Nikkei up 3.3% but Europe bourses fade on the open, US Futures –150 to the close LIBOR, TED all continue to ease Sarkozy announces 10 B euro injection into French banks Euro battered by repatriation flows, risk aversion and doubts over EZ rescue plan Gasoline below $3/gallon in US for first time since February Citic Pacific loses $2 Billion in FX hedge best gone wrong, stock plunges 50% in HK Prudential looking to buy AIG Asia operations German FinMin Steinbrueck no need for identical CB moves but direction should be the same Oilremains firm at $74/bbl Gold below $800/oz. $775/oz. Now next support Overnight Eco AUD New Motor Vehicles 0.4% vs. –4.0% last NZD Credit Card Spending 2.6% vs. 2.6% CHF Trade Balance 1.44B vs.1.20B Event Risk on Tap GBP CBI Industrial Order Expectations –30 forecast CAD BOC rate cut market looks to 25bp but 50bp possible Price Action USD/JPY trades to 101.00 despite equities rising in Asia AUD/USD trades to 6837 as carry sold despite bounce in stocks GBP/USD hits an 8 day low at 1.7080 as flows continue to favor the dollar EUR/USD hits a 19 month low to 1.3235 as fears that EZ may be hurt worse than US from credit crisis Euro Hits a 19 Month Low As Fears of EZ Recession Grow No respite for weary euro bulls in early European trade tonight as the battered unit hit a 19 month low against the dollar amidst rising fears that the regions economy may be severely impacted by the recent turmoil in the credit markets. Although the FX markets initially responded positively to the pan-European rescue plan spearheaded by French President Nicolas Sarkozy last week, the details of the legislation especially out of Germany suggest that the government will exercise considerable authority over the disbursement and management of the investment funds.Limitations on executive compensation, dividend policy and overall risk taking have attached a multitude of onerous conditions to government capital . The net result is that the European proposal may not provide the necessary relief to the banking sector that legislators had expected. Indeed, with Deutsche Bank spurning any government aid, other German banks applying for the injection of capital from the government are now seen as weak by some investors and may therefore hesitate to do so. Contrast that dynamic with the current US Treasury plan which essentially forced all the major money center banks to participate in the deal eliminating the stigma while at the same time quickly recapitalizing the sector. The fears that the EZ response will create more problems than it will cure, has been the primary driver of euro weakness this week. Although some analysts have suggested that today’s Lehman CDS settlement may be behind the rally in the greenback, many others have noted that the actual net amounts are relatively modest. Even if some of the dollar strength can be attributed to repatriation flows, the near 300 point collapse in the EUR/USD over the past 24 hours cannot solely be the result of this dynamic. The weakness in the EUR/USD despite favorable carry trade conditions indicates that the FX market is now worried that the biggest fallout from the credit crisis will happen in the 15 member union rather than US. The fear is that the region’s banking sector, which many market participants believe was even more leveraged than its US counterparts, will be slow to recover, precipitating a much deeper recession in the area than the initial analyst consensus.

Source