NY ROUNDUP – Friday, December 19, 2008

HIGHLIGHTS

US Treasury: Auto Loan to be 300 bps over LIBOR with 2% floor
US Treasury Paulson seeks second $350 bln in TARP bailout funds
US President Bush says US will help automakers avoid collapse
ECRI: US Recession to worsen “significantly”
Colombia Central Bank cuts policy rate 50bps to 9.5% – unexpected

COMMENTS

The US didn’t get much news – the much awaited US auto loan from TARP was announced. The details seem as leaked – $13.4 bn with another $4 bn dependent on Congress allowing the Bush Team to tap the second tranche of TARP $350 bn. The money has the usual stipulations – executive pay limits, warrants but it has one ominous warning that the loans will be called March 31 if companies don’t appear viable. This led to some doubts that the plan was as friendly as the headlines suggested and the equity rally went sideways with EUR/JPY remaining under pressure leading to a break in the EUR 1.3880 support and opening up a test of 1.3820. Volumes were light while the snow in New York was heavy making for a long day as option expiry in equities provided less than the usual entertainment. The stocking stuffers for the weekend come from the emerging themes for 2009: 1) Inflation or deflation? Yesterday GS had a research call and it was oversubscribed. The market fears deflation in the US and the rest of the world with many looking to Japan’s lost decade for its lessons. But a solid minority see a reflation that will spark a Weimar Republic risk in the US. 2) Value and Volatlity. The movements in markets have left many investors on the sidelines. The quieter holiday weeks ahead may be the necessary break to inspire some valuation metrics to return. Many see a brighter 2009 for equity returns. 3) Correlations and FX. The biggest trades of the year may have been best expressed in correlation trades – EUR to Oil, AUD to Gold, JPY to US Rates. The path of 2009 will have a number of trades that revolve around similar assumed trading rules. The present connection of the USD to credit or EUR/JPY to equities may be at risk. 4) Quantitative Easing vs. Negative Real Rates. The QE policy path of the FED and BOJ contrasts sharply to the ECB. The focus on real rates will be a big policy issue for 2009 with negative headline CPI and sticky core inflations. The role of rates to banks set by the central bank misses the point of the credit crisis which leaves many that need cheap money left out in the cold. 5) Private vs. Public capital needs. The break in credit process leaves open a shift of private debts to public ones. The G10 nations may find that they have a better recovery path in the process compared to the Emerging Markets. This leaves many thinking that sovereign credit risks will become a more significant part of the equation of trading in equities, FX and fixed income. 6) Competitive devaluations. The rush for growth in 2009 has left many nations searching for any mechanism to jump start their economy. The USD weakness that followed the explicit push for QE Tuesday has been followed with comments and actions from Japan, Norway and Switzerland. Risk of a G10 rush to FX for relief may be the short-term block to a broader G7 consensus on how to fix the global recession. Bottom Line: The FX markets have gone on holiday. The move EUR from 1.32 to 1.47 over the last two weeks shocked many people out of their trading framework of Risk Aversion being a USD positive event. The risk today was that the USD weakness unwound significantly further – but that didn’t happen. We will test it again next week but many see the new year as a more likely place and time to search for presents. There are no stocking stuffers this year.

CURRENCIES

Cross Low High

EUR/USD 1.3824 1.4030 Close: 1.3884

USD/JPY 88.80 89.85 Close: 89.45

EUR/JPY 123.75 125.20 Close: 124.19

GBP/USD 1.4810 1.5058 Close: 1.4862

EUR/GBP 0.9280 0.9373 Close: 0.9342

USD/CHF 1.0990 1.1132 Close: 1.1078

EUR/CHF 1.5350 1.5475 Close: 1.5381

AUD/USD 0.6767 0.6878 Close: 0.6819

USD/CAD 1.2112 1.2345 Close: 1.2228

NZD/USD 0.5708 0.5794 Close: 0.5739

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