U.S. Stocks closed at 5-½ year low

U.S. stocks closed at their lowest levels in 5-½ years on Monday, extending a global sell-off as worry about the severity of a global recession and the bleak outlook for profits gripped investors.
Trading was volatile and volume was light, with stocks falling sharply in the last half hour of trading. With just four days left in October, the S&P 500 is on track for its worst month ever in the post-World War Two period.

Hedge funds and mutual funds have been dumping stocks to raise cash to meet redemptions from their clients, traders noted, exacerbating the late-day selling.


JPY gained and GBP declined
The yen rose to the strongest level versus the euro since May 2002 and traded near a 13-year high against the dollar as global economic turmoil encouraged investors to sell higher-yielding assets funded in Japan.


French Finance Minister Christine Lagarde said in an interview with Bloomberg News that the Group of Seven doesn't plan to intervene to weaken the yen after the G-7 said in an unscheduled statement that excessive movements in the currency may threaten financial stability. The pound slid after an industry report showed U.K. house prices slumped.


Japan: Yen rise not due to fundamentals

The recent surge in the yen does not reflect Japan's economic fundamentals, Economics Minister Kaoru Yosano said, adding that an interest rate cut by the Bank of Japan would affect neither the currency nor the economy.


Reflecting growing concern over the recent volatility in market moves, Finance Minister Shoichi Nakagawa said the government would ban from Tuesday naked stock short-selling, in which traders effectively sell stocks without first borrowing them to sell.

But Nakagawa would not comment on whether Japan will intervene in the currency market to tame further yen gains. The yen has leapt about 20 % on a trade-weighted basis this month as investors unwound carry trades.

On Tuesday yen slipped against major currencies as some market players booked profits on the recent surge.

Government efforts to stabilise financial markets have provided little respite, with the Nikkei stock average sliding below 7,000 to hit a 26-year intraday low on Tuesday. At 3:40 GMT Nikkei had recovered and was trading in positive territory at 7,297.



Australia central bank intervenes again

Australia's central bank intervened to prop up the Aussie dollar for a third straight day on Tuesday after the currency fell to fresh 5- year lows against the U.S. currency in offshore trade.
A spokesman for the Reserve Bank of Australia (RBA) said the central bank was providing liquidity in an illiquid market, echoing comments made a day earlier.

Dealers also said the central bank was buying the Australian dollar at around the AUD 0.6060 level during the European session on Monday, but the RBA declined to confirm that.

"They are trying to make the decline less disorderly," said John Horner, foreign exchange strategist at Deutsche Bank. "Despite their intervention, the process of deleveraging and pricing of a global slowdown will continue to weigh down on the Aussie."

The waiting has begun

The European short term interest rates took another round in the carousel as the Eurozone CPI flash estimate beat analysts’ expectations. The red Euribor contracts (Sep09 – Jun10) fell around 20 ticks whereas the short sterling futures contracts fell by “just” 9 - 10 ticks. The short term US rates traded more calmly as the market is awaiting ISM manufacturing today and non-farm payrolls thursday.

With the inflation data from Germany in the end of last week and the CPI flash estimate from yesterday, it will surprise a lot of people if the European Central Bank is not raising rates this Thursday. We are in addition to a hike from the ECB expecting a somewhat hawkish Trichet at the following press conference. The market has currently priced in 23-25 bps for a hike this thursday, which essentially means that the hike is fully priced in. The short term interest rates are indicated slightly up in both the Eurozone and the US.


Reserve Bank of Australia, RBA, kept the main policy interest rate at 7.25%. Governor Stevens said in his statement that inflation in Australia has been high in the past year, spare capacity has been limited, and that growth in demand has been strong. The tightening financial conditions are on the other hand working to restrain demand and the outlook for demand and inflation is uncertain due to these opposing forces. The Australian dollar fell versus the US dollar after hitting a new high of 96.68 yesterday.


This Tuesday offers ISM manufacturing and domestic vehicle sales from the US in addition to PMI manufacturing from both the Eurozone and the UK, and unemployment from the Eurozone. The waiting game for Thursday has begun……

A slow start for a busy week

TODAY's COMMENT

Risk aversion was riding high in Friday’s European trading session as concern over rapidly rising oil prices and jitteriness regarding upcoming 2nd quarter results and this week’s flood of macro economic news including the monetary policy meeting in the ECB, the release of the ISM indices from the US and the all important Non-farm payrolls on Thursday. The jitteriness took its toll on EURJPY and EURCHF and as the Russian central bank stated that it doesn’t rule out increasing their share of Swiss Francs in Russia’s forex reserves pressure on EURCHF build. Sentiment does seem to have improved somewhat in the course of Friday’s American trading session. With the Nikkei only slightly down this morning and a macro economic calendar without any ignificant news it looks like we are in for a relatively easy start to the week. Although we don’t expect any drastic moves today we expect pressure on EURCHF and EUR JPY to persist. Thus looking a bit further ahead we continue to see risks mainly to the upside on the JPY and the CHF.

Tomorrow morning the Reserve Bank of Australia announces interest rates and we expect that rates will be left unchanged at 7.25%. Furthermore as the tendency towards weaker macro economic data has continued since the last meeting we believe that the RBA is done raising rates this time around. The AUD has shown a remarkable strength lately and currently AUDUSD is headed for a test of the 96.50-area. Looking a bit further ahead though we believe in a correction lower on the currency cross but as the timing for a selling recommendation seems off for the time being we prefer to maintain a neutral stance.

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