further out that the bank debt guarantee idea is on the table.

Let's hope that the risk appetite continues to recover this week. Tomorrow will offer better market conditions for judging the real market sentiment, as Monday was a holiday in Japan and is also a banking holiday in the US, with the bond market closed while stock markets will be open. Also, we dare not contemplate the longer term fall-out of this crisis at the moment, but we will be forced to in coming weeks as the white knuckle environement eventually begins to calm somewhat. For now, we'll take one day at a time and see how the new sweeping measures enacted daily by global officialdom are acting on risk appetite and those all important credit spreads.

Remain very careful out there.

Published on  Mon, Oct 13 2008, 08:42 GMT

Archive

• Risk appetite rallying sharply in response.
  Published On Mon, Oct 13 2008, 08:42 GMT
• Market melts down into another weekend
  Published On Fri, Oct 10 2008, 08:14 GMT
• Unprecedented coordinated rate cut by six major central banks
  Published On Thu, Oct 9 2008, 07:25 GMT
• AUD collapses in sympathy with equity markets
  Published On Wed, Oct 8 2008, 08:21 GMT
• AUDJPY dropped as much as 13% yesterday - was that the capitulation?
  Published On Tue, Oct 7 2008, 07:47 GMT

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