Market Brief

The Usd dominated the majors with the exception of the Jpy, which seems to be regarded as safe-haven currency of choice. The EurUsd sunk over 170pips through 1.32, while the UsdJpy traded close to its previous close at the low range of 89. The GbpUsd came under strong selling pressure, dropping over 300pips through prior support of 1.45. Equity markets were negative to flat in the US, following the trend of stocks in Europe. Bond yields remain compressed well below historical levels providing false support to the dollar. On the commodities front, oil settled at $38bbl seeing resistance at $40bbl. Gold was mostly flat at $821oz, after a sharp unwinding by metals traders and reversal in risk appetite.

ECB President Trichet emphasized the need to take aggressive action and reiterated the benefits of having one common currency. The content of his speech seemed like more of an attempt to restore much needed confidence in the ECB among the financial community. The action by S&P to put Spanish long term debt on credit watch negative was a severe blow to the Trichet, and increases the likelihood that rates may be cut further than 50bps. S&P noted that Spain will encounter a severe challenge to rebuild their economy, particularly the area of public finance. Investors looking for security in govt. debt may be strongly discouraged from these bonds as the value will be affected by ratings changes. The return of dollar strength is mostly inspired by weak expectations in corporate earnings and global economic growth. Reform will be a key component in timing the market recovery, more information regarding the US stimulus plan will be released once President Elect Obama comes into power.