Fear of the unknown continues to grip Capital Markets. Equities struggle as rhetoric about losses at Financials are grossly underestimated. US FI class remains better bid, not on the back of the buy-back program, but as a Ã¢â‚¬ËœsaferÃ¢â‚¬â„¢ asset class and all this despite $2.5t worth of supply having to be absorbed. Even the greenback is gnawing its way to global dominance as investors look for that bit of extra quality for now.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies, in a Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range.

Twiddling of the thumbs was the order of yesterday as copious amounts of bad news scrolled across the tickers deflating global optimism like a flat tire. Equities and commodities continue to find it difficult to get off the canvas, like an punched drunk boxer, they seem well beaten as the doomsayers continue to dominate the floorshow. It has been difficult to maintain the 4-week market hype, just when we though it was safe to come out and play again, risk aversion strategies are being strapped on. It is rumored that the IMF is expected to announce that the toxic debts racked up by banks and insurers could spiral to $4t, not the $2.2t already declared. By default, banks will need even more capital as losses continue to mount. Expect to see more going bust and more being nationalized!

A scary stat that appeared yesterday, to date with almost $1.3t of losses and write-downs at financial institutions worldwide, mix this with the deepest recession in over 50-years and what do we have? MoodyÃ¢â‚¬â„¢s announcing an expected global default rate to peak at 14.6% in the 4th Q. There is a bright side to this, itÃ¢â‚¬â„¢s lower than last months +15.3% forecast due to bond spreads declining moderately.

The USD$ currently is higher against the EUR -0.59%, GBP -0.59%, CHF -0.49% and lower against JPY +0.71%. The commodity currencies are weaker this morning, CAD -0.31% and AUD -0.97%. The loonie remained little changed yesterday and continues to error on the side of weakness as global equities and commodities take it on the chin. This has persuaded speculators to gravitate towards the greenback as they shy away from riskier assets. Canadian fundamentals this week have not helped the currencyÃ¢â‚¬â„¢s cause; building permits fell by 4-times the expected pace last month, further proof of how weak the housing sector remains north of the border. Other factors continue to contribute to a weaker CAD, BOC Governor Carney will announce at the end of this month a plan that would Ã¢â‚¬Ëœflood banks with cash to halt the hoarding of capital and expand lendingÃ¢â‚¬â„¢. We have witnessed other currencies depreciate significantly when their governments entertained quantitative easing methods (BOE, BOJ, Fed). Secondly, itÃ¢â‚¬â„¢s difficult to want to own the currency ahead of this weekÃ¢â‚¬â„¢s employment numbers tomorrow. For now, one should expect to buy USD on pull backs.

Weaker fundamental data down under continues to put pressure on the AUD, as it enters its longest losing streak this year at 4-days. Risk aversion strategies and investor speculation that both equities and commodities will continue to underperform has traders shying away from the higher yielding currencies. Look to sell on upticks (0.7081).

Crude is lower in the O/N session ($48.00 down -120c). Crude prices slipped yesterday as US equities declined on speculation that bank loan losses will continue to increase and on speculation that the weekly EIA report this morning will show US increased their inventories for the 24th week as this recession curbs fuel demand. Nervousness about the equity markets has heightened again after analysts recommended selling financials. Traders are also concerned that the IEA will probably lower its global demand forecast again this month because of slowing world economic growth. Until we see inventories decline substantially, there will not be a sustained gain in price. Oil temporarily advanced last week after leaders at the G20 agreed on measures to fight the global recession. However, industrial reports showing that rising oil inventories and falling demand continues to signal that the worst of the recession may not be over. Last weekÃ¢â‚¬â„¢s EIA report showed that US stock levels rose to a 15-year high as this global recession continues to curb demand. It was the 23rd gain in 27-weeks. Inventories climbed +2.84m barrels to +359.4m vs. an expected increase of +3m. Most surprising was gas supplies, which unexpectedly rose by +2.23m barrels to +216.8m w/w. Investors should treat last weeks advances as a bear market rally until the 2nd-half of the year when by then we will have burned off some of the excess. Gold has found a toe-hole in the O/N session, the 1st-time in four sessions on speculation that the credit crisis will deepen, thus boosting the Ã¢â‚¬Ëœyellow metalÃ¢â‚¬â„¢sÃ¢â‚¬â„¢ appeal as a safer haven ($889).

The Nikkei closed 8,595 down -237. The DAX index in Europe was at 4,284 down -37; the FTSE (UK) currently is 3,904 down -25. The early call for the open of key US indices is lower. The 10-year TreasuryÃ¢â‚¬â„¢s eased 3bp yesterday (2.87%) and are little changed in the O/N session. The front end of the US yield curve fell as investorÃ¢â‚¬â„¢s sought the safety of Government bonds as equities fell for a second day on the back of corporate profit concerns yesterday and all this despite the US Government issuing another $55+b of new debt this week! Supply will eventually trump demand.

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