Intraday Market Thoughts Archives

WHAT YIELD CURVES ARE TELLING US? The latest yield curves of the US, EU and UK in the Analytics Section of the website show both the EU and UK curves (as measured by the difference between 10 and 2 year yields) to have steepened (grew more inverted) in recent days. See Deconstructing Yield Curves for more detailed explanation on how to read the curves. The steeper the yield spread, the more it is indicative of slowing economic dynamics and downside risks because as 2-year yields fall relative to 10--year yields, the 10-2 year spread increases, hence the curve in the chart increases. Note how the US yield spread turned lower on Thursday due to the rally in US stocks, which eased the downside risks and effectively reduced the 10-2 spread. Market probabilities for a US rate cut moved lower, thereby pushing higher the 2-year yield and narrowing the 10-2 spread. Should you have any questions, please do not hesitate to post them in the comments section of the Global Yield Curves.

Congress finished meeting with Paulson and Bernanke agreeing on legislation by end of next week aimed at improving liquidity and possibly creating an institution that buys bad debt from struggling banks. There's also talk of SEC temporarily banning short selling (nothing on uptick rules). US stocks futures and Asian indices are up acorss the board, lifting the dollar against the majors at the expense of the yen.

Stocks soar, USD gains and JPY weakens as CNBC reports of possible solution similar to the Resolution Trust Commission (RTC) used during the Savings & Loans crisis of 1989-90, whereby a fund was created to buy all bad loans off banks, giving time for banks to focus on their remainingfood assets/loans. Treasury has not yet confirmed anything.

More cash injections in early late Asian Thursday trade from the Fed, BoJ, BoE, BoC. After injecting a total of $150 bln, Fed adds $180 bln. Asian markets ended higher, JPY is off its highs and AUD pushes back higher. Lower highs in USDJPY remains the pattern and the pair is already faling off its 105.60 high back down to 104.80. 104.20 seen resurfacing so is 1.0960 in USDCHF. US equity futures are up.

NY Times says FED GIVES $80 bln to AIG IN RETURN OF 80% OWNERSHIP. JPY drops across the board. While this helps alleviate worries in the short term, it leaves very much to the imagination about the gravity of the problem that the US central bank is taking over insurance companies.

The question is now raised: How long will the positive market impact last this time around. It seems that the Fed completely obliterated market disappointment from holding rates unchanged by injecting $210 bln in less than 24 hours.

JPY Erases Post-FOMC losses with USDJPY and AUDJPY dropping 100 and 200 points respectively after a Reuters story says the Federal government CANNOT PUT AIG under conservatorship. AIG chief Greenberg said AIG needs a bridge loan rather than conservatorship. But USD failed to breach beyond USD resistance levels we stated below. UK jobs data due at 4.30 am EST will be key.

PRE-FOMC INSIGHTS: A 50-bp rate cut in the Fed funds rate would be the most generous result for risk appetite as far as realistic outcomes are concerned, in which case we could see a rapid and short-lived decline in the yen across the board, a broad dollar decline with the exception of against the yen. The resulting yen decline will only go as far as the duration of the rally in stocks, which will also be partly dependent on whether the Fed would cut the discount rate. Alternatively, the Fed could hold the Fed funds rate steady and cut the discount rate by 50 bps from 2.25% to below the Fed Funds rate at 1.75%. Such an outcome could also be effective in stemming risk aversion, but it is vital to stress that a great deal of this depends on finding capital for AIG.

S&P500 Futures drop under 1,180 on S&P's downgrade of AIG. USDJPY drops below 105, eyeing 103.75. Due to broad CHF strength, USDCHF may extend to as low as 1.10 trend line support. Big question whether FOMC will cut its discount rate or fed funds rate, but one of them will need to to be cut in order to avert immediate market deterioration. EURUSD faces interim trend line resistance at $1.43, while cable at $1.8050.

USD pushes to Asian session highs as group of international banks form $50 bln fund to save help troubled banks. The risk aversion pendulum continues to swing--this time downwards-, pushing yen lower and USD pairs higher. Lehman's bankruptcy now appears imminent, while Merrill-BoA is not yet confirmed. Dow futures opened 320 pts down but are now stabilizing. Once again, any dollar rebound is on short term talk of bailout rather than improvement in fundamentals of the US economy.

USD EXTENDS SELLING DESPITE talks of BANK OF AMERICA BUYING MERRILL LYNCH. Bloomberg says deal could happen as early as this evening (morning Tokyo session). WHITE HOUSE declines to comment on Lehman's possible receivership. THIS IS NOW A CASE OF BROAD DOLLAR SELLING (EUR 1.4349, GBPUSD 1.8067) combined with BROAD YEN STRENGTH.

JPY SOARS, USD DROPS aross the board in early Monday Asian/Pacfic trade on NY Times Reports that Barclays will not buy Lehman Bros. On Friday, JPY rose and risk appetite fell across the board on talks that Barclays may buy part of of the troubled US investment bank. At 3.56 pm EST, USDJPY trades at 105.72 down from Friday's 107.80. EURUSD at 1.4280, AUDJPY at 87.68 from 88.50. If no buyer steps in, USDJPY to extend declines towards 104.80, EURUSD reaches above 1.44 as that would mean the liquidation of Lehman. This should FUTHER RAISE ODDS OF FED CUT This week.