Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 14 08 08:03 GMT |
Danske Daily

* US treasury Secretary Paulson yesterday announced a new plan to support the GSEs. This should be supportive for the auction of short-term notes expected to be issued today by Freddie Mac, scheduled to sell USD 3bn in short-term notes.
* Mixed session in the Asian stock market where most indices are following the negative trend from the US market with modest losses. However, Nikkei is up 0.7%
* Dollar is still trading on the weak side, but rebounds modestly in Asian trade.
* Key events today - EUR industrial production data

Markets Overnight

Freddie Mac is likely to find buyers for USD 3bn of notes that it plans to sell after US Treasury Secretary Paulson announced steps to help shore up the beleaguered mortgage finance company. Paulson, speaking on the steps of the Treasury facing the White House, asked Congress for authority to buy unlimited stakes in and lend to the companies, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank.

Freddie Mac tumbled 47% in the New York Stock Exchange composite trading last week and Washingtonbased Fannie Mae lost 45% of its value, forcing Treasury Secretary Paulson to issue a statement of support last week, and now he has come up with a plan to recapitalise both GSEs. Fannie Mae and Freddie Mac are critical for the housing market because they guarantee almost half the USD 12 trillion in outstanding US mortgages.

These problems together with higher energy costs have led to a general decline in US equity prices, where American stocks fell for a sixth week. S&P500 declined some 1.1% on Friday and has lost 16% since the beginning of the year. However, the VIX vol continues to increase and rose to a three-month high. Energy costs continue to rise as the crude oil futures rose to a record USD 147.27 a barrel on speculation that Israel may attack Iran, leading to disruption in Persian Gulf petroleum shipments.

The Asian stock markets have followed the negative sentiment in the US market with modest losses in most major indices. However, Nikkei is up 0.7% this morning led by steelmakers as one South Korean steel producer posted record profits. In the world of beer, InBev is buying AnheuserBusch for some USD 49.9bn.

The bond market reacted negatively to the statements from President George W. Bush, Treasury Secretary Henry Paulson, and Senate Banking Committee Chairman Christopher Dodd damped talk of a US takeover of the two largest mortgage finance companies. 2Y yields ended up 19bp, while 10Y yields ended up 16bp on Friday.

The dollar has been under pressure against other major currencies, but got some relief from the government support to the GSEs this morning. EUR/USD and USD/JPY is trading at 159 and 106.5 this morning. No major movements in Scandinavian currencies against the Euro this morning. EUR/NOK has stabilised at the 805-level, while EUR/SEK is trading at the 946-level.
Global Daily

An otherwise busy week begins with a light agenda. At 11:00 CET today's only major data release is due; Euroland industrial production data for May. In line with consensus we look for a steep 2.3% m/m decline, which will serve to confirm the deteriorating state of the Euroland economy.

Later this week, the market will have plenty of important events to guide its direction. In the US, Bernanke will deliver his semi-annual monetary policy testimony (Humphrey Hawkins) to the Congress Tuesday and Wednesday afternoon. The Minutes of the June 24-25 FOMC meeting is due Wednesday night. The economic calendar will be dominated by US PPI and retail sales on Tuesday, CPI on Wednesday and building permits/ housing starts on Thursday. Only major release out of Euroland is the ZEW indicator, which is published Tuesday. In Japan and Canada central banks will announce rate decisions on Tuesday.

On top of a heavy loaded calendar, markets should remain focused on last week's nasty cocktail; the evolving drama surrounding the GSEs, new highs for the oil price, and a strengthening bear market sentiment, which has driven US equity markets to fresh lows.

Given the significance of the events due later this week, we expect bond markets to be in a wait-and-see mode today. If anything the sentiment should be governed by the news flow from commodity markets, the GSE story and equity market sentiment.

Danske Bank
http://www.danskebank.com/danskeresearch