The US dollar turned and commodities rebounded strongly as markets took fright at the ramifications of not only the $US700 billion bail out plan, but its transformation into a garbage bin for all sorts of failed financial assets, even shares.
Some US commentary is suggesting that the plan to end the rout in financial markets may derail the greenback’s rally since mid-July as investors weigh the costs of the rescue.
And as we know, when that happens, commodities, especially oil, gold, copper, grains and a host of other products, get some price benefit, even if demand from the tanking global economy limits some of these price gains.
And that’s what happened overnight.
There had been early signs Friday night with the US dollar weakening and oil, copper and some other commodities rising.
But last night oil leapt 17%, the biggest move ever, to more than $US130 a barrel at one stage, before easing. Oil eased at the end to finish just over $US120 a barrel as the October contract expired.
Oil eased in early Asian trading to around $US109 a barrel on the November contract is is now the main pricing contract.
Gold rose $US40 to over $US909 an ounce and copper jumped by more than 9 cents to $US3.2685 a pound. Copper also eased a touch to trade around $US3.25 a pound, still up on Friday’s close.
The US dollar plunged by the largest amount ever against the euro, hitting and falling past $US1.4800 and the Aussie dollar jumped more than 2 US cents to top 85 US cents.
Yields on 10 year US Government bonds rose past 3.8%.
Investors are wondering about the impact from the $US700 billion on dodgy mortgage-related assets and providing $US400 billion to guarantee money-market mutual funds, plus another $US140 billion to bail out AIG (even though there’s some opposition emerging), Bear Stearns and the initial costs of saving Fannie Mae and Freddie Mac.
That $US700 billion fund seems to be transforming daily from just residential securities, to car loan debt, credit card and student loan debt, to debts of foreign investment and other banks who have large operations in the US (such as HSBC).
This raises the question will corporate debt be included, thus helping the likes of KKR, CVC, Blackstone and hedge funds?
US reports say the Democrats want the fund to take equity in firms being helped and want other absurd things done, all of which stand to devalue the impact of the proposal and turn it into a slush fund that will raise the cost of help and push up inflation.
Bloomberg reported yesterday that the Bush administration had widened the scope of its plan by including assets other than mortgage-related securities.
Bloomberg reported: "The U.S. Treasury submitted revised guidance to Congress on its plan a day after first submitting it, as lawmakers and lobbyists push their own ideas. Officials now propose buying what they term troubled assets, without specifying the type, according to a document obtained by Bloomberg News and confirmed by a congressional aide.
"The change suggests the inclusion of instruments such as car and student loans, credit-card debt and any other troubled asset.
"That may force an eventual increase in the size of the package as Democrats and Republicans in Congress negotiate the final legislation with the Bush administration, analysts said."
Those investors worried about inflation and money supply are starting to fret about the possibility of an inflationary breakout, coming just as inflation globally seems to be turning because of falling commodity prices, led by oil, and the emergence of a global economic slowdown.
While these new concerns remain, oil is likely to remain over $US100 a barrel, copper and gold remain firmer than they were before last week’s mad trading; grains higher and precious metals will cost more.
That’s potential bad news for inflation and for the struggling US dollar.
The rescue comes as the US budget deficit grows as the US economy slows. The trade deficit has improved as imports have slowed and exports have surged.
That’s why US economic growth grew at an annual 3.3% rate in the second quarter. We get the final update on that this Friday.
The Congressional Budget Office has forecast the domestic deficit will increase to $US438 billion next year from $US407 billion and over half a billion according to other analysts because of rising unemployment and slowing tax revenues and other income for the federal, state and local governments.
Another drawback for the dollar is that the Fed’s key rate of 2%.
That’s 3.4 percentage points less than the inflation rate, a 28 year high, and the next move is likely to be down, although the Fed gave no hint of any change at all last week.
Our rates here are falling and a cut could come next month.
We will get a better idea of our outlook when the Reserve Bank releases its bi-annual Financial Stability report this Thursday.
According to Bloomberg, Goldman Sachs says that the "biggest beneficiaries may be Brazil’s real and Australia’s dollar, as demand for higher-yielding assets rebounds".
Goldman forecast that the two currencies, the biggest losers versus the dollar since July, may rebound 7.7% and 4.6%, respectively, in the next two weeks.
"The currencies that have been damaged the most have the best growth," according to Goldman Sachs in New York.”You’re going to see a lot of flows back into these currencies now," Bloomberg reported.
Both are the two most exposed currencies to commodity price movements (even though iron ore and coal are not traded and Australia is big in both of these still
