The robust negative correlation between risky assets and the US dollar was back with a vengeance in NY trading. Equities could not hold on to yesterday's high close for the year and sank more than -1% before the dust settled. The decline looks to have been exacerbated late in the session by some headlines that White House Budget Director Orszag said a capital gains Medicare tax is in play. This had the bulls running for the exit and could see the market weaken further if it gets any traction ahead of year-end. Gold made another valiant try above the $1120 area but once again failed above that important daily trendline resistance. The precious metal plunged more than $13 on the day but should still find better buying interest ahead of the $1100 mark.

Economic data continued to suggest caution. Initial jobless claims printed a better than expected 502K for the latest week (the lowest since the first week of January) but the true continuing claims tally remains at a staggering 9 million (not seasonally adjusted). The lack of improvement in the unemployment backlog suggests folks on the sidelines are still having trouble finding work. Furthermore, the politics at the moment continue to incentivize staying aboard the gravy train.

Congress recently passed the extension of unemployment insurance which extends federal payments by up to 20 weeks from the current 33 week maximum (and up to two years in some cases!). Congress will extend a payroll tax on employers to pay for the costs. So in essence, businesses will be taxed in order to incentivize people to wait longer before looking for a job. This employment cycle will be more drawn out than the 2003/2004 jobless recovery †by a mile.

The weekly energy inventory report, meanwhile, showed a 1.7 million barrel increase in crude oil stockpiles after a steep -3.9 million drop the prior week. Gasoline also jumped 2.6 million from a negligible decline previously. Both numbers were well above expected and should continue to weigh on oil prices in the short-term. Oil is also in a seasonally negative period and further weekly increases in stockpiles should exacerbate the decline. For FX, this means a higher USD/CAD into year-end as per the recent correlation.

There was also a rather sloppy 30-year Treasury auction today. The bid/cover came in at 2.26 and the indirect bidders (proxy for foreign central banks) took 44% of the offering. This compares to a 2.57 bid/cover average and an indirect take average of 46% since June so demand looks to have waned a touch. The yield tailed about 3 basis points above the WI rate, suggesting investors demanded a higher return for the risk. This is USD negative at the margin, but the sharp decline in risky assets mattered more and the buck retains a bid tone as we head into the Asia session.