Good Morning,

As the full contingent of players returned to various markets for the first 'real' day of trading in 2009, significant moves were seen - and they were mostly US dollar-related. President-elect Obama's $675=$775 economic stimulus package, along with the Fed's explicit backing of an all-out effort to revive the US economy, revved up the greenback overnight. The US currency rose to 82.80 on the index (for a gain of 1.47) while crude oil and base as well as precious metals headed much lower. The euro hit a three-week low against the dollar as perceptions that the ECB is far behind the curve in slashing interest rates.

Central banks have obviously shifted their focus from inflation combat, to bailing out the deflationary ballast from the fast-listing global economic boat. Words we had not heard since the good old days of Japan's deflation were blatantly uttered over the weekend: Undesirable Inflation Levels - Evidently, targets are targets, and anything below 2% on the inflation front is seen as less than palatable and calls for heavy fiscal artillery. Mr. Obama's plan is larger than was expected by markets, and it leans heavily towards including a near-$300 billion tax cut for individuals and for businesses.

St. Louis Fed Pres. James Bullard was quoted as saying that an explicit inflation target would help policy-makers prevent either deflation or inflation from taking hold in the United States. His colleague, Janet Yellen was even more precise, alluding to the 2% inflation target as the one to attempt to maintain. Mr. Bullard also said that as interest rates are nearly at zero, such an inflation target signal policy to the private sector which would normally be communicated by changes in official borrowing costs.

Maybe now would be a particularly good time to do that because you have this possibility of expectations drifting off to deflation or a lot of inflation. ... I think it would help, said Mr. Bullard on Saturday.

Gold prices started the first full trading week of 2009 under heavy selling pressure, brought on by the surge in the US dollar (now up 1.70 to 83.04 on the index). Opening with a $22 loss, bullion fell to $853.00 per ounce after having touched a low of very near $850 overnight. It is now the turn for price support levels to show their soundness, after resistance levels near $890 proved their mettle. Silver dropped 59 cents and started off at $10.94 on the day, while platinum and palladium lost ground on expectations that car sales figures for December might reveal just how few buyers ventured out onto dealers' lots.

Platinum lost $19 to $921 and palladium fell $7 to $184 per ounce. Sentiment is cautious at best, with players eyeing nearby support at $845 and $819, and it appears that markets have factored in the Israeli push in Gaza and that safe-haven demand has therefore abated somewhat. The price of crude appears to be echoing the same conditions as well. Gold fell for a third day as a convention of US economists over the weekend rejected the idea that a recovery in the economy is around the corner from anything other than the end of 2009, or mid-2010.

Last week we reported that gold demand in India took a 47% hit for 2008, mainly on too rich of a price level. As suspected, another traditionally price-conscious market came in with statistics not far behind those seen in India. The volume of gold jewellery sold in Abu Dhabi fell 40% last month, as higher gold prices put a dent into purchases. January sales could improve, should prices retreat sufficiently to attract buyers. A local industry source was quoted as saying that: People view current prices as an appropriate time to cash in. An inauspicious gold-buying period in India will draw to a close only after mid-month. As for gearing up for Chinese New Year, the buying patterns at the moment are less than conclusive.

Whither the world economy? Well, in the crystal ball over on the desk at HSBC, it's more like wither. Here is what the bank has to say about 2009's prospects for global economic...ahemm...growth:

THE global economy is expected to shrink by 0.1 per cent this year amid the worst economic crisis since the 1930s. HSBC global economics head Stephen King and economist Stuart Green said most of the bank's economists believed the world was currently in the worst part of the crisis.

Unlike previous crises, the report says, conventional monetary policies such as cutting interest rates, have failed. It urges governments to come up with unconventional policies to reverse the downward slide. Irrespective of interest rates, the authors say, the quantity of lending available is down sharply. The report says a crisis that originated in the US housing market and a meltdown in the world's financial system is mutating into a shock that now involves monetary hoarding.

Households and companies have increasingly reacted to the credit crunch by liquidating risk assets and holding cash.

Stuffing money under the mattress, however, leads to a drop in currency in circulation which, in turn, reduces demand, the report says.

The authors said the usual remedy for this problem was to cut interest rates, but such was the lack of trust in the financial system, investors were currently happy to own government paper with negative interest rates. With interest rates edging closer and closer to zero, governments had started to look at non-conventional means of slowing the economic deceleration. As an example of unconventional policies, the bank cited the actions of the US Federal Reserves, which had expanded its balance sheet.

The Fed has more than doubled the size of its balance sheet in the space of two months, from less than $US1 trillion at the beginning of 2008. It has printed money to buy assets from troubled financial institutions. Despite Washington pumping money into its economy, the unemployment rate in the US will continue to rise into 2010, the report says.

At 8.8 per cent, the rate will be the highest since the dark days of the mid-1970s oil shocks, Middle Eastern crises and Watergate. It also warns that unlike past crises, when governments had to deal with inflation, deflation was today's obvious risk.

Ongoing weakness in commodity prices could force many indicators of consumer and producer price inflation into negative territory for a period next year.

Asset prices have fallen sharply and unions are increasingly willing to accept wage cuts in exchange for job guarantees. As a result, the possibility of generalised deflation is undeniably growing.

Lower wages threaten more than just a recession as they encourage monetary hoarding and a downward spiral in economic activity, the report says. Capital flows, accompanying the rise in trade activity, have been regarded as a key driver of global growth over the past decade, and these are slowing.

It is a truly concerning development that the Bank of International Settlements reported a record $US1 trillion decline in international claims in the second quarter of 2008, the report says. The two remaining areas of growth in the world are China and India.

China's government stimulus will generate between 2 per cent and 4 per cent growth to lift this year's rate to 7.8 per cent. India is expected to grow at 5.9 per cent. The bank expects Japan's economic activity to shrink by 1.4 per cent this year, the US by 0.9 per cent and the EU by 1.4 per cent. Australia will grow by 1.5 per cent. The global economy is expected to return to growth of 2.6 per cent in 2010, HSBC says.

Fittingly, one of the author's names is...Stephen King. The report was brought to you by The Australian this morning.

Stay tuned for swift action. The players are back. Time to trade something, for something else. Name of the game.