Markets Crash, Carry Crushed On European Open, All Eyes On G-7 And Lehman Settlement Later Today

Top Stories

• Equities crash worldwide, Nikkei drops -10%, Europe open -8%-10% across the board
• IMF has drawn up emergency plans for rescue of G-7, according to Guardian in UK
• Markets fear the LEH CDS settlement today
• G7 to meet and talk of coordinated bailout of financial sector with supra nationalization of banks makes rounds
• Traders fear that GS and MS may not survive the present crash unless prices stabilize
• Currencies trading on pure risk aversion as yenhits a high of 97.88, cable loses 1.7000 Aussie at 6500
• Will LIBOR and CDS markets be centralized for clearing?
• Oil down to $81/bbl as liquidity demands drive it lower
• Gold at $930/oz. As traders watch warily if financial markets continue to melt

Overnight Eco

• CHF Unemployment rate 2.6% bit higher than 2.5% forecast
• EUR French Industrial Production -0.4% vs. -0.7% forecast

Event Risk on Tap

• CAD Employment market looks at 11K jobs vs. 15.2K last
• CAD Trade Balance 4.6B vs. 4.9B previous
• USD Trade Balance forecast to improve to -59.5B on lower oil

Price Action

• USD/JPY hits a low of 97.88 as global equity markets crash
• AUD/USD drops to 6500 as carry crushed
• GBP/USD breaks 170.00 for first time since 2003
• EUR/USD fares better than most majors rallying to 1.3600 with 1.3500 acting as near term support

Markets Crash, Carry Crushed on European Open, All Eyes on G-7 and Lehman Settlement Later Today

Global equity markets crashed in the wake of sharp declines in the DJIA yesterday with Nikkei dropping almost 10% as the index closed below the 8000 level for the first time since the mid 1980's. The European markets followed with a disastrous opening with most indices gapping lower by -8% to -10%. For a little while the only stock price showing green amidst the thousands of European equities on the multitude of bourses across the continent was that of Volkswagen, which was pushed higher by a complex short squeeze dynamic.

After the horrid opening European equities stabilized as attention turned to the G-7 meeting later on in the day in Washington DC and the settlement of the Lehman CDS paper in the wake of its bankruptcy.Markets are unsure about the extent of the open liability on the guarantees triggered by the Lehman default and fears abound that the settlement of trades could further stress the balance sheets of the already badly battered financial sector.

In addition to the Lehman story the North American open brings a slew of fresh event risk including the release of GE earnings at 10:30 GMT and possible announcement from G-7 of additional coordinated action.The US Trade Balance is due as well at 12:30 GMT but at this point fundamentals have become nothing more than an intellectual curiosity as the only issue driving all markets is risk or no risk. To that end, it will be crucial for authorities to act today, as next Monday brings Columbus Day holiday and although US markets will be open in the, banks and the Federal government will be closed. If there is no stabilization and some concrete assurances by market open on Monday, some analysts fear that Goldman Sachs and Morgan Stanley could come under enormous pressure and possibly face the risk of bankruptcy much like Lehman and Bear Stearns.

Given these apocalyptic scenarios, consensus is building amongst the G-7 policymakers to centralize the two largest over the counter markets - LIBOR and CDS which have come to a grinding halt, as counterparties no longer trust each other and credit is cut off to a trickle. The centralization of clearing for these two key markets (much like equities on NYSE and NASDAQ and futures on CME) would go along way towards alleviating the fear that has paralyzed these two key markets. Centralized clearing would effectively guarantee counter party risk and provide much better price transparency perhaps enticing bargain hunters to make some bids. Global policymakers however must move fast, as investor confidence is being drained by the moment and markets are unlikely to stabilize and function well without some centralized structure. For FX, the bottom line is that risk on remains the dominant trading theme of the day and high yielders will continue to be pressured until some semblance of order returns.

FX Upcoming

Boris Schlossberg
http://www.gftforex.com

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