Daily Market Update 17/03/2008

The unprecedented events that have occurred over the past 72 hours have changed the landscape and history of the financial world. The devastating combination of the bursting of US real estate bubble and belligerent use of complex financial instruments have reached further than most ever imagined. Over the weekend, it was widely reported by virtually every major media outlet that, with the assistance of the Fed, JP Morgan Chase would purchase Bear Stearns (the 5th largest US investment bank) for $2/share, an estimated 94% discount to its previous closing price (note: Bear Stearns stock closed at $57 on Thursday and $30 on Friday). The effects of the collapse of Bear Stearns have sent shockwaves throughout all global markets, crushing virtually all assets of perceived risk as investors fled to the safety of government bonds and (surprisingly) commodities. Additionally, the Fed has announced a -0.25% cut in its discount rate, this coming a mere two days before the FOMC rate decision. This climactic episode in financial market history rivals the greatest of collapses - from tulips in 17th-century Holland to the dot com mania of 2000 - the bursting of bubbles inevitably takes victims, and Bear Stearns has unfortunately ended its 85-year life at the mercy of the Credit Crisis.

As volatility reached tremendous heights and volume surged among illiquid conditions, nervous market players approached the FX market in a predictable fashion. The first move was to dump the Carry Trade - and asset of ''risk'' - with reckless abandon. The Japanese Yen has skyrocketed unlike anything seen since August 2007 as USDJPY plunged down to the mid-96.00s. EURJPY took a nosedive, dropping over 300 pips to 152.00. As EURGBP found incredible upside interest, GBPJPY fell into an abyss, surrendering an astonishing 700 pips to deal near 193.00. Next, the US dollar saw a colossal wave of selling, likely due to the United States being the epicenter of the current disaster. EURUSD initially screamed to a fresh all-time high north of 159.00, but felt a formidable reversal of 150 pips as rumors of an unscheduled European Central Bank meeting raced across trading desks around the world. USDCHF tumbled to a low over 250 pips from Friday's closing rate, but has since had an exceptional rebound to the upper-0.9800s.

We seem to finally be in the core of the credit crunch, but questions about the health of many financial institutions remain. There have even been reports published by major media outlets of the reluctance of certain parties to deal with specific counterparties. If an acceleration of this mindset occurs, the crisis could easily worsen. Additionally, the reaction of the US markets - fundamentally, technically, and psychologically - will be a key variable in the near-term environment. Bears are looking for more blood in the streets, while bulls are grasping for a stabilization.

Upcoming Economic Data Releases (New York Session)

0830 EDT Canada - Jan New Motor Vehicle Sales MoM, consensus: +6.5% (relevance: low)
0830 EDT Canada - Jan Manufacturing Shipments MoM, consensus: +1.0% (relevance: low)
0830 EDT US - Q4 Current Account Balance, consensus: -$183.8B (relevance: medium)
0830 EDT US - March Empire Manufacturing, consensus: -7.4 (relevance: low)
0900 EDT US - Jan Net Long-Term TIC Flows, consensus: $60.0B (relevance: medium)
0900 EDT US - Jan Total Net TIC Flows, consensus: $85.0B (relevance: medium)
0915 EDT US - Feb Industrial Production, consensus: -0.1% (relevance: low)
0915 EDT US - Feb Capacity utilization, consensus: 81.2% (relevance: low