Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Sep 17 08 07:48 GMT |
Danske Daily

* The FOMC kept its key rate unchanged at 2% and the Fed has now moved to a neutral stance
* The US government has calmed the markets (for now) by seizing control over AIG. US stocks rose on the news, and we are likely to see some relief today
* Today we are looking for quarterly earnings from Morgan Stanley. Other key data are US housing starts at 16.00CET

Markets Overnight

Last night the Federal Open Market Committee (FOMC) decided to keep its policy rate unchanged at 2%, thereby disappointing markets which had priced in a 90% probability of a rate cut. The statement reveals that the Fed has now moved to a completely neutral stance, leaving the door open to any policy action depending on how circumstances evolve. The decision was unanimous, as Dallas Fed Governor Richard Fisher refrained from voting for an increase at this meeting.

The initial market reaction was a flattening of the curve with 2-year treasury yields rising 10-12bp and 10- year treasury yields up 6-8bp. Equities responded negatively to the disappointment, but moved higher later in the session on rumours that the US Treasury is considering taking over the insurance company American International Group (AIG) under conservatorship. S&P500 ended 1.8% up and Dow Jones Industrial gained 1.3%.

Then a couple of hours after the US markets had closed the Fed announced that it will give AIG a USD 85bn loan and take a 80% stake in the company. This led to big rises in US treasury yields. 2yr yields are now at 1.92% coming from as low as 1.60% yesterday afternoon. 10yr yields currently trade at 3.52% - almost 30bp higher from its low point yesterday.

EUR/USD has been relatively stable overnight around 1.415 despite a big movement in bond yields. However, USD/JPY has risen by roughly 2 big figures since prior to the Fed meeting, and the cross now trades just below 106.

Commodities have rebounded, especially gold and oil. Crude oil rose by USD 3 a barrel to roughly USD 94 per barrel. Asian equities are a bit mixed this morning, Nikkei225 gaining roughly 1% as we speak, while Hang Seng has dropped 1.6% thus far. Australian markets tumble and AUD/USD falls as Macquarie Group, Australia's top investment bank, was down 7% at AUD 34.23 after touching a four-year low on concerns that the company would struggle to refinance AUD 5bn in debt soon.
Global Daily

Today the market is likely to trade on relief over the rescue of AIG. This points to increases for risky assets and higher bond yields as the fear of a total financial meltdown has dampened for now. Focus should quickly turn to the earnings report from Morgan Stanley today - one of the two investment banks left (the other one is Goldman Sachs) after Lehman Brothers, Bear Sterns and Merrill Lynch have folded or been taken over.

On the data front the most interesting numbers should be US housing starts (16.00CET). Housing starts are expected to fall a bit further from 965k to 950k. If the recent stabilisation in home sales continues we should start to see a bottoming in housing starts - and hence residential construction spending - in early 2009. The great uncertainty is of course whether the flare-up of the financial crisis will lead to another leg down in housing activity.

Other data out is unemployment and CBI industrial trends in the UK. Also the Minutes from the Bank of England are released, which should give us more insight into the thinking about the trade-off between high inflation and low growth.
Scandi Daily

Today we will receive more details on the reasoning behind the Riksbank's decision to hike rates by another 25bp at the policy meeting in early September. It is no wild guess that the rift between the 'old' members (or doves, if you prefer) and the 'new' members (or hawks), with Governor Ingves holding the decisive vote, remains - and should have widened further. To us, it will be most interesting to see if the rhetoric among the hawks has changed, and if so, in what way. In any circumstances we still believe that the Riksbank will pay dearly for its high focus on spot inflation and lagging inflation expectations instead of being forward-looking. By this time next year, we would not be surprised to see a policy interest rate some 100 bp lower than currently.

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

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