The temporary defeat of the ‘Toxic waste plan’ may push Cbanks towards slashing simultaneously global borrowing costs. Political jockeying at the Ã¢â‚¬ËœhouseÃ¢â‚¬â„¢ has pushed global capital markets to within an inch of committing Ã¢â‚¬ËœHari KariÃ¢â‚¬â„¢.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies, in another Ã¢â‚¬ËœvolatileÃ¢â‚¬â„¢ trading range.

US lawmakers and political lobbyists have their work cut out to get a $700b US financial aid package through the House of Representatives (a month before congressional elections) after failing its first-go-around yesterday afternoon. The US capital market rot has not been contained and is beginning to spread like an epidemic throughout other global economies. The credit squeeze is in fear of bursting out and becoming deep rooted in the Euro-zone as well. Yesterday, in response to continued strains in short-term funding markets, a well orchestrated and coordinated move by Cbanks was initiated. They announced further actions to expand significantly the capacity to provide US dollar liquidity. They will continue to work closely together and are prepared to take whatever steps are required to address funding pressures. The Fed announced yesterday several initiatives to support financial stability and to maintain a stable flow of credit to the appropriate economies during this historical period of significant strain in global markets. They will increase TAF (Term Auction facilities) notional values, introduce forward TAF auctions and increase SWAP authorization with various Cbanks. They will continue to tinker and adapt these liquidity facilities as long as the credit crisis deems it necessary. Europe is playing catch up to the US financial debacle; the idea of it being contained to just the US economy is now a mere Ã¢â‚¬ËœmythÃ¢â‚¬â„¢. Interest rate observes believe that the ECB could Ã¢â‚¬ËœslashÃ¢â‚¬â„¢ borrowing costs immediately (4.25%) while the Fed can probably still hold off (2.00%), but a no vote in the house of representatives for the financial bail-out package has Paulson vowing to use all Ã¢â‚¬Ëœthe tools at his disposalÃ¢â‚¬â„¢ to protect financial markets. Futures traders have aggressively priced in a 50bp cut sooner rather than later (even between meetings). PIMCO’s Bill Gross believes over the next 24h we will see high quality rates come down, with the potential for a Cbank ease, possibly on a global basis. Economic activity is collapsing in Europe faster than that of the US. The German IFO index is at a 15-year low and export orders have fallen for the 8th consecutive month (Germany is EuropeÃ¢â‚¬â„¢s largest economy). The bailing-out of Fortis, Bradford and Bingley is strong evidence that the US financial crisis has infiltrated Europe. Worse still, Trichet and his policy makers do not have the bailout authority similar to that of Bernanke or Paulson.

Its worth noting that the proposed Ã¢â‚¬Ëœtoxic waste planÃ¢â‚¬â„¢ that was voted down yesterday addressed several key concerns raised by both Democrats and Republicans. The government was to release the money in tranches ($250b straight away, $100b at the request of the White House and Congress will veto the release of the remaining). Banks that accepted bail-out money would have to hand over equity in return (tax payers will benefit from the banks’ recovery). Finance executives would see total compensation limited, thus, no Ã¢â‚¬Ëœgolden parachutesÃ¢â‚¬â„¢. The Financial industry was to have helped finance the bail-out if the money could not be recovered from the Ã¢â‚¬Ëœstruggling banksÃ¢â‚¬â„¢ themselves. Four agencies are expected to monitor the deal; including an independent Inspector General and a bi-partisan oversight board (Fed renews its neutral non-political bias). Banks would be obliged to join an insurance program to protect themselves against losses of mortgage-backed securities. How are US lawmakers and political lobbyists to tweak the plan now to push through the house? Next vote is to come as early as tomorrow.

The US$ currently is higher against the EUR -0.40%, GBP -0.00%, CHF -0.80% and JPY -0.86%. The commodity currencies are mixed this morning, CAD -0.01% and AUD +0.39%. The loonie remained under pressure yesterday and declined the most in nearly a month as the greenback managed to appreciate against most of its major trading partners. With crude prices falling 9%, also managed to lend a hand to the CAD$ decline. The ongoing global credit squeeze has investors shying away from riskier growth currencies like the loonie. Capital market remains focused on the US financial aid package progress through both US houses before it becomes written in law. US law makers are going back to the drawing board and are looking to amend a Ã¢â‚¬Ëœset of principlesÃ¢â‚¬â„¢ for a financial rescue plan to inject fresh capital into the paralyzed credit markets. Despite the US being CanadaÃ¢â‚¬â„¢s largest trading partner (75% of all exports head south of the border), the currency had appreciated +1.5% last week vs. the greenback, but now is expected to remain under short term pressure. Capital markets believe Ã¢â‚¬ËœaÃ¢â‚¬â„¢ plan will stabilize the US economy, but weaker global fundamentals will dictate stagnant growth, which will surely hinder the performance of commodity currencies in the short term. The bulls will have to wait until the financial aid package is passed before the loonie has any short term hope of appreciating. Governor Carney last week indicated that any further slowdown in the US economy will affect areas that matter most to Canada. He is confident that domestic banks are Ã¢â‚¬Ëœfaring well amid the crisisÃ¢â‚¬â„¢, but, expects demand for Canada’s products to drop more than anticipated and inflation to slow. This should give Governor Carney the latitude to ease O/N borrowing costs (3.00%) by year end, as the downside risks for slower growth will intensify. Expect traders to be better sellers of the CAD$ on USD$ pull backs in the short term until proven wrong.

Despite the AUD dollar advancing in the O/N sessions on the back of higher gold prices (0.8078), traders expect the currency to underperform vs. the greenback in the short term. When the US financial aid package is finally voted through, its objective is to instill confidence in both the US currency and the US financial system. This of course will take some time before it filtrates through capital markets. World economies remain weak and this does not bode well for commodity currencies. Traders have increased their bets that the RBA will cut O/N borrowing costs (7.00%) next month by 50bp, to encourage banks to boost lending amid a global credit freeze rather than hoarding cash.

Crude is lower O/N ($96.13 down -24c). Crude oil fell the most in nearly 7-years yesterday (-9.9%) after the US House of Representatives rejected the $700b financial-rescue plan. Despite a rescue package being hastily tabled and voted on, itÃ¢â‚¬â„¢s back to the drawing board to woo an extra 24 members to vote the package through (expected by Wed). Fundamental concerns look to keep pressure on the Ã¢â‚¬Ëœblack stuffÃ¢â‚¬â„¢ prices this week. The global economy remains very fragile, economic activity in Europe seems to be collapsing faster than in the US. The bail-out package does not guarantee that there will be no more bank runs or that the US economy will recover anytime soon. President Bush said the legislation Ã¢â‚¬Ëœwill help keep the crisis in the financial system from spreading throughout the whole economyÃ¢â‚¬â„¢. Bank bailouts in Europe (Fortis in Belgium and Bradford & Bingley in the UK) have pressurized the EUR and Sterling respectively. By default, it has created a stronger USD, which makes commodities more expensive for investors outside the US, thus weakening demand. On Friday a poll indicated that over 48% of market analysts expected crude prices to retreat this week, on concerns that US fuel consumption will weaken because of lower economic growth. Capital markets still wait for the plan to be vetoed by all. Fundamentals are expected to kick in after last FridayÃ¢â‚¬â„¢s negative US data. With the sales of new homes in the US falling to a 17-year low, combined with orders for durable goods falling more than forecasted, has provided further proof that economic issues will once again weigh on the market. ItÃ¢â‚¬â„¢s only a matter of time before the global economic slowdown spreads further afield (China, India) and cut consumption even more. Gold remains better bid ($900) as traders seek the sanctuary of a safe heaven asset class. The ongoing global credit squeeze has heightened the desirability of the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢ as an alternative investment vehicle.

The Nikkei closed at 11,259 down -483. The DAX index in Europe was at 5,752 down –52; the FTSE (UK) currently is 4,799 down -19. The early call for the open of key US indices is higher. 10-year Treasury yields collapsed 26bp (3.66%) yesterday and are little changed O/N. The Treasury yield curve remains better bid after Citigroup with the aid of FDIC seized control of WachoviaÃ¢â‚¬â„¢s banking group (5th largest in the US), thus averting the total collapse of the US financial system. The Ã¢â‚¬Ëœtoxic waste disposal planÃ¢â‚¬â„¢ being voted down had investors scrambling and seeking the shelter of a safe heaven asset class. The one-two combination of surety of funds and a global slowdown has traders selling global equities as the credit crisis deepens. CBankers are working feverously to ease liquidity constraints despite financial institutions hoarding cash. The Fed has announced further coordinated actions, including an increase in the size of the 84-day TAF (Term Auction Facility) to $75b per auction (from $25b), two forward TAF auctions totaling $150b and an increase in swap authorization limits to a total of $620b (from $250b) with the BOC, BOE, BOJ, ECB, National Bank of Denmark, Bank of Norway, RBA, Bank of Sweden, and SNB. Cbanks remain proactive in trying to stem a pandemic financial meltdown before a US financial aid package can be vetoed and implemented. Futures traders are pricing in a 50bp ease by the Fed next month (3.00%). The market requires a collective ease from most Cbanks about now!

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