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US Senate approves altered bailout plan

Thu, Oct 2 2008, 07:31 GMT
by John Hardy

Saxo Bank

ECB on tap after 1.4000 falls again overnight. Huge trendline under fire in EURUSD in 1.3900 area - is 1.3400 next?

MAJOR HEADLINES

• Australia Aug. Trade Balance out at 1364M vs. 200M expected

• New Zealand Sep. ANZ Commodity Price Index fell -4.9%, the most in 21 years

• China Sep. CLSA Manufacturing PMI out at 47.7 vs. 49.2 in Aug.

• UK Sep. Nationwide House Prices fell -12.4% YoY as expected

THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

• Norway Sep. Unemployment Rate (0800)

• UK Sep. Construction PMI (0830)

• Switzerland Monetary Policy Report (0900)

• EuroZone Aug. PPI (0900)

• EuroZone ECB Interest Rate Decision (1145)

• US Weekly Initial Jobless Claims (1230)

• US Aug. Factory Orders (1400)

• US Fed's Bullard to Speak (2300)

• Australia Sep. AiG Performance of Service Industries (2330)

• US Fed's Hoenig to Speak (0145)

Market Comments

The new version of the TARA bailout plan made it through the US Senate with flying colors yesterday with a vote of 75-25. The new version bears the same outlines as the old one, with new additions giving tax breaks businesses in coming years, raised the cap on FDIC insurance to $250,000 from $100,000 and also provides for the modification of "troubled" mortgages. While these measures are likely to convince enough House Republicans to change Monday No-votes into Friday Yes-votes, some are now speculating that the tax breaks will create issues for the Democrats. We would still give it good odds of passing - with the always pressing question: will it matter, will the spreads come down... The market seems reasonably confident that things are going in the right direction judging from yesterday's action, as US Treasury yields eased higher after early signs of renewed panic, and as US financial stocks rallied fairly confidently on the day. Still, recent action has been so dominated by day-to-day direction changes that it's clear that the markets are having a tough time deciding what they want to do. Equity markets have fallen in the futures market and in Asia overnight, for example, despite the affirmative vote...

In FX land, the big theme is still the need for USD funding and worries about the state of play in European banks. Yesterday's US ISM release was a showcase example of how little economic data is relevant for anything these days and why the focus remains on relative banking system vulnerabilities. The Sep. ISM number was an absolutely terrible 43- the lowest level since the steep business capex recession that struck back in the wake of the internet/telco bubble in 2001 and yet EURUSD only bounced about 5 pips before swooning back to test the lows on the day. Of course, we did get a small rally, but the heavy action overnight underlines the EUR weakness. Elsewhere, GBP and CHF are also weak, while the JPY seems to be tracking the USD for the most part, with no convincing action in USDJPY following Tuesday's large reversal. The "other dollars" are doing relatively well in this environment, as their banking systems are not really in focus. NZD in particular has been strong and EURNZD looks like it could head much lower. Position squaring may be a key driver for these currencies - it's certainly not because of resurgent NZ fundamentals...

The Wall Street Journal is out with an article claiming that the Fed is considering interest rate cuts to shore up market confidence, but many point out that any such move would be largely symbolic with the issue at hand the extension of any credit at all, not the price of that credit. The ECB and BOE have far more to work with in the interest rate department anyway with their far higher interest rates, and this makes the ECB's announcement today and press conference of extra interest. While Trichet and company are not expected to move on rates, if ever there was a time for Trichet to clearly indicate that the next move in interest rates will be to the downside - it is today! It's hard to find a EUR-bullish outcome from Trichet's press conference today - no signs of moving suggests that he is willing to turn a blind eye to the severity of the problems here, while dovishness highlights the potential for interest rate spreads to narrow further. The BOE does not meet until next week, where we would expect at least a 25 bp cut.

Another WSJ article discusses the failure of the last large SIV in London, which has buckled under in the wake of the Lehman bankruptcy. The worry is that this fund's large assets (it was a $27 billion fund) will need to be liquidated into an already illiquid market, further pressuring asset prices on similar instruments.

As ever - be very careful out there. It seems like a long wait until the House of Representatives vote on the TARA bailout plan on Friday and we won't know the fallout until next week...

Chart: EURUSD

A bit surprising ahead of the ECB today to see EURUSD weak enough that 1.4000 falls again after falling briefly yesterday. Flatline support comes in at the 1.3885 lows of the previous downleg, but many are also focusing on the enormous trendline (on non-logarithmic charts, at least...) that stretches all the way back to 2002. The previous low nearly touched this trendline, and it is now quickly coming into view again. It seems that if we see a powerful break of these support levels, we could see another significant downleg. Next big support may be the 200-week moving average down around 1.3400.

Published on  Thu, Oct 2 2008, 07:35 GMT