Market Comment:

In his speech at an investor conference overnight, Fed Gov Kevin Warsh blamed the “panic” that hit financial markets in late-2007 for contributing to, and then magnifying, the depth of the recession. Warsh clearly laid the blame on “faulty private practices and flawed public policies” and concluded with an admonition to fellow policymakers that their policy preferences must be communicated clearly, credibly and consistently and backed by concrete action.

More of a contingency plan rather than a direct policy initiative, the Fed along with the BOE, ECB,SNB and BOJ announced currency swap lines in EUR, JPY, GBP and CHF. The plan, if used, would enable the Fed to provide foreign currency liquidity to US financial institutions and will initially have a shelf life up to October 30. The amounts committed are GBP30 bln, EUR80 bln, JPY10 tln and CHF40 bln.

Looking at market movers in Asia this morning, the UK Times carried a report that the IMF warns that toxic debts held by banks and insurance companies across the globe could spiral up to $4 tln, in its latest assessment of the global economy scheduled for publication on April 21. This marks an increase from the $2.2 tln in US-originated assets to $3.1 tln plus an additional $900 bln for toxic assets originated in Europe and Asia. The IMF noted in January that early write-downs came from sub-prime mortgages and associated instruments, but now it notes that degradation is also occurring in general loan books of banks as the deepening recession takes its toll. This story accounted for a heavy sell-off of JPY crosses early in the Asian session, EURJPY down to 133.60 and AUDJPY down to 70.83. USDJPY eased off to a 100.25 low.

Reports circulated that the US Securities and Exchange Commission is considering implementing an updated version of the uptick rule whereby shorting would only be allowed at a price above the highest available bid, ie stocks can only be shorted on the offer rather than by hitting the bid. In addition, the Commission is reportedly working on a circuit breaker proposal that would temporarily prohibit short sales if a stock had already fallen by a certain percentage, or invoke the revised uptick rule instead. S&P futures were marginally higher after the news but struggled to maintain gains in a broader risk-averse environment.

The big mover of the day was the AUD on the back of the RBA rate decision. Market opinion seemed to switch course regularly since the last meeting. Initial calls for rate cuts were knocked back after some better-than-expected data but dovish themes soon re-emerged, particularly over the past 2 days, when revered analysts and the market predicted a 50bp cut. In the end, the RBA drove a middle course and cut the official cash rate by 25bp to 3.0%. In its accompanying statement, the RBA noted that demand for credit and labour was weak and capacity utilization was off its peak and would continue to decline over the rest of the year. Hence the RBA judged that there was scope for a further modest adjustment to the cash rate. The stance of monetary policy together with the substantial fiscal initiatives will provide significant support to domestic demand during the period ahead. The contraction of the global economy has continued into the first few months of the year but it believed that the massive global stimulus packages that had been unveiled in many economies should help contain the downturn over the rest of the year. The AUD’s kneejerk reaction to the cut was lower, but only by some 50 ticks. A sharp rebound ensued which eventually brought us back to the highs of the day as traders latched on to the comment that future rate cuts would be modest.

Prior to this, the BOJ had left the o/n call rate target unchanged at 0.1% in a unanimous decision. As expected, focus remained on broadening the scope of collateral accepted in its money market operations, with municipal bonds now accepted as it attempts to ease corporate financial conditions. The BOJ maintained its recent assessment of the economy, stating that conditions were deteriorating sharply. However, it did expect the rate of decline in exports and industrial production to moderate from now on.