December 11, 2008 --- Ytd a Win, But Tmr?

Overnight, US equities swung between +/- as growing concern that Congress won’t agree on a $15bn loan to Big 3. As a result, GM & Ford declined +3%. In Fin sector, bad news continues pumping in… American Express dropped 11% as Citi said a slowing economy will hurt earnings. XL Capital slid 36% due to loss > market Cap. GMAC was unable to raise the necessary funds, may abandon its effort to become a bank holding company - casting doubts on its ability to survive…

But I would say Yesterday is a Win not just because equities close with up, but because we had less volatility. VIX closes at 55.7 off 5.4%, but interestingly, all other trades of a risky nature have a correlation of one – gold is over $800; Oil up 2%; EUR closes over 1.3005. Having said so, economic outlook (US Mortgage Applications, Wholesale Inventory/Sales ratio and even China Export) looks gloomier than anticipated. The markets now assume a 75bp easing from the FED with more direct talk of QE. Against that the FED floated the idea of bond issuance – a way of sterilizing their expanding B/S and a means for markets to speculate on the ability of the central bank to pay its bills rather than the US government. 

The last story came from the cost of US Bailout. Deficit hits a new record - $401bn for the two months, with income -6% yoy and spending up 46.8%...I think this laid the merit of wider US govt CDS than Norway & German as the market felt a sense of unease. I am more lean to this view as the medicine behind recent calm looks temporary – based on the excess USD liquidity forced into the globe by the FED, by governments playing with fiscal pump priming, and by a market believing in lower energy prices…Question is will this all last for another 24 hours?

Oversea Markets Review

Equity markets broadly moved higher last night with Japan advancing 3.1%, +2.4% in EM, 1.4% in US, and 0.3% in EU . Globally, stocks gained 1.6% today—up 5.9% this week. Elsewhere, IMWTI oil rose $1.45 to $43.52/bbl. UST yields edged up, with 2yr by 1bp to 0.85% and t10yr by 4bp to 2.68%. Two- and ten- year yields are up 4bp and 13bp, respectively, since their lows last week. US Mtg rates have also moved up a bit since lows last week—30-year FRM rates are higher 12bp to 5.70%. USD slipped 2% this week on TW basis. USD fell 0.7% against EUR to $1.302 but climbed 0.7% against YEN to 92.8.