The fact that US Treasury credit default swaps dipped slightly suggests that part of the decline in Treasury yields was on the basis of greater confidence that there is a limit to government spending. As for the plan itself, it differed little from what had already been leaking out into the wires during Asian trading yesterday. There are three basic initiatives: Rather than a standalone "bad bank" there will be a joint private-public partnership to buy up to US$500 bn worth of distressed assets, with the Fed or the FDIC effectively providing low cost funding; (2) The Federal Reserve's Term Asset-backed Securities Loan Facility (TALF) will be widened to include commercial MBS and private label mortgage securities and expanded from its current $200 billion limit to up to $1 trillion, thanks to a jump in Treasury funding to $100 billion from $20 billion; (3) Additional funds for foreclosure prevention will be detailed in the next two weeks, with some reports suggesting this amount could be US$50 bn. Finally, Geithner stressed that the bank bailout package was complementary to the Administration's stimulus package, which the Senate voted on Tuesday 61-37 to approve.


Was the drop in risk appetite by the markets warranted? The improvement in risk appetite over the past week or so had been driven by a mixture of stabilisation in global PMIs as well as optimism ahead of yesterday's bank bailout package. To be honest, it is not clear what more the market could have expected from the Treasury without opening up the purse even wider. However, to do so would have sparked even greater concern about the growth in US public debt. Interestingly, not only did Treasury CDS spreads fall yesterday, but so did CDS (Credit Default Swaps) spreads for US banks more generally. Since bank liabilities and government liabilities are interchangeable these days, this is a noteworthy response. The market probably should be pricing in some end to the intense part of the financial crisis, and accordingly risk seeking currencies such as the AUD could probably outperform on a 3 to 6 month time horizon, and any further drop in AUDUSD for example would be a great opportunity for medium-term long positions, of course being mindful of tomorrow's labour market data for Australia. As for the US dollar itself, it still benefits from the increased dovishness of the ECB of late.

ECB members continued to apply a more dovish stance on monetary policy. After ECB President Trichet made clear that a further easing in rates cannot be excluded in order to support the economy, ECB Governing Council Member & Bundesbank President Axel Weber has strengthened his dovish rhetoric considerably. Weber highlighted that the ECB should not refrain from cutting rates aggressively, in order to counter a severe economic downturn. Elsewhere Eurogroup´s Alumnia highlighted that despite of some improvements there is not enough credit around, and that a further coordination by EU members is needed in order to support credit markets. Altogether, we remain of the view that growth conditions will remain in a clear weakening trend, and in line with ECB Governing Council Weber's commentary we expect the ECB to keep on cutting rates rather aggressively in the months ahead. Also, further extraordinary measures cannot be excluded. As such we remain of the view that the single currency will remain in a broad downtrend, in particular versus the USD. Swiss CPI missed expectations to the downside, largely the result of lower clothing prices. CPI m/m was -0.8% m/m versus consensus -0.4% m/m and prior -0.5% m/m. CPI y/y was 0.1% y/y (consensus 0.6% y/y, prior 0.7% y/y). We do not expect any material improvement in growth conditions, leaving the franc largely subject to swings in risk sentiment. With the downtrend in inflation, remain cautious on the CHF.


In figures released yesterday, the RICS house price balance deteriorated to -76 vs. -74 previously, far worse than expectations for an improvement to -70. The RICS itself issued a bleak outlook, warning that the balance of those reporting expectations of further declines in house prices slipped to -88, the lowest on record. The figures contrast the recent HBOS house price index which should a monthly increase in prices. Price volatility can be expected in these data sets but in general given the lack of credit across the real economy, the outlook will remain challenging for the housing market. Meanwhile, the trade balance improved to -GBP7.4bln vs. -GBP8.1bln previously, the weakest in 18m. The fall in imports was the main driver of the move, and continues to cast doubt over the ability of the UK to boost exports with a weaker pound due to the sharp decline in global demand. Sterling is broadly stable at present but further upside will be limited if risk aversion returns, as we expect.

Tags: EUR