Europeans Agree On Unified Plan, Markets Breathe A Sigh Of Relief

Top Stories

• Global equity markets sharply higher and carry rallies as credit chokehold eases
• EZ officials agree to bank capitalization plan, guarantee Interbank lending through 2009
• UK invests 37 Billion GBP into Lloyds/HBOS and RBS, Barclay's looks to raise private capital
• German rescue package at $470 Billion - according to CNBC
• UK deal looks to hold shares for 3 years and insists on
• US Treasury mulls plan to invest directly into US banks
• Mitsubishi UFG looking to amend terms of $9 Billion investment deal into MS with preferred than common shares
• 1M and 3M USD rates below 5% as week-end steps by policy makers ease the market
• Japan and US on bank holiday so liquidity remains spotty
• Oil steady above $80/bbl
• Gold continues to slide $860/oz last as credit risk recedes

Overnight Eco

• NZD Retails Sales 0.8% vs. 1.0% prior
• CHF PPI -0.5% vs. -0.3% as costs decline on lower energy, commodity prices
• GBP PPI -1.2% vs. -1.5% expected but declines still substantial

Event Risk on Tap

• CAD Bank Holiday
• USD Bank Holiday

Price Action

• USD/JPY above 100 as risk appetite returns on bounce in equities
• AUD/USD very volatile but gathers pace running past 6700 as risk is bought
• GBP/USD rallies but 7250 looks to be strong resistance
• EUR/USD gaps higher and trades more than 200 points higher as markets view favorably the joint EZ response

Europeans Agree on Unified Plan, Guarantee Interbank Lending Equities Rally Sharply as Markets Breathe a Sigh of Relief

EZ officials surprised global markets today by agreeing to a coordinated program of stabilization including public guarantees of Interbank lending until December 31, 2009 and the right of member states to take preference equity positions in banks, effectively recapitalizing troubled financial institutions In the region.Meanwhile in UK PM Gordon Brown announced that the British government will take direct stakes in RBS and the new combination of HBOS/Lloyds while Barclay's will attempt to go at it alone and raise private financing for additional capital.

The response from global equity markets to the latest policy initiatives from the G-4 officials was uniformly positive with Hang Seng, Footsie and DAX all up by more than 6%. The Nikkei was closed for a holiday but will likely play catch up tomorrow. In currencies, the latest news translated into a much sharper rise in risk appetite with the high yielders rising at the expense of the dollar and the yen. EUR/USD gapped higher by more than 100 points on the Asian open and climbed steadily afterward benefiting from both the rise in risk assumption and relief on the part of many market participants that EZ officials were able to coordinate an effective, unified policy plan in a region which though united monetarily is fractured politically.

As the credit crisis reached its crescendo last week, part of the EUR/USD weakness stemmed from the fact that traders doubted that EZ officials could act in a coordinated manner to combat the problems that brought EZ credit markets to a virtual halt. Indeed in the first two weeks of the crisis, with many member states acting unilaterally, the EZ appeared to be headed on beggar thy neighbor course of destruction and some analysts even wondered if the euro would survive. Tonight's action however is the first positive step in the right direction and demonstrates the ability of officials to act in concert which should provide the EUR/USD with a boost of confidence for the time being.

Will the work of EZ and UK officials pay off?The answer to a large extent will depend on the response of US policymakers. After the disastrous market reaction to the ill-conceived Paulson plan, US officials must quickly amend their direction and follow the footsteps of their European and UK colleagues by injecting capital directly into the banking sector rather than buying up the inventory of MBS assets at inflated prices. Furthermore, much like the EZ authorities, US officials must also guarantee the LIBOR market and demand a quick move of all over the counter trading to a centralized exchange model to assure safety and solvency of trades.If those two steps are taken quickly, market confidence should return with investors much more likely to make bids for what are clearly grossly oversold assets.As risk aversion then recedes, the dollar and the yen are likely to lose more ground with carry trade flowsbeating out the flight-to-safety trade. However, the situation remains precarious and if US policy makers fail to act quickly, the risk liquidation dynamics of the last week could return with a vengeance as markets lose hope once again.

FX Upcoming

Boris Schlossberg
http://www.gftforex.com

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